Dimensional Fund Advisors: Questioning Authority Since 1981

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Question commonly held perceptions.
SAGE Advisory Group: Question commonly held perceptions.

Remember those “Question Authority” buttons from the late ’70s and early ’80s? Admit it: You may even have one stashed in a drawer somewhere. The era also sprouted a new kind of authority-questioning mutual fund company. Since its founding in 1981, Dimensional Fund Advisors has been empirically questioning and periodically up-ending commonly held perceptions about how to bring cost-effective investing to the people.

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The Almost-Famous Fund Family
While Dimensional may not yet be a common household name, its reputation has quietly grown. Today, it’s the eighth largest mutual fund company, second only to Vanguard Group in 2013 sales, as reported in this October 28 InvestmentNews article. It also was recently listed as financial advisors’ favorite fund company in this Cogent Research report.

So what makes this almost-famous fund family so well liked among those in the know?

In our last post, “Passive Investing Turns 40-ish,” we described the history behind Dimensional and other fund managers who have turned away from an active investment strategy – i.e., from attempts to consistently profit by betting against a largely efficient market.

Among this non-active camp, Dimensional has been an especially strong proponent of developing new market insights and has sought to incorporate the best ones into its own fund family over time.

The Dimensional Difference
Just as the world changed considerably after we figured out that it was round, so too has the investing landscape – at least for those who are heeding the decades of academic evidence that has unfolded ever since. Here’s a handy timeline of the body of inquiry involved.

As described in our last post, the best-known passively managed funds are index funds, such as the popular Vanguard 500 Index Fund. It tracks the well-known S&P 500 Index by holding its 500 representative stocks. The end goal is to cost-effectively capture expected returns available from the asset class being targeted. For example, the S&P 500 tracks U.S. large-company stocks, because evidence has shown that this asset class is expected to deliver premium returns to patient investors who buy and hold it over time.

Dimensional is different. It’s not traditionally “active.” It does not place bets on individual stocks or unpredictable market movements. But it’s not “passive” either. Unlike an index fund manager, its funds are not rigidly tied to a commercial index proxy. While tracking an index fund is still preferred to active management, there are a few disadvantages to the strategy as well, as summarized in this table:


Dimensional Chart


Instead, Dimensional has let its freak flag fly by directly tracking asset classes and other “dimensions of returns” (other market factors that are expected to yield positive returns to patient investors) according to its own, rigorously established guidelines on how to accurately do so, typically using non-commercial benchmarks maintained at the University of Chicago’s Center for Research in Security Prices, or CRSP, as its measuring stick.

Elegant Investing
We know. That’s a lot to take in. Dimensional describes some of the distinct guidelines it applies before giving the nod to a dimension of expected return. Its fund management strategies must be:

  1. Sensible
  2. Persistent across time periods
  3. Pervasive across markets
  4. Robust to alternative specifications (ensuring a perceived pattern is more than random noise)
  5. Cost-effective to capture in well-diversified portfolios

Like Newton and his apple, sometimes the best ideas are the ones that make the most sense once they’ve knocked you on the head. Of course these basics involve deeply considered, smartly applied execution to make them come alive. But the fact that they can be summarized so clearly is incredibly powerful, and we believe an enormous contribution to the entire investment community.

Keep on Questioning
There are countless other ways in which Dimensional Fund Advisors has stood apart from most other fund families available – from the manner in which it makes its funds available (largely via a select group of informed advisors like SAGE Advisory Group) to the grassy park planted atop its Austin, TX corporate HQ’s parking garage.

At the core of its quirky success, you’ll find its aforementioned “question authority” roots. For the record, lest we baby boomers think we invented the concept, it’s worth noting there’s not much that’s more American than that. In fact, the expression may date back to when founding father Benjamin Franklin is reported to have said: “It is the first responsibility of every citizen to question authority.”

Have you got any questions of your own? We’d love to hear from you and continue the discussion.


SAGE Serendipity: You may also wish to view this short but informative video produced by Dimensional titled “The Power of Markets”. The video explains how security prices are set and change based on the collective knowledge of buyers and sellers.


Sheri Iannetta Cupo, CFP®, is Founding Principal of SAGE Advisory Group, based in Morristown, NJ, an independent, Fee-Only Registered Investment Advisory firm, specializing in providing busy professionals and their families with holistic financial life planning and investment management services. You can find more here: www.sageadvisorygroup.com where this post originally appeared. You can also connect with Sheri on Twitter, Google+ and LinkedIn.

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