Inflows to DFA are Way Up

Here is the link (and a copy of the article) about inflows (new investments) to DFA.

November 12, 2009
Morningstar: Fund Flows Up, But U.S. Equity Lags
Investors are plowing cash back into mutual funds, with bond funds leading the way even as U.S. equity funds continue to see outflows.
According to funds data company Morningstar, total inflows into U.S. open-end mutual funds were $314 billion this year through October. That’s a stark contrast from the $154 billion in outflows during the year-earlier period. 
Much of that money is coming from money market funds, which have seen roughly $400 million in outflows in the nine months after they peaked at $3.6 billion in January.
Taxable bond funds saw the biggest inflows in October, at $35.6 billion, followed by municipal bond funds at $6.2 billion. 
On the equity side, international stock funds raked in $5.1 billion during October, while U.S. equity funds experienced outflows of $8.1 billion. That’s the second consecutive month of outflows for U.S. equities, leaving the category in the red so far in 2009. 
Among fund families, Dimensional Fund Advisors has seen the largest inflows year-to-date as of October, at $5.8 billion. Three of the top ten largest fund families suffered outflows during this timeframe—American Funds, Oppenheimer Funds and Dodge & Cox.
In the exchange-traded funds universe, positive inflows in October strengthened a trend that has boosted overall year-to-date inflows to nearly $64 billion. Taxable bond funds have been the most popular category, with commodities and alternative funds neck-and-neck for second spot. 
Among Morningstar’s seven ETF categories, the only one with year-to-date outflows is U.S. stocks ($34.6 billion).

DFA – Kiplinger Article – Rocket Science

This is an interesting article from Kiplinger about DFA Funds.
This Is Rocket Science
Academic ideas spawned one company’s great funds. But to get them, you must play by its rules.

By Bob Frick

From Kiplinger’s Personal Finance magazine, October 2008
The story of dimensional fund advisors is unlike that of any other fund company. You can’t just buy shares. Rather, you must first observe a courtship ritual and then hire an adviser. And if you’re patient enough to listen and you agree with DFA that no one can beat the market, you’ll be allowed to own DFA funds. As DFA’s chief investment officer, Eduardo Repetto, puts it: “If we show you the data and you believe the data, then we are here to serve.”

Just like Saab’s claim that its cars are “born from jets,” DFA funds are born of eggheads. Nobel prize-winning economist Myron Scholes sits on DFA’s board, as does University of Chicago finance professor Eugene Fama — considered a shoo-in for a future Nobel award. Chief executive David Booth and director Rex Sinquefield, who co-founded DFA in 1981, were Fama disciples in college. “When I walk into a board meeting,” says Booth, “I don’t have to worry about being the smartest person in the room.”

The DFA philosophy boils down to the relationship between risk and return. History shows that some riskier stocks — those of small companies and those considered undervalued — produce higher returns on average over time than other types of stocks. “But on average doesn’t mean every year,” says Booth. DFA clients must be willing to endure periods of drought.

But over the long term, many DFA funds boast impressive results. DFA’s marquee fund, U.S. Small Cap Value, for example, beats every relevant benchmark. The fund, which invests mainly in U.S. stocks with the lowest 10% of market capitalizations, returned an annualized 11% over the past ten years (all return data is to August 1). That beat both the Russell 2000 Value index, which measures undervalued small-company stocks, and the typical small-company value fund by an average of almost two percentage points per year. And it left the large-company Standard & Poor’s 500-stock index in the dust by nearly eight percentage points a year.  ….

Read the complete article here:



DFA – How the Really Smart Money Invests (article from Fortune)

How the Really Smart Money Invests

From Shawn Tulley – Fortune Magazine, July 6, 1998

Suppose you made a list of the smartest people alive in finance–those who have done the most to advance our understanding of how the stock market really works. Somewhere near the top you’d surely place Eugene Fama of the University of Chicago, the leading champion of the efficient-market theory and a favorite to win a Nobel Prize one day. You’d obviously want to include Merton Miller of Chicago, who earned a Nobel by analyzing the effect of a corporation’s capital structure on its stock price, and Myron Scholes of Stanford, who won his Nobel by explaining the pricing of options. You’d also pencil in Fama’s collaborator Kenneth French of MIT, as well as consultant Roger Ibbotson and master data cruncher Rex Sinquefield, who together compiled the most trusted record of stock market returns going back to 1926.

What would you give to know how these titans invest their own money? Well, don’t give too much, because all you have to do is look at the funds of one Santa Monica money management firm, Dimensional Fund Advisors. Sinquefield and partner David Booth, both former students of Fama, founded DFA and now run the funds. Fama and French map out many of the investment strategies (and earn royalties for doing so). Miller, Scholes, and Ibbotson are directors. All except Miller, who believes directors should not invest in their own funds, have large chunks of their own money in DFA.

If you want to invest like these giants, however, you may have to check one of your most cherished investment notions at the door. Unlike any other money management firm, DFA insists that each of its funds follow a strategy based on rigorous academic research. And for the past three decades that research has squarely challenged the industry’s fundamental assumption–namely, that a stock picker, given enough smarts and enough research, can consistently beat the market. To the Über-intellects at DFA, the genius stock picker is a myth. “I’d compare stock pickers to astrologers,” says Fama. “But I don’t want to bad-mouth the astrologers.”

Such talk may seem harsh in these stock-mad days–when top mutual fund managers are as celebrated as sports stars–but DFA has the numbers to back it up. Sinquefield and Booth will be happy to share the reams of academic research supporting the theory that stocks are, with a few exceptions, an efficient market, in which prices fairly reflect all available information and stock pickers can’t really add much value. They can also point to the wildfire spread of indexing among professional and retail investors, an investment strategy they helped pioneer.

Sinquefield and Booth might also bring up the success of their own firm. After being hooted at by Wall Street 20 years ago, the pair today manage $29 billion in 22 funds, making their firm the ninth-largest institutional fund manager in the country. The client list includes the pension funds of PepsiCo, BellSouth, and the state of California, and the endowment of Stanford University. The firm is also the most popular choice of the mutual fund industry’s fastest-growing retail distribution channel, fee-only financial planners. (If you want to invest your own money in DFA funds, you’ll need to go through one of them.) DFA collects fees averaging about a quarter of a percent on that asset base, for a gross of some $70 million a year. Which pretty much disposes of the notion that ivory-tower ideas never make you rich.

If nothing else, DFA’s success is a measure of how deeply the once thorny theories of academic finance have taken hold in mainstream investment practice. And that is due in no small part to the two founders’ own tireless proselytizing. Sinquefield and Booth met in 1971 at the University of Chicago Graduate School of Business. Booth, a Ph.D. candidate, was grading papers and advising students in Fama’s finance course. Sinquefield, an MBA student, regularly bombarded Booth with doctorate-sized questions. Both were already ardent believers in the efficient-market hypothesis, a theory that Fama first espoused in his Ph.D. thesis in 1964 and elaborated on in subsequent articles and academic confabs. Booth, a blond, Midwestern computer jock, came across Fama’s thesis as a master’s candidate in computer sciences at the University of Kansas. Dazzled by Fama’s intellectual footwork, he gave up his IBM’s to move to Chicago and study under Fama.

For Sinquefield, it was a case of one theology replacing another. Raised from age 7 in Saint Vincent’s Catholic orphanage in St. Louis, he earned his keep there making beds and waiting on tables. He went on to study for the priesthood but left the seminary after three years. Sinquefield first encountered Fama’s theories at the University of Chicago and, like Booth, had an epiphany. “It reminded me of studying Aristotle and Thomas Aquinas,” he says. “The theories were so ordered and logical.”

The object of their devotion, Eugene Fama, is a blunt, brilliant rebel, the scion of a working-class Boston family, whose greatest love is upsetting the status quo. As restless physically as he is mentally, Fama is a fanatic tennis player and athlete who rises at dawn to work out in his basement to blaring Wagner operas. On visits to DFA’s California headquarters, he wears a special beeper that goes off whenever the wind is right for windsurfing. Once alerted, the 59-year-old Fama packs up his sailboard and heads for the beach–or if he’s stuck in a meeting, he exhorts the participants to hurry up. Although considered a front-runner for a Nobel, Fama refuses to shed his curmudgeonly ways, even to compete for the prize. When well-wishers gently suggested that he might help his chances by chatting up the Nobel committee, his response was pure Fama: “If they come over here, I’ll chat, but I’m not dragging my behind over to Sweden.”

While other thinkers had long questioned whether stock prices were really predictable, Fama’s work gave the efficient-market hypothesis its most rigorous intellectual grounding (as well as its name). Fama argued that the stock market is a matchless information-processing machine, whose participants collectively price shares correctly and instantaneously. Unlike the market portrayed in mutual fund advertisements and personal-finance magazines, it is not a place where the smartest managers outwit the less smart. Instead, the market is so full of well-trained, well-motivated investors avidly gathering information and acting on it that not even Nobel Prize winners can hope to beat it consistently. Sure, some managers will outpace the market for a few years, but it is impossible to prove that those runs are more than just sheer chance.

The efficient-market theory still raises hackles on Wall Street, for obvious reasons. But in academia the debate is all but over, and among pension fund fiduciaries Fama’s theories are now so accepted that an estimated 24% of the trillions of dollars in pension assets is invested in index funds.

When Sinquefield and Booth joined the work force after leaving Chicago, however, the efficient market was a revolutionary idea. While working as a trust officer at American National Bank in Chicago, Sinquefield evaluated the bank’s money managers and discovered just what Fama had predicted: Funds that actively pick large-company stocks collectively do no better than the S&P–worse, in fact, once you count their fees of 0.5 to 1.5 percentage points a year. Why not create a fund that simply tracked the index? asked Sinquefield. As long as fees were low, it would be all but certain of beating most professional stock pickers over time.

The new concept was the ultimate hard sell. “You think John the Baptist had it tough!” recalls Sinquefield. But he finally persuaded New York Telephone to invest in an S&P 500 fund if American National started one. So in 1975 Sinquefield and American National launched the first index fund to mimic the S&P. (Or maybe the second–Wells Fargo, which came out with a similar fund at the same time, claims it got there first.)

Meanwhile, at investment firm A.G. Becker in New York City, Booth was advising pension fund managers on where to put their money. He noticed that almost all the managers invested in big companies. Booth pleaded to start a small-cap index fund, but his colleagues guffawed at his presentation. “They were saying, ‘Don’t let the door hit you on the way out,’ ” recalls Booth. The next day Booth started DFA in his Brooklyn apartment, ripping out the sauna to put in a Quotron machine.

As Booth began looking for clients, another of Fama’s graduate students, Rolf Banz, was researching the performance of small stocks vs. large. Banz’s research proved for the first time what most professional investors take for granted today: that small-cap stocks produce higher returns than big ones over long periods. The reasoning is pretty straightforward. Smaller companies are riskier than larger companies and have a higher cost of capital. No one would invest except in expectation of earning a commensurately higher return.

Sinquefield, who had been following Banz’s research, immediately proposed a small-cap index fund at American National. The bank nixed the idea. By coincidence, Booth called shortly afterward to say his fledgling firm was hatching a product just like the one Sinquefield’s employer had deep-sixed. Sinquefield quit his job and joined Booth. DFA was in business.

In keeping with Banz’s research, the fund would own all the stocks that made up the smallest two deciles, measured by market capitalization, of the companies on the New York Stock Exchange. (The name, the 9-10 fund, derives from the two deciles.) True efficient-market believers, Sinquefield and Booth made no effort to sort the winners from the dogs among the fund’s holdings. Thus, there would be no research department or celebrity money managers, and costs could be held to a modest half percentage point, a third of what the average small-cap fund charges today. The result was a fund with the efficiency of an S&P indexer but the promise of higher returns in the long run.

One of DFA’s first moves was to recruit Fama, Miller, Scholes, and Ibbotson as advisers. Fama was delighted with the idea of a fund based on his principles. “In class he kept telling us that the efficient-market theory was the most practical thing we’d ever learn,” recalls Booth. “I think Rex and I were the only people who believed him.” Over the years Wall Street firms, including Goldman Sachs, have tried to lure Fama away, but he always refused to leave his brainchild.

At first things went splendidly. From July 1982 to mid-1983, DFA’s small-cap fund gained nearly 100%, and pension funds rushed to sign up. Then Sinquefield and Booth experienced a corollary of Banz’s research: When small stocks fall, they fall harder than big ones. From 1984 to 1990, small caps went through the worst seven years in their history, returning just 2.6% a year, vs. 14.7% for the S&P. “At least it discouraged the competition,” muses Booth.

What saved DFA during this period was that Sinquefield and Booth had not overpromised when selling the fund. They never told clients that small stocks would outpace big ones in any given period, even one lasting seven years. They did pledge that DFA would beat most competing small-cap funds, saddled as they were by high fees. And so it did: All small-cap funds underperformed the S&P, but DFA did better than most. Moreover, since the small-stock dry spell ended in late 1990, the 9-10 fund has waxed the S&P 500, the Russell 2000 small-stock index, and the average small-company mutual fund.

Then as now, DFA owed much of its out-performance to a fierce attention to costs. After all, in an efficient market, costs are the one thing you can control. In addition to charging low management fees, DFA gains on the competition by sharp trading. Part of its advantage is size: As the nation’s largest market maker in small caps, DFA is the first stop for active managers desperate to buy or sell blocks of small stocks. Says Robert Deere, the head of trading: “We make it as painful for them as possible.”

While the 9-10 fund remained a moderate success, it took another breakthrough by Fama to really push DFA into the big time. The study, conducted with Kenneth French, then of Yale, confirmed Banz’s small-stock effect but also showed convincingly that the lower the company’s ratio of price to book value, the higher its subsequent stock performance tended to be. No other measures had nearly as much predictive power–not earnings growth, price/earnings, or volatility. While “value” managers such as Warren Buffett and Michael Price had long maintained that it was smarter to buy companies when they were out of favor–thus trading at low price-to-book ratios–Fama and French proved the point with statistical rigor. According to Fama and French’s most recent data, downtrodden “value” stocks have outpaced high price-to-book growth stocks annually by an average of 15.5% to 11% over the past 34 years.

What makes the numbers so dramatic is that growth stocks–the Coca-Colas and Gillettes–are inevitably the most highly regarded issues, with the most predictable earnings streams. The only problem is that you have to pay for that reliability. That leaves less room for future appreciation. Value stocks, by contrast, have low prices but big upside potential. They have to offer investors higher return to compensate for the extra risk of owning them, just as Kmart must offer higher rates to sell its bonds than Wal-Mart. In a way, the value effect is similar to the small-stock effect: Bigger risk pays off, in aggregate, with higher returns. In fact, small stocks that also trade at low price-to-book ratios provided the best results of all in Fama and French’s study, returning an annual 20.2% over 70 years, eight points more than big growth stocks.

DFA was quick to launch a small- and a large-cap value fund based on Fama and French’s research. The funds buy only stocks that fall into low price-to-book deciles, and they make no attempt to distinguish “better” value stocks from worse ones. Partly on the strength of Fama’s research, the two funds have proved enormously popular and now contain some $8 billion. One believer is Robert Boldt of Calpers, which invests $1.7 billion with DFA. “I’m convinced the value effect is real,” says Boldt. “You have to expect higher returns for investing in beaten-down companies.”

With a certain amount of academic prudence, the DFA sages are careful to warn that their research is no substitute for a balanced investment plan. They don’t, for example, recommend that you invest only in small-cap and value stocks; the two strategies sometimes badly under-perform. For stability, they recommend holding about 45% of your equities in an S&P index fund.

None of that diminishes their evangelical–some would say arrogant–attachment to their strategies. The zealots at DFA believe that their methods have not only the weight of evidence behind them but also the force of history. “Today the only people who don’t think markets work are the North Koreans, the Cubans, and the stock pickers,” says Sinquefield.

Who could argue, given all the brainpower at DFA? Still, hope springs eternal in investors’ hearts. The temptation to try to pick the next Microsoft or Peter Lynch is–let’s face it–pretty hard to overcome. And besides, at least one DFA giant thinks it’s okay to indulge such guilty pleasures as long as you recognize them for what they are. “I choose a few stocks myself,” says Nobel laureate Merton Miller. “But I do it strictly for entertainment.”

An Article about DFA Funds

This is a great article about DFA Funds

DFA Funds Hard to Buy, Easy to Own

By Timothy Middleton


June 2002

 Call Dimensional Fund Advisors the anti-Long Term Capital Management .

 The latter is the professor – run hedge fund that imploded because the risks it was trying to avoid bit it in the backside. DFA,  likewise run by a coven of finance professors, doesn’t avoid risk—it relishes it .

And that’s produced an excellent long- term performance record, which, alas, most individual investors can’t take advantage of. DFA funds are sold only through fee-only financial planners—and then only when DFA agrees to accept their business.

“I can’t stand their attitude! ” grouses a planner whom DFA turned down. “They’ve got great funds, and a great discipline, lots of deep thinking, but they’ve got an attitude.”

 Before Harold Evensky, a well-known planner, was allowed to invest in DFA funds, he had to t rek to seminars it sponsors at places such as the University of Chicago. “I remember way back when they told me you had to be approved that I was incensed,” he says. “But it’s not elitist criteria they’re pushing; it’s professional criteria.”

 Today, DFA funds account for as much as 40% of a typical client’s equity port folio at Evensky, Brown & Katz, headquartered in Coral Gables, Fla. DFA is run on principles developed in the nation’s graduate schools of ….

Read the complete article here

Investing Strategy Part 1 – Be Risk Appropriate

This is the first of an eight-part series on the keys to a successful investing strategy. Watch for one blog each day over the next week to help you in formulating your personal investing strategy.

A good investment strategy is comprised of several key practices. The first is to make sure that your investment portfolio is risk-appropriate. The primary factor in determining the risk of your portfolio is the mix between equity investments (stock, usually in mutual funds) and fixed-income investments.

Equity investments have a higher historical & expected return over the long run, but are more volatile (more risky). Fixed income investments are less volatile, but also have a lower historical and expected return. The higher the proportion of equity investments in your portfolio, the higher the expected.

Each of us has a certain set of circumstances, situations, beliefs and tolerances that define a unique risk capacity for us. For example, a young person with no dependents, who has already built their emergency fund, and who is comfortable with volatility may want to take on more risk than someone who has dependents, is closer to retirement, has a very risky job or is closer to retirement.

Two of the biggest mistakes investors make are:

1. Taking too much risk and

2. Taking too little risk.

There is no right or wrong when it comes to making the risk decision. Each of us choose the equity/fixed income mix that fits us best. Understanding the consequences of a given risk decision is an important factor. I spend time with each client looking at the historical impact of various risk decisions on what size losses or gains you might expect over one, three and five year periods. There are calculators on the internet and various rules of thumb (some driven by your age – which I really don’t like) that you can use.

I believe that there is no better way to make the most appropriate decision for you than understanding the costs and benefits of taking risk in your portfolio.

This IS Rocket Science – Great Article on DFA Funds

You have read that I am a big fan of DFA (Dimensional Fund Advisors) mutual funds because of their diversification and low costs.  The following is an interesting article from Kiplinger’s on DFA:

This Is Rocket Science

Academic ideas spawned one company’s great funds. But to get them, you must play by its rules.

By Bob Frick 

From Kiplinger’s Personal Finance magazine, October 2008The story of dimensional fund advisors is unlike that of any other fund company. You can’t just buy shares. Rather, you must first observe a courtship ritual and then hire an adviser. And if you’re patient enough to listen and you agree with DFA that no one can beat the market, you’ll be allowed to own DFA funds. As DFA’s chief investment officer, Eduardo Repetto, puts it: “If we show you the data and you believe the data, then we are here to serve.” 

Just like Saab’s claim that its cars are “born from jets,” DFA funds are born of eggheads. Nobel prize-winning economist Myron Scholes sits on DFA’s board, as does University of Chicago finance professor Eugene Fama — considered a shoo-in for a future Nobel award. Chief executive David Booth and director Rex Sinquefield, who co-founded DFA in 1981, were Fama disciples in college. “When I walk into a board meeting,” says Booth, “I don’t have to worry about being the smartest person in the room.” 

The DFA philosophy boils down to the relationship between risk and return. History shows that ….. 

Read the complete article at … 

Dan Solin’s three stock market predictions for 2010

I think that you will find the following article about Dan Solin’s three stock market predictions for 2010 very interesting:

His three predictions are:

1.  There will be no end of “financial experts” who will shamelessly set forth their views on what will happen to the stock markets in 2010.   (he has some great examples of predicions by experts made last year and earlier this year – including a prediction by Jim Cramer  Jim Cramer — not one to lack in confidence or flair — that Goldman Sachs (GS) would finish 2008 at $300 a share. Cramer didn’t consider this a mere prediction. It was “an inevitability.”   Goldman Sachs finished 2008 at $84. Its current price is $167.  

2.  Most investors will continue to rely on the discredited pseudoscience of stock market predictions. Their brokers and advisors will tell them they can “beat the markets,” time the markets, pick stock winners and pick superior fund managers. Even though no data indicate anyone has these skills, it won’t deter these “financial pros” from pitching them to trusting and gullible investors.

3.  A growing number of investors will fundamentally change the way they invest.   They’ll understand that they can control only a few things: They can keep their fees low by choosing the right funds; they can focus on their asset allocation; and they can use low-cost passively-managed funds (like DFA) to put together a globally diversified portfolio of stocks and bonds.

You can read the full article at: