Dimensional Fund Advisors

Executive summary

In this report, we have studied the business model of Dimensional Fund Advisors. We have also analyzed the performance of two of their funds, small cap based (DFISX) and value based (DFIVX). In part 1, we have attempted to delineate the underlying principles of the DFA managers and also proposed a strategy that might be an interesting addition to their already varied portfolios. In part 2, we looked at the performance of the two DFA funds in terms of returns, fees, and Sharpe ratio. We looked at the funds’ current performance and historical performance. We also compared these with two other funds and attempted to make a judgment on how well these funds performed on a holistic level. It must be noted that a significant portion of our views about the future performance are based on our gut feeling derived from basic market knowledge.

1. a.)

DFA’s activity underlies on 3 principles: market efficiency, the value of academic research and skilled traders. Each of which are the basis for DFA’s business, costs (fees) and clients strategy.

The first principle accepts that markets are efficient in pricing the stock market; i.e. no agent can consistently beat the market. No investor can achieve higher returns without being exposed to higher risk. Based on this principle, DFA positions itself in the market as a passive fund whilst still claiming to add value through diversification, low turnover and low transaction costs. So the clients that the fund is targeting are the ones who don’t require active management, more long-term investors that will be comparing the amount of the management and success fees to other passively managed funds.

The second principle, DFA highly values sound academic research as a basis of being able to read which risks are worth taking in order to achieve higher returns. As such, DFA partnered with academics. In order to stimulate their interest in investigating subjects of interest to the firm, DFA gives any professor a share...