As some of my posts contain information produced by Dimensional Fund Advisors (DFA), I thought it would be appropriate to explain a bit about who they are, and why I reference them with some regularity.
DFA was founded in 1981 and is currently headquartered in Austin, Texas. Its governing board includes a who’s who list of respected academics and financial economists such as professors Eugene F. Fama of the University of Chicago and Kenneth R. French of Dartmouth.
At its core, DFA is a mutual fund provider. In that respect, it bears similarities to many other fund providers whose names may be more familiar to you. But in several key ways, it’s very different.
DFA offers a new model for investing, especially compared to the typical Wall Street firms who are mostly engaged in an active investing game of “Beat the Market.” The problem is, active investing is speculative and costly, and those costs come straight out of your pocket. DFA has adopted a different angle that encourages cost-efficient, broad diversification across global capital markets. You might say its philosophy resembles that of the great hockey player Wayne Gretsky, who is purported to say, “I skate to where the puck is going to be, not where it’s been.” (Although there’s some indication the advice actually came from his father, also a wise man.) The idea is, rather than actively spending time and money to chase the returns of hot stocks and funds after the fact, it is far better — and far more efficient — to be passively invested in them in the first place.
So why haven’t you heard of DFA? After all, they are a significant market presence. During the last several years of tough markets, investors poured new assets into their funds. As of September 30, 2010, DFA held $188 billion under management. And yet they remain relatively obscure because, in another point of distinction, DFA only distributes its funds through independent investment advisors and institutions such as pension funds. This isn’t because they’re shy or anything. It’s another important strategy used to manage the costs that ultimately deter from your end returns.
So that, in a nutshell is an introduction to DFA. For a more detailed exploration, visit their website at www.dfaus.com, or be in touch with me to continue the conversation.