dimensional funds

Financial Planning - Financial planning in general. (Moderated) 

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Subject Author Date dimensional funds pago_boss 04-09-2007  Re: dimensional funds Michael Siemon 04-09-2007  Re: dimensional funds pago_boss 04-10-2007  Re: dimensional funds Andrew Koenig 04-10-2007  Re: dimensional funds Andrew Koenig 04-09-2007  Re: dimensional funds Rich Carreiro 04-09-2007  Re: dimensional funds Mark Freeland 04-11-2007  Re: dimensional funds Jose Bailen 04-09-2007  Re: dimensional funds David Moore 04-09-2007  Re: dimensional funds pago_boss 04-10-2007
Posted by on April 9, 2007, 12:28 pm Dimensional Funds claim to offer superior returns with lower risks. The key to their success is using the 3 factor Fama/French to select a portfolio of value stocks. It claims to have all the benefits of indexing while still outperforming the market. My question is, how can an index manager outperform the market? by definition, an indexer cannot outperform the market. Thanks, Pago Posted by Michael Siemon on April 9, 2007, 12:58 pm pago_boss@yahoo.com.au wrote: > Dimensional Funds claim to offer superior returns with lower risks. > The key to their success is using the 3 factor Fama/French to select a > portfolio of value stocks. It claims to have all the benefits of > indexing while still outperforming the market. > > My question is, how can an index manager outperform the market? by > definition, an indexer cannot outperform the market. An index adds/drops stocks as they meet, or depart from, the defining parameters. A mutual fund tracking an index necessarily has some transaction costs at these points. DFA "models" the index parameters but does not necessarily buy or sell stocks on the same schedule as the index itself, spreading large transactions. In the case of their micro-cap fund (their first), they are a large player in the market and have developed some clout/strategies that enable them to do a particularly good job of managing spreads in their transactions. Similarly, their modeling of an asset class is nuanced (e.g. with respect to value, their criteria are a bit more sophisticated than just book-to-market). You can see their general comments on their approach on their web page, http://www.dfaus.com/ Whether they "beat" an index (on a regular basis) is arguable, but in general they often do better than most other fund providers in their target asses class funds. Posted by on April 10, 2007, 5:01 am > > pago_b...@yahoo.com.au wrote: > > Dimensional Funds claim to offer superior returns with lower risks. > > The key to their success is using the 3 factor Fama/French to select a > > portfolio of value stocks. It claims to have all the benefits of > > indexing while still outperforming the market. > > > My question is, how can an index manager outperform the market? by > > definition, an indexer cannot outperform the market. > > An index adds/drops stocks as they meet, or depart from, the defining > parameters. A mutual fund tracking an index necessarily has some > transaction costs at these points. DFA "models" the index parameters > but does not necessarily buy or sell stocks on the same schedule as > the index itself, spreading large transactions. In the case of their > micro-cap fund (their first), they are a large player in the market > and have developed some clout/strategies that enable them to do a > particularly good job of managing spreads in their transactions. > > Similarly, their modeling of an asset class is nuanced (e.g. with > respect to value, their criteria are a bit more sophisticated than > just book-to-market). > > You can see their general comments on their approach on their > web page,http://www.dfaus.com/ > > Whether they "beat" an index (on a regular basis) is arguable, > but in general they often do better than most other fund providers > in their target asses class funds. so Dimensional Fund managers are not passive managers like Vanguard, ie they do not track the market and they manually intervene to achieve their outperformance by being using smart buying and selling strategies. pago ======================================= MODERATOR'S COMMENT: Please trim the post to which you are responding. "Trim" means that except for a FEW lines to add context, the previous post is deleted. Posted by Andrew Koenig on April 10, 2007, 8:14 am > so Dimensional Fund managers are not passive managers like Vanguard, > ie they do not track the market and they manually intervene to achieve > their outperformance by being using smart buying and selling > strategies. The phrase "track the market" is too vague, because there is no single index that represents "the market" (unless maybe you consider some composite of all the stocks available worldwide). So in general, an index fund doesn't track "the market;" it tracks a particular index. My understanding of how DFA works is that each of their funds tracks an index. However, the index they track isn't usually one of the widely published ones. In other words, they don't decide on the basis of individual research whether to include a company; but rather they have rules that they apply mechanically, just like any other index fund. Here are two differences I've seen on their website between their indices and some of the others. Of course I may be misinterpreting their statements, or their policies might have changed since I read about them, but this is what I remember: 1) They don't include newly public companies until one year post-IPO. They say that their experience is that there's too much volatility in the first year without an attendant performance gain, on average. 2) They exclude companies for which there are too few market makers, as it is difficult to buy and sell those companies quickly. In addition to having slightly unconventional indices, they allow their funds to deviate slightly from the index in the interest of minimizing transaction costs. For example, their funds have some hysteresis about companies leaving or entering the index, so that they rarely have to buy a stock and then sell it again quickly. I personally consider these strategies, as described, to be very far from what I would ordinarily expect from an actively managed fund. Posted by Andrew Koenig on April 9, 2007, 1:39 pm > My question is, how can an index manager outperform the market? by > definition, an indexer cannot outperform the market. They can't. What they can do is select their markets more carefully than the published indices. So, for example, their small-cap funds stick to smaller compmanies than most others. As another example, just try to find an international small-cap value index fund that's open to new investors. The other thing they claim to do is to deviate slightly from the index when it would be more expensive to stick to it. For example, suppose a company in a small-cap fund grows to be a little too big for the fund. Then if the fund is trying to stick to the index, it has to sell that stock immediately. Then the company shrinks a bit, so it fits in the index again, and so the index has to buy it back. Sell high, buy low. DFA claims to solve this problem through hysteresis. When a company crosses the boundary of their index, they don't sell (or buy) it immediately. Instead, they wait until it has gone past the boundary by some amount. Another thing they claim to do is pay attention to transaction costs in a way that index funds generally don't. For example, when they sell stock, they look for buyers who are willing to pay a premium for fast execution. There are a few other tweaks that they claim to make. However, I think that the biggest advantage they offer is access to market segments that aren't well covered in general. Similar Threads Posted sovereign wealth funds vs. hedge funds June 21, 2007, 4:06 pm Foreign Funds September 27, 2006, 3:54 pm Inherited Funds March 12, 2007, 4:21 pm 529 or mutual funds, or something else? 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