Once dubbed “the best fund company you’ve never heard of” and recently ranked No. 1 in Barron’s “Best Fund Company” list, Dimensional Fund Advisors has been on the cutting edge of “evidence-based” investing for more than 40 years.
While we don’t use Dimensional Funds exclusively, we enthusiastically embrace their approach to investment management which, simply described, is a “step above” traditional index investing.
For over 40 years, Dimensional Fund Advisors (DFA) has consistently and successfully bucked Wall Street’s conventional wisdom that “stock-picking” and “market-timing” are the keys to investment success. In fact, the firm maintains no Wall Street office, dedicates zero resources to economic forecasting, and doesn’t allow individual investors direct access to its mutual funds.
Why? Performance. As of June 30, 2022, 83% of DFA’s mutual funds outperformed their Morningstar category averages. Their flagship Small Cap Value fund, for example, has outperformed its benchmark by by more than 1.75% per year since its 1993 inception.
Remarkably, this performance comes not from DFA’s superior skill at predicting future stock prices. It comes from a deep understanding of the dimensions that drive stock returns.
Dimensional’s funds are, essentially, enhanced index funds. They deliver all of the benefits of index funds, but use a more flexible process that harnesses information in market prices to systematically target research-backed drivers of higher expected returns.
Markets, not managers, generate portfolio returns. But within those markets are certain factors (“dimensions”) that have distinct risk and return characteristics.
For example, small company stocks have historically outperformed large company stocks, and value stocks have historically outperformed growth stocks. As such, “tilting” a portfolio towards value and small company stocks can enhance its performance over time.
There is, of course, no guarantee that such “tilts” will generate excess returns in the future, but history and statistical confirmation strong suggests that they will.