Cardiff Park is among a select group of advisors qualified to offer clients direct access to passively managed, index-like funds designed and offered through Dimensional Fund Advisors (DFA). Founded in 1981, DFA works with some of the world's leading financial economists to bring their theories and research into practice.
About Dimensional Funds
The DFA investment approach draws upon the work of Nobel laureates and renowned financial economists, including DFA’s Board of Directors, Eugene Fama (University of Chicago), and Kenneth French (Dartmouth). Professors Fama and French are among eminent academic leaders whose breakthrough theories challenged and changed the practical world of modern investing by examining the behavior of markets, the relationship between capital structure and firm value, and the common risk factors in stock and bond returns. Among other things, their research demonstrated that holding the market and over-weighting portfolio exposure to size and value risk factors offers more attractive expected returns than most active investment advisors, the majority of whom fail to beat market benchmarks.
DFA mutual funds offer broad diversification and are structured for low turnover and reduced trading costs and capital gains distributions. Fund management fees are low, in part because DFA funds do not charge 12B-1 fees to cover marketing and advertising expenses. DFA total mutual fund fees, and costs are believed to be lower than the total fees and expenses incurred by most other mutual funds, including many similar exchange traded funds (ETF) and other index funds.
DFA offers over 60 passively managed index-like portfolios with precise asset class characteristics. Their investment process is straightforward, well defined, and consistent across all funds, resulting in reliable exposure to specific asset classes. Cardiff Park receives no compensation of any kind from DFA. We choose to work with DFA because they offer a complete selection of low cost, tax aware and tax-efficient passively structured portfolios covering all major domestic and foreign stock and bond asset classes.
How Dimensional Funds are Different
In their quest to understand and capitalize on risk dimensions in the market, DFA forged a practical new model centered on asset class investing. To understand this, consider how their philosophy differs from traditional approaches.
Traditional managers fall into two camps: active and indexing. Active managers spend time and resources attempting to identify mispricing in the market. These imbalances are not easy to exploit consistently or cost-effectively. An active manager's stock choices and market timing efforts may result in poor diversification, frequent trading, and higher turnover, which can undermine asset class exposure and generate higher costs.
A traditional index manager may promise better asset class exposure at a lower cost to the portfolio. But an emphasis on closely tracking the index can result in forced trading at inopportune times. This tracking obligation drives a manager's strategy and often results in higher transaction costs when there are supply/demand imbalances at periodic reconstitution dates.
Indexes are not model portfolios. Rather, they are created to serve as proxies of a market segment to help compare performance. Hence, strictly following an index is generally not the best or most efficient way to capture the returns of an asset class.
Asset class investing as practiced by DFA takes a different approach to pure indexing, offering more flexibility in portfolio composition, broader diversification and greater exposure to key risk factors that generate returns. Asset class investing also gives traders the freedom to lower transaction costs, leading to more precise asset class exposure and higher expected returns.
Dimensional Manages Costs
DFA’s approach to investing is dynamic as it seeks to control the forces that influence returns. Fees, commissions, market impact costs, and bid/ask spreads consume a high proportion of the gross investment returns offered by the markets. DFA makes it a priority to minimize these costs in strategy design, management, and execution. Their structured, engineered approach combined with patient trading translates into lower management fees and higher returns.
Many of DFA’s portfolio design filters are applied to eliminate hard-to-trade securities and to maintain a large list of substitutes for cost-effective trading.
DFA portfolios are also managed to reduce the momentum-effect, the tendency of securities that have outperformed our underperformed the market over a three to twelve month period to continue to do so. In addition, DFA avoids the adverse price impact that occurs when a manager trades index securities around periodic reconstitution dates. These trading costs are largely controllable, and avoiding them makes a real difference in ultimate returns.
In short, DFA funds buy and sell solely on price and not according to the pressures of time, limited alternatives, or commitment to a forecast or index. The result is formidable trading power. By being patient when others are pushing to buy and sell, and price sensitive when others pay a premium, DFA works daily to improve results.