DFA diehards tend to be proud and protective of their relationship with the exclusive fund family — Dimensional Fund Advisors works with fewer than 2,000 advisors — known for its deep value orientation and emphasis on empirical financial research.
As befits the financial sophistication for which the firm is known, the latest paean to the fund firm’s superiority is a three-factor regression analysis that DFA advisor Eric Nelson of Servo Wealth Management has undertaken with a view toward understanding which factors account for DFA’s excess returns.
Writing on his blog, the Oklahoma City-based advisor seeks to show that DFA’s superior returns derive not merely from fund design characteristics — factors that lead some investors to favor ETFs over mutual funds or index funds over actively managed funds, for example; rather it is superior fund management that makes DFA funds advantageous.
To demonstrate this point, Nelson compares DFA funds over the past 15-plus years in two broad categories for which multiple index fund and ETF alternatives exist: large value funds and small value funds.
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He looks at how the DFA fund compared with two iShares ETFs and a Vanguard index fund in each category, then isolates how much did each fund’s value orientation, small-cap bias and management alpha contribute to performance.
The analysis seems to show that DFA is a different sort of creature than these other value products.
For example, in the large-value category, DFA’s annualized return of 7.2% far exceeded the 4.9%, 5.8% and 5.2% returns of the iShares S&P 500 value index, iShares Russell 1000 and Vanguard Value Index Fund.
Part of the reason for that, Nelson explains, is the fund’s 0.6 value coefficient compared to value exposure in the other funds ranging from 0.3 to 0.4.
That means that when value beats growth, the DFA fund will capture 60% of the outperformance compared with its peers’ 30% to 40%. And DFA gets this deeper value orientation by buying low price-to-book ratio stocks in the bottom quartile rather than the bottom half as is common with index funds, resulting in a deeper value bias.
The more diluted stock selection of DFA’s peers “results in watered-down and stale portfolios with much lower returns,” Nelson writes.
The DFA fund also outperformed its exposure to small-cap and value stocks by 0.1% through alpha (compared to its peers’ -0.1 to -1%), meaning through portfolio management emphasizing patient trading and lending of securities for added portfolio income.