DFA Case Write Up
1. Should DFA enter the retirement market?
a. Yes, DFA should enter the retirement market. The firm prides itself on value added through skillful trading after thorough research and analysis. Also, everyone is concerned with retirement once they enter the job field, so it’s always going to be something that people will consider carefully and often will turn to advisement. DFA should be successful if many potential investors know their thorough reputation. Also retirement assets were becoming a dominant part of the mutual fund market.
2. Is Booth’s hunch about the performance-flow relationship in mutual funds changing over time correct? To answer this, split the sample into two sub-periods: 1980-2000 and 2001-2009. Using the data in the Spreadsheet Supplement to the case, generate a table of the average return and future flow for each return decide in both sub-periods. Then estimate the regression equation (1) from the case for both sub-periods both including and excluding the squared return. What do you find? Should this impact Booth’s decision?
a. Based on the table of averages, both sub-periods (1980-2000, 2001-2009) show a slight increase in return from previous to current quarters in the top 5 deciles, while the bottom ranked 5 show slight decreases in return from previous to current return flows. Even though half of the deciles had smaller amounts in the future they still had increasing flows. This reflects Booth’s idea of the somewhat curved relationship between performance and flow that had appeared in the industry of mutual funds. The funds that were top performers (top 5 in each decile) reaped an inconsistent share of future investor flows into mutual funds.
3. Is “Dimensional Managed DC” an improvement over existing options? Why or why not?
a. SmartNest is unlike many other retirement plans. Instead of providing an ending date lump sum amount of overall wealth, DFA focused on providing an annuity that was protected against inflation DFA aimed, with
a. Yes, DFA should enter the retirement market. The firm prides itself on value added through skillful trading after thorough research and analysis. Also, everyone is concerned with retirement once they enter the job field, so it’s always going to be something that people will consider carefully and often will turn to advisement. DFA should be successful if many potential investors know their thorough reputation. Also retirement assets were becoming a dominant part of the mutual fund market.
2. Is Booth’s hunch about the performance-flow relationship in mutual funds changing over time correct? To answer this, split the sample into two sub-periods: 1980-2000 and 2001-2009. Using the data in the Spreadsheet Supplement to the case, generate a table of the average return and future flow for each return decide in both sub-periods. Then estimate the regression equation (1) from the case for both sub-periods both including and excluding the squared return. What do you find? Should this impact Booth’s decision?
a. Based on the table of averages, both sub-periods (1980-2000, 2001-2009) show a slight increase in return from previous to current quarters in the top 5 deciles, while the bottom ranked 5 show slight decreases in return from previous to current return flows. Even though half of the deciles had smaller amounts in the future they still had increasing flows. This reflects Booth’s idea of the somewhat curved relationship between performance and flow that had appeared in the industry of mutual funds. The funds that were top performers (top 5 in each decile) reaped an inconsistent share of future investor flows into mutual funds.
3. Is “Dimensional Managed DC” an improvement over existing options? Why or why not?
a. SmartNest is unlike many other retirement plans. Instead of providing an ending date lump sum amount of overall wealth, DFA focused on providing an annuity that was protected against inflation DFA aimed, with