By Peter C. Thoms, CFA
February 6, 2015
Because Dimensional Fund Advisors (DFA) does virtually no public advertising and only permits access to its funds through investment managers with whom it wants to work, many investors are unfamiliar with what separates Dimensional’s investment strategies from the strategies of other fund companies. Though Dimensional is not well known to the public, it is a large, successful and rapidly-growing company managing nearly $400 billion in fund assets.
This piece, the first in a series, will discuss the facets of Dimensional funds that we believe make them the best value proposition in the fund industry and therefore worthy of consideration by all investors.
Dimensional’s equity strategies are managed according to the conclusions of empirical research about the characteristics exhibited by stocks that are likely to perform best over time. Professor Eugene Fama of the University of Chicago has conducted much of the research that underpins Dimensional’s strategies. Prof. Fama, widely recognized in financial circles, was named the 2013 Nobel Laureate in Economic Sciences for his research into asset pricing. Watch the one-minute video of Prof. Fama receiving his award in Stockholm here.
Dimensional structures its portfolios to take advantage of what it calls the “dimensions” (attributes, essentially) exhibited by stocks that have better-than-average expected future performance. There are three such factors, or dimensions, that the firm emphasizes when constructing portfolios:
- Value Premium – the tendency of value stocks to outperform growth stocks (Value stocks are stocks that trade at a cheap level relative to their book value. Growth stocks trade at expensive levels relative to their book value.)
- Size Premium – the tendency of small company stocks to outperform large company stocks over time
- Profitability Premium – the tendency for the stocks of high profitability companies to outperform the stocks of low profitability companies
This piece will discuss the Value Premium. The others will be covered in future articles.
To our knowledge, Dimensional has conducted some of the most expansive and in-depth research on the history of asset prices both in the U.S. and in international markets. The clear conclusion of Dimensional’s research (and much other research on the topic conducted by other firms) is that value stocks, over time, have provided higher investment returns than both growth stocks and broad market indexes. Will that continue into the future? No one knows. But the data that it has happened in the past are clear. It is interesting to note that the value premium exists not only in the U.S. but also in international developed and emerging markets as well.
The chart below details the annual performance differences between U.S. value stocks versus U.S. growth stocks from 1927 to 2013.
From the chart above it is clear, however, that value stocks don’t always beat growth stocks. (If only life were that simple ) In fact, there are several instances in which growth stocks prevailed for two years in a row or more. However, consider the bottom graph (U.S. Value Premium) in the chart below, which measures the five-year rolling returns of value stocks versus growth stocks in the U.S. Here it is clear that value stocks have delivered better returns in the vast majority of five-year holding periodsa relevant time horizon for most investors.
In both its domestic and international equity portfolios, Dimensional exploits the tendency of value stocks to outperform growth stocks over time by overweighting or “tilting” its equity portfolios toward value stocks. This does not mean that Dimensional funds do not own any stocks that are considered growth stocksit just owns them in lower weightings than they have in broad market indexes. This bias toward value has served Dimensional’s equity strategies very well over the years. For information and performance details about any particular fund, please visit www.dfaus.com and click on “Strategies.”
In something as important as investing to build and protect your retirement nest egg, it pays to put the odds on your side.
To learn more about Dimensional funds and how we employ them to construct low-cost, tax-efficient, value-focused portfolios for our clients, please visit us at: www.orionportfolios.com.
Peter C. Thoms, CFA
Orion Capital Management LLC
1330 Orange Ave. Suite 302
Coronado, CA 92118
Tel: 619.435.1701
Email: [email protected]
About the Author:
Peter C. Thoms, CFA, is the founder and managing member of Orion Capital Management LLC, an independent Registered Investment Advisor based in Coronado, California. The firm manages assets for individuals, families, trusts, corporate pension plans and non-profit organizations.
Disclosure:
This document is for informational purposes only. Nothing in this report is to be construed as a specific investment recommendation. This document does not constitute the provision of investment advice, which is only provided by Orion Capital Management LLC under a written investment advisory agreement and only in states in which Orion Capital Management LLC is registered or is exempt from registration requirements. Orion is not a tax advisor and does not provide tax advice. For tax advice individuals should consult their CPA.
