Dimensional Fund Advisors
In February of 2003 we contacted a mutual fund company called Dimensional Fund Advisors (DFA) . We were interested in their approach, but to be able to distribute DFA mutual fund shares we were required to undergo a thorough audit and interview process. DFA is very selective about whom they do business with. They require that an advisory firm has a disciplined, passive low turnover approach and is fee based. Upon approval, we were one of only three advisory firms in Washington State who were accepted to do DFA business.
This was highly unusual because in every other instance mutual fund companies called on us to convince us to to sell their funds to our clients. In fact almost everything about DFA proved to be different:
Passive, but not Index
DFA is a proponent of the efficient markets hypothesis, and therefore does not engage in active management. But unlike other passive managers, most of DFA’s funds are not index funds. Instead DFA develops massively diversified baskets of securities without the need to slavishly trade based upon the reconstitution of indexes. This results in low cost mutual funds with turnover rates generally lower than that of the benchmark indexes.
DFA purchases institutional blocks of stock by negotiating directly with sellers. Sellers are often impatient and DFA is regularly able to negotiate below market prices. When selling shares, DFA is very patient, often selling over long periods of time to avoid the lower prices that are often the result of selling pressure.
High turnover is not always the fault of a mutual fund manager. Flighty investors who move money in and out of mutual funds can force a fund to buy and sell securities within the portfolio. To combat this, DFA does not offer shares to the retail investor unless they work with an approved advisor or meet very high minimums. Typical minimums are $2 million. In this way, investors in DFA funds enjoy exceptionally low turnover rates.