INVESTMENTS - DFA Case study
Dimensional Fund Advisors, further referred to as DFA, is an investment company that bases its strategy mainly on academic research and related theories. They work together with proponents of the efficient market hypothesis, indicating a relatively strong belief in this theory and thus in efficient markets. However DFA also feels that skilled traders have the ability to contribute to a fund’s profits even when the investment is inherently passive and DFA does adjusts its strategy to new findings in the field. In this report we will evaluate the relevance and accuracy of the theories used by DFA, especially the value premium and the size premium where almost all of their funds are based upon. This will lead to comments on the usefulness of these theories to increase the return of DFA’s funds and to recommendations about changes in strategy that will enhance the performance of DFA overall. Performance and strategy so far
DFA has performed relatively well over the years, aside from some relatively rough patches in the late 1990s. Growth of the company had been stable and profits high. There was no need to sell shares for liquidity reasons and shares were only sold if they did not fit into a fund anymore. This didn’t happen very often though as DFA had several funds that were “connected”, when a stock in the Micro Cap portfolio grew too big it could be placed into a fund with bigger companies (Small Cap portfolio). An important part of DFA’s strategy, that contributed to the performance of DFA so far, is aimed at achieving discounts in trades through buying in large blocks. Results from research by Donald Keim1 show that the average discount obtained by DFA on block trades was 3.33%. These discounts were largely responsible for the fact that DFA’s passively managed small-stock portfolio outperformed the typical small-stock indexes by about 200 basis points per year on average. Another factor contributing to the relative...
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