Dfa Case Study

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9-203-026
REV: JANUARY 28, 2003

RANDOLPH B. COHEN

Dimensional Fund Advisors, 2002
In June of 2002, David Booth faced a dilemma. His firm, Dimensional Fund Advisors (DFA), had in recent times shown stellar performance after going through some relatively rough patches in the late 1990s. Growth was steady and profits strong. Yet, Pensions and Investments ranked DFA a mere th 96 in size among investment companies (see Exhibit 1). While DFA had never viewed maximizing assets under management as a goal, the ranking did suggest that it might be possible for DFA to achieve more as a firm than it currently was. Should Booth and DFA continue on the path that had brought them this far? Or was this the time for a major initiative that could catapult DFA to a status among the largest firms in the business?

The Company and its Clients
DFA was an investment firm based in Santa Monica, California. Founded in 1981 by Booth and Rex Sinquefield, two former students at the University of Chicago Graduate School of Business, DFA was dedicated to the principle that the stock market was “efficient”—that is, while over any given period some investors by luck would outperform the market and others would underperform, no one had the ability to consistently pick stocks that would beat the market. Such beliefs were associated with proponents of index funds, and, indeed, Sinquefield had run one of the very first S&P 500 index funds while at another firm. But DFA was not simply an index fund manager. In addition to efficient markets, DFA’s founders believed passionately in two other principles: the value of sound academic research, and the ability of skilled traders to contribute to a fund’s profits even when the investment was inherently passive. At its founding, DFA surmised that acting on these core beliefs would make it unique among investment companies. By 2002, DFA had 130 employees, over 100 of whom worked in the main office by the sea in California. Most of the rest worked in a Chicago office and two other trading offices, in London and Sydney. In addition, the firm had close working relationships with a number of prominent academics, especially Eugene Fama and Kenneth French, who had been involved with the firm from its early days, when they both taught finance at the University of Chicago. DFA encouraged academics to work on subjects of interest to the firm by giving any professor a share of profits from investment strategies derived from his or her ideas.

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Professor Randolph B. Cohen prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Professor Jay Light prepared “Dimensional Fund Advisors: 1993,” HBS Case No. 294-025. Copyright © 2002 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

203-026

Dimensional Fund Advisors, 2002

DFA had started with a single investment fund that held small stocks, but it now offered a fairly broad product line (see Exhibits 8 and 9 for information on DFA’s equity products; DFA also had about $2 billion of fixed-income investments). Still, small stocks continued to be DFA’s primary business. DFA’s fees tended to be lower than those of most actively managed funds but higher than those of pure index funds (see Exhibit 5). This was fitting given DFA’s position in the market as a passive fund that...
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