Does DFA hit its benchmarks?
(MoneyWatch) Many investment strategies appear to show value added before expenses, but the big question is if they actually deliver what they promise. Today, we'll look at whether the passively managed asset-class funds of Dimensional Fund Advisors, which has well over $200 billion in assets under management, have delivered the returns of the asset classes in which their funds invest.
According to its website, DFA touts its ability to "capture what markets have to offer." Thus, it should be able to produce fund returns comparable to appropriate benchmarks. As you review the results, remember that indexes have no costs, but funds do. We should generally expect to see a fund underperform its benchmark by at least its expense ratio, plus some additional amount related to the costs of turnover. Also, we'll also take a look at each fund's securities lending revenue, which helps offset the fund's expenses. (Please note that the revenue figures are for the fund's latest fiscal year, which ends in October, so they don't exactly align with the fund's returns as presented.)
We'll start with DFA's domestic funds, looking at five funds versus appropriate benchmarks. The time period for all these funds is inception through June 2012.
- DFA US Micro Cap Portfolio (DFSCX) vs. CRSP 9-10 Index
- DFA US Small Cap Portfolio (DFSTX) vs. CRSP 6-10 Index
- DFA Small Value Portfolio (DFSVX) vs. Fama-French Small Value Index (ex utilities)
- DFA Large Value Portfolio (DFLVX) vs. Fama-French Large Value Index (ex utilities)
- DFA Large Company Portfolio (DFUSX) vs. S&P 500 Index
The evidence is clear that DFA has been able to earn the returns of the asset classes its funds invest in, outperforming benchmarks by an average of 0.68 percent. Even if we exclude the large value fund as perhaps an outlier, the average underperformance of the remaining four funds was just 0.10 percent. Note that the average expense ratio is 0.36 percent. However, once we add in the securities lending revenue, the average "effective" expense ratio falls to 0.24 percent.
Next, we'll see how DFA's international funds have performed. This time, we have four funds to examine:
- DFA Large Cap International Portfolio (DFALX) vs. MSCI EAFE Index
- DFA International Value Portfolio (DFIVX) vs. MSCI EAFE Value Index
- DFA International Small Company Portfolio (DFISX) vs. MSCI World ex US Small Cap Index (net dividends)*
- DFA International Small Cap Value Portfolio (DISVX) vs. MSCI EAFE Small Value Index (net dividends)
The four international funds outperformed their benchmark index (something the vast majority of active funds fail to do) by 0.77 percent, overcoming the drag of their expenses. The gross expense ratio averaged 0.50 percent. However, once we consider the securities lending revenue, the "effective" expense ratio falls to 0.32 percent.
As you review the evidence, keep in mind that the emerging markets are probably the most expensive to operate in. We have three funds to examine:
- DFA Emerging Markets Portfolio (DFEMX) vs. MSCI Emerging Markets Index (gross dividends)
- DFA Emerging Markets Small Cap Portfolio (DEMSX) vs. MSCI Emerging Markets Small Cap Index (net dividends)
- DFA Emerging Markets Value Portfolio (DFEVX) vs. MSCI Emerging Markets Value Index (gross dividends)
DFA's three emerging market funds were able to outperform their respective benchmark indexes by 3.46 percent, overcoming a gross expense ratio that averaged 0.67 percent. After accounting for the securities lending revenue the "effective" expense ratio was 0.55 percent.
The bottom line is that whether we look at domestic stocks, stocks of other developed markets or stocks of emerging markets, DFA has demonstrated that a well-designed and well-run passively managed fund can meet the objective of investors -- to earn the return of the asset classes in which they want to invest. Case closed.
Larry Swedroe's firm, Buckingham Asset Management, primarily uses DFA funds in the construction of client portfolios.
*The start date for DFISX is October 1996, but data for the best benchmark for this fund starts January 1999, so the data used in this comparison starts in January 1999.
Image courtesy of taxbrackets.org
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