Dimensinal Fnd Advisory Case Study

Case 4: Dimensional Fund Advisors

12/3/2008

Sung Jin Chung (A41101474)

Kang Bong Chang (A41072572)

Jung hyun Kwak (A41510709)

Jae Hyo Choi (A40951370)

1. What is DFA’s business strategy? Are the DFA people really believers in efficient markets?

DFA’s business strategy is based on the principle that the stock market is “efficient”. To keep track of the concept that market is efficient, DFA focused on the Small Value investment fund.(Value-stock funds and small-stock funds) DFA believes that Small company stocks have higher expected returns than large company stocks and Lower-priced "value" stocks have higher expected returns than higher-priced "growth" stocks. DFA is famous for its passive fund in the market.

In addition to efficient markets, DFA’s founders believed passionately in two other principles: the value of sound academic research, and the ability of skilled traders to contribute to a fund’s profits even when the investment was inherently passive. For example, DFA encouraged academics to work on subjects of interest to the firm by giving any professor a share of profits from investment strategies derived from his or her ideas. On top of that, DFA focused on the importance of diversification, low turnover, and low transaction costs.

To be more specific, DFA’s business strategies are as follows.

Small Cap Strategies : Dimensional has been a pioneer in small stock research since 1981. Research documents that, over the long term, small companies provide higher expected returns than larger companies.

Value Strategies : Dimensional's value strategies are based on the Fama and French research and are designed to capture the return premiums associated with high book-to-market (BTM) ratios.

Tax-Managed Strategies : Dimensional's tax-efficient mutual funds target market segments that have higher expected returns but are otherwise costly or unsuitable for taxable investors. The tax-managed strategies deliver the same strong,...