How Avier Embraces the Dimensional Fund Advisors Investment Philosophy

JP Osseward | July 14, 2014

Avier Wealth Advisors manages our clients’ wealth in accordance with the Dimensional Fund Advisors (DFA) Investment Philosophy. Here’s why we do that:

Investing in DFA funds allows us to potentially minimize taxes and transaction costs by keeping the turnover rate low in our clients’ portfolios, all of which post tremendous benefits to our clients.

If you would like to learn more about the difference that such a strategic investment approach can make for you, please contact us to schedule an appointment with a specialist.

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What is the Dimensional Fund Advisors Investment Philosophy?

The investment philosophy of Dimensional Fund Advisors is based on the works of Eugene Fama, a professor at the University of Chicago, Kenneth French, a professor at Dartmouth College and Robert Merton, a professor at MIT. Their research identified that fundamental factors generate returns. By investing in stocks that have these factors, investors generate returns on par with or above the market over long time periods.

The core principle of the DFA Investment philosophy, which we agree with, is this:

While the market can be irrational, investors are rewarded for their allocation to these fundamental characteristics in the long run.

The factors that Fama, French and Merton identified are the market effect, size effect, value effect and accounting profitability effect. Rather than picking individual stocks, DFA captures these returns by investing in thousands of companies and making tilts towards these fundamental factors. With a portfolio that spans thousands of different companies, the impact, either good or bad, of one company is diminished. The fund seeks to benefit from the growth of the economy rather than just the returns of one company.

The Overlooked “Ts” and the Difference They Make

DFA also considers the often overlooked and misunderstood “Ts” of market returns: transaction costs and taxes.

Transaction costs are difficult to calculate and are never displayed prominently by fund managers. Transactions costs have real effects on the portfolio and drag down portfolio performance significantly. While explicit costs for a transaction include the price of the commission, other factors such as the transaction spread, usually has a far more dramatic effect on portfolio returns.

Equally notable is that every time a security is sold, another security needs to be purchased in order to be fully invested. Additional manager expenses would on average reduce the return to below the market return.

Taxes create an additional burden for investors that is often not addressed adequately. Funds display returns that are before tax that do not adequately represent the return to the individual investor. Instead of looking at the before tax return, investors should focus on the after tax return of the fund. Indeed, it’s not what an investor earns but what an investor keeps.

DFA minimizes both taxes and transaction costs by keeping its turnover ratio (the percentage of the portfolio that’s sold during the year) low. For example, DFLVX, Dimensional’s Large Cap Value Fund, has a turnover rate of 15%, indicating that it takes on average 6 years to buy and sell a position. DFA minimizes this turnover by using investor inflows to purchase undervalued securities and investor redemptions to reduce overvalued positions. Rather than sell or buy a position merely because of its fundamentals, DFA traders work to change the amount of a position by allocating funds in the most transactionally efficient manner.

The performance of DFLVX illustrates how the diligence to a research driven, fundamentally tilted, transactionally efficient and tax conscious portfolio affects returns. Over 5, 10 and 15 year time periods (Morningstar data as of 6/30/2019), the fund’s before tax return was in the 45th percentile, 8th percentile and 17th percentile of funds, respectively. The after tax return over 5, 10 and 15 year periods was in the 36th percentile, the 5th percentile and the 11th percentile, respectively (Morningstar data as of 6/30/2019).

Implementing the Dimensional Fund Advisors Investment Philosophy

If you would like to get started or improve upon your portfolio by implementing a strategy based upon the Dimensional Fund Advisors Investment Philosophy, please contact us by clicking below to set up a meeting.