Dimensional Fund Advisors Profile + 529 College Savings Plan Access

Institutional Investor has an interesting profile of Dimensional Fund Advisors (DFA). Since DFA doesn’t do much marketing, there are very few articles about them in the mainstream financial media. A rare example is this 2007 article (backup copy) by Michael Lewis for a now-defunct magazine.

DFA funds are similar to Vanguard index funds in that they provide low-cost, diversified, tax-efficient funds that try to capture the market’s overall return. DFA differs from Vanguard in that it tries to beat an index benchmark with various tweaks that target systemic market “risk factors” including size, value, and profitability. (They still believe that prices are efficient and thus don’t pick specific stocks.) They also charge a bit more than pure index funds from Vanguard, Fidelity, Schwab, and iShares.

DFA doesn’t accept money directly from individual investors. You must buy their funds through approved financial advisors or via institutional accounts like 401(k), pension, and 529 plans. Their rationale is that retail investors move their money around too much and at the wrong time. Here’s an impressive statistic:

In 2008, while investors pulled an overall $500 billion from equity funds, the firm had positive flows. It wasn’t because of performance: Dimensional’s funds lost more than the market. According to the group gathered for the September dinner in Austin, clients chose to stay because they understood the firm’s philosophy and the small judgment calls it was making on market portfolios.

DFA is privately-owned and highly academic. DFA executives are “engineers, Nobel Prize winners, physicists, and fluid-mechanics experts”. As such, they are all about the science as opposed to the marketing. The article asks what will happen when the founding members eventually die or leave the firm. Will it have an IPO and be publicly-traded? Will this change the culture to be more focused on short-term profits? Will they someday allow Average Jane investors with $500 to invest? Will the new executives be able to continue the superior performance from understanding market factors?

Succession an interesting question that comes up whenever there is a “special sauce” to your investment’s outperformance. I think Vanguard has done a pretty good job of moving on without Bogle, and I can’t name the current CEO. If you own plain, vanilla index funds there are fewer risks tied to specific people. To simply achieve market return at rock-bottom costs, the current structure should still work 50 or 100 years from now.

DFA doesn’t offer a momentum strategy. The hot trend right now is “smart beta”, and momentum is a big part of that:

It’s instructive to consider other things Dimensional doesn’t have. For example, it doesn’t offer a momentum stock strategy even though the pattern of outperformance is seen clearly in the data. The firm believes a portfolio of momentum stocks generates too much turnover and creates a fund whose characteristics look very different from a market portfolio. Instead, Dimensional uses information on momentum to inform its trading strategies, such as delaying purchases and sales at certain times.

Owning a little bit of DFA funds. I remain intrigued by DFA and their unique culture and methods. Since DFA doesn’t trust us DIY investors (probably rightfully so in aggregate) and many financial advisors charge roughly 1% annually on top of the higher costs of DFA funds themselves, I choose not to invest in DFA funds with my primary portfolio. I’m happy retaining full control and keeping costs as low as possible.

However, I do invest in DFA funds through the Utah 529 College Savings plan. A few other 529 plans also offer DFA funds, but I believe Utah has the biggest selection at a reasonable cost. Here are the currently available options:

• DFA Global Equity Portfolio
• DFA Global Allocation 60/40 Portfolio
• DFA Global Allocation 25/75 Portfolio
• DFA Five-Year Global Fixed Income Portfolio
• DFA U.S. Large Cap Value Portfolio
• DFA U.S. Small Cap Value Portfolio
• DFA Real Estate Securities Portfolio
• DFA International Value Portfolio
• DFA One-Year Fixed Income Portfolio

I kept it simple and picked the all-in-one DFA Global Equity fund. I figure, I’ll let DFA take the wheel and see what happens in 20 years. I don’t have to worry about taxes or withdrawals for a long time. As it’s mostly a low-cost index fund at its core, I don’t worry about the downside too much. I just hope Utah does’t change up their fund options down the road and force me into something different.