Dimensional Fund Advisors (DFA) is a highly regarded investment management firm known for its passive, index-based investment approach rooted in academic research. Founded in 1981 by David Booth and Rex Sinquefield, DFA pioneered the concept of small cap and value premiums and bases its investment strategies on the Fama-French three factor model.
With over $576 billion in assets under management as of January 2023, DFA has delivered strong long-term performance by focusing on dimensions of returns like market, size, value, and profitability. However, some critics argue DFA funds have become less passive and more expensive over time. This article examines DFA’s investment philosophy, key funds, performance record, and debates around the firm’s shift towards semi-active management.
DFA applies academic insights systematically
At the core of DFA’s approach is the efficient market hypothesis that securities prices fully reflect available information. Given this, DFA funds do not try to outperform through stock picking or market timing. Instead, the firm offers investors reliable long-term exposure to compensated risk factors identified in academic research, like the size, value, and profitability premiums.
Core equity funds capture different risk premiums
DFA’s U.S. core equity suite includes the Large Cap Value (DFLVX), Small Cap Value (DFSVX), Large Cap Growth (DFLGX) and Small Cap Growth (DFSGX) funds. These funds systematically buy small cap and value stocks to capture the long-term outperformance associated with those market segments and risk factors. Results have been solid if not spectacular – for example, DFSVX has returned 11.11% annually over the past 15 years, beating the Russell 2000 Value benchmark by 42 basis points.
Some shifts towards semi-active approaches
While staying true to its passive asset class foundations, DFA has introduced new funds like the U.S. Vector Equity (DFVEX) which skew towards more profitable companies. Some critics argue such “tweaks” that overweight certain segments conflict with the firm’s stated philosophy and resemble semi-active approaches. DFA counters that factors like profitability strengthen rather than contradict long-standing and validated dimensions.
Expenses higher than traditional index funds
As a pioneer in passive investing, DFA helped drive down expense ratios across the fund industry. However, with an average expense ratio around 0.30%, DFA funds still cost more than traditional index funds from Vanguard or Fidelity. The firm argues its systematic approach to capturing compensated risk factors justifies the higher fees.
In summary, Dimensional Fund Advisors bases its investment approach on academic research insights into systematic market premiums, delivering solid long-term performance. However, some shifts towards overweighting certain factors have drawn criticism, as have expense ratios higher than traditional index funds.