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For those of you who’ve been clients of The Asset Advisory Group since our beginning in 1988, you know we have always followed an investment philosophy of diversification and rebalancing, but the investments we’ve used to implement your plan have changed over time. As an independent company, we can work with anyone, but we believe the best investment solution for meeting your financial goals is Dimensional Fund Advisors, or DFA.

DFA has been very successful, but quiet, since its funds became available to approved registered investment advisory firms in the early 90’s. As of December 31, 2010 they manage $207 billion in assets. Lately, due to the additional attention focused on the company since the publication of The Investment Answer, people are more curious about the company. Here’s a brief summary of why we use them to implement our clients’ investment plans:

  1. They use academic research vs. forecasting. No DFA fund holdings are based on an individual or committee’s opinion of what will “outperform” in the coming year. Instead, specific criteria determine what can be held in each fund based on research developed over long periods of time. If you are invested in DFA’s Large Company Fund, you don’t have to worry that your fund manager will someday move everything into oil stocks just because he feels good about that part of the market.
  2. They don’t blindly follow indexes. DFA is sometimes characterized as an index company, but they really create their own standards for what can be included in each of their funds. These “buy” lists are created using measures such as company size and geographic location, and then screened to exclude companies with issues such as bankruptcy, limited ownership, or other problems.
  3. They take risk where you CAN be rewarded. Active managers try to obtain gains for their shareholders by concentrating their holdings in a few stocks (and praying those few do well) or shifting in and out of the markets at the “right” time. Ongoing research and internet sites such as CXO Advisors show that those tactics do not work consistently. DFA’s research shows that investors are rewarded for holding stocks, and even more so for holding higher risk stocks characterized as value and small cap. They have designed funds to capture these returns.
  4. They are low cost. DFA funds have no sales loads, commissions, or trailing fees paid to advisors or custodians. They are pure, no-load funds. They are one of the largest mutual fund managers in the world, but you won’t see them sponsoring a golf tournament or paying $3 million for a 30 second Super Bowl commercial. Instead, they look for ways to reduce their investors’ management expenses. For example, many mutual funds lend out securities to other funds and receive payments to boost their company profits. DFA gives this interest income back to the funds that hold the securities, lowering the annual management expense for the fund’s shareholders vs. keeping it for themselves.
  5. Their independence keeps them client-focused. The Asset Advisory Group is independent and can focus on client needs vs. selling a product a corporate parent wants us to push. As an independent investment company, DFA is under no quarter-to-quarter pressure to meet earnings per share targets that Wall Street might expect. As a result, they can make decisions that are better for the long-term success of their mutual fund shareholders. Examples include absorbing management fees on new funds and investing in research to determine how they can further improve returns.
  6. They use trading to their advantage. If you have ever bought or sold a home, you know the person under no time pressure is the one with the bargaining power. If you are in no hurry to buy or sell, you can wait for your price. DFA uses this same strategy to obtain better prices for their funds. Index fund managers must sell when the index they follow changes. DFA can wait.
  7. They have brain power. Roger Ibbotson of Yale, Robert Merton of MIT, Myron Scholes of Stanford, Eugene Fama of University of Chicago and Kenneth French of Dartmouth are all academic leaders involved in the management of the company, and lend their expertise to its improvement.
  8. They are “wholesale” vs. retail. DFA funds are not available to the retail public. This protects you in several ways. First, when the media has investors scared and they begin the stampede to the exits of their mutual funds, you will not be trampled. Your DFA manager will not be forced to sell stocks to meet liquidity requirements when prices are down. Alternatively, DFA is not forced to digest hordes of cash when everyone decides that emerging markets is the hot investment for the year. They do not need to spend money attracting investors with full page newspaper ads and commercials. See #4 above.
  9. They focus on constant improvement. DFA is constantly examining what they do and how they can improve it, using a feedback loop between the academics that sit on their board, investment advisors who use their funds, and the clients of those advisors. This continuous sharing of information has brought about many changes to the company over the years. For example, beginning in June 2010, the DFA Micro Cap now excludes the extreme small cap growth stocks that fall into lowest 25% book to market and earnings to price ratios, because academic research has shown that this segment lowers returns.
  10. They provide access to education. We work to make sure that we stay up-to-date on tax, financial planning and investment issues by attending conferences and continuing education programs within our industry. DFA provides excellent educational opportunities for us by hosting conferences attended by some of the brain power mentioned earlier. We have to pay all of our own expenses to attend (see #4 again!) but we are more than happy to do so, because the education we receive makes us better advisors for you.

If you are interested in learning more, first hand, you are welcome to attend a seminar we are hosting at the Double Tree Suites from 11:30am to 1:00pm on March 11th. Joel Hefner, CFA and Vice President of Dimensional Fund Advisors will offer his take on “Redefining Investment Advice.” Please contact Mary Herrmann if you would like to attend.

Jeannette A. Jones, CPA, CFP®