Investment Philosophy
Dimensional’s approach is firmly rooted in the belief that markets are “efficient”, and that investors’ returns are determined principally by asset allocation decisions, not market timing or stock picking. All portfolios employ a passive strategy designed to capture the return behavior of an entire asset class. DFA has no economists forecasting business cycles or interest rates, no investment strategists shifting allocations between stocks and bonds, and no analysts searching out “undiscovered” stocks.
While conventional index managers also employ this passive approach, DFA differs in several key respects. Dimensional funds do not necessarily track popular market benchmarks, but are designed to capture separate dimensions of worldwide returns which are accompanied by independent sources of risk. These dimensions are identified by rigorous academic research, often conducted by one or more of the leading financial economists with which DFA maintains a relationship.
DFA also places great emphasis on minimizing trading costs. Unlike conventional passive managers who replicate an index in mechanical fashion, Dimensional funds employ a sophisticated equity block trading strategy that allows for slight variations in day-to-day portfolio balance versus a market index in return for substantial cost reductions and hence improved total return. DFA claims to achieve negative trading costs in illiquid market sectors such as U.S. small company stocks.
In its ongoing effort to maintain the low expense characteristic of institutional mutual funds, Dimensional requires us to place client trades through one of several firms (e.g. Schwab Institutional) who maintain an “omnibus” account relationship with Dimensional and aggregate buy and sell orders on a daily basis. By adhering to this approach, we are able to purchase fund shares in amounts as small as $2,500, versus DFA’s published minimum of $2,000,000.
