The financial world is no different. Before computers there was no way people could possibly understand what drives the market returns, was it by chance, or are there fundamentals that drive long term returns.
Two researchers Eugene Fama and Kenneth French developed a new framework to study financial markets, Eugene has been honoured with a Nobel Prize in Economic Sciences for his work.
Their research underlies all of Dimensional’s thinking and helped develop the firm’s process.
Transforming the way finance is viewed and conducted, which you may know as evidence-based investing.
Dimensional Fund Advisors is currently the eighth-largest fund management company in the world.
It manages assets exclusively for institutional investors and the clients of a select group of fee-based advisers.
Those assets were worth $660 billion as of June 2021.
Now for the part I really love.
DFA’s board members, directors, and consultants represent a “who’s who” in the world of financial economics, including Eugene Fama and other Nobel Prize-winning laureates, Robert Merton and Myron Scholes.
DFA does not develop or recommend investor portfolios, instead, this work is left up to the adviser chosen by the client.
Development of highly efficient portfolio models requires a thorough understanding of Modern Portfolio Theory (MPT).
The principal goal of MPT is to achieve the greatest return for the amount of risk taken (or, conversely, to minimise the risk in a portfolio targeted to achieve a specific return).
Doing so requires combining asset classes in the portfolio to achieve effective diversification.
Domestic or foreign.
We use US data here because Vanguard has a longer history in the US.
As you can see, DFLVX outperformed VIVAX by 1.67% per year.
You will also see that Dimensional outperforms Vanguard across the U.S. Small Cap and U.S. Small Cap Value asset classes as well.
The driving factor behind Dimensional’s outperformance comes from their ability to have an exposure that is more sensitive to the market, size, and relative price premiums.
A systematic investment approach is the way forward, it keeps investors disciplined and patient even through the most challenging times because they believe in the enduring power of the markets. They believe in their strategies and that their portfolio is working for them no matter what.
This is why during the volatile period of 2008-2012, US mutual funds saw outflows of $535.7 billion and Dimensional saw inflows of $34.4 billion.
Having a strategy you trust is vital to investment success, it will give you the clarity and confidence needed to control your financial future.