Best Mutual Funds: Dimensional Fund Advisors US Small Cap Value (DFSVX)

Dimensional Fund Advisors (DFA) was founded by two University of Chicago business school alums, David Booth and Rex Sinquefield, back in 1981. The company’s board of directors include Eugene Fama, Kenneth French, Roger Ibbotson, Myron Scholes and Robert Merton. Chock full of Nobel laureates…yum.

DFA’s website  pays homage to Fama’s theories. That loyalty was recently bolstered when Booth donated $300 Million to his namesake alma mater, University of Chicago’s Booth School of Business.

In its infancy 30 years ago, DFA primarily invested in small caps, following Banz’s size effect theory. The plan completely ignored Fama’s Efficient Markets Hypothesis and CAPM, reinforcing DFA’s conviction that small stocks historically beat large caps. Over the years they broadened their offerings. DFA now manages $187.8 Billion. That’s definite success in the business world. But how are their returns doing? Specifically, do they have any alpha?

Insider Monkey, your source for free insider trading data, got a hold of Dimensional Fund Advisors’ US Small Cap Value Portfolio’s (DFSVX) returns. We used Carhart’s four factor model to calculate the fund’s alpha. Using Fama-French’s three factor model would probably yield the same results. The reason is that DFSVX is a passively managed fund with an annual turnover of less than 25%.

Regression results for the first 5 years of the fund (between mid 1996 and mid 2001) show that DFSVX has an annual alpha of -0.11% with more value tilt than size tilt. During the 9 years ending June 2010, DFSVX had an annual alpha of -0.13% with more size tilt than value tilt. Fama and French’s investment strategies can’t generate alpha for Dimensional Fund Advisors. This isn’t surprising because Fama and French dedicated their lives convincing people that markets are efficient and that nobody can generate alpha. You might think that 13 basis points is a very small price to pay for investing in the universe of small and value stocks. The truth is that most mutual funds underperform their benchmarks by much more than 13 basis points per year, and that’s *after* taking expenses into account.

Dimensional Fund Advisors use a couple of strategies to shift their expenses to individual clients. For example, a small investor can’t invest directly in DFA’a funds. One must go through a DFA “approved” financial advisor, who usually charges around 1% of the invested assets per year to open the door to DFA. So, if you’re a small investor, then the true alpha of DFSVX for you is -1.13% per year. This isn’t much different from other index hugging mutual funds. In the meantime, DFA manages to minimize untimely redemptions and unnecessary expenses by erecting a “financial advisor” wall. DFA then collects money from those advisors by requiring them to pay for seminars led by financial gurus. This is an additional income stream for their management company. Moreover, these advisors are required to attend company paid seminars led by financial gurus. The advisors are requried to pay for their own travel and lodging expenses, however.

Insider Monkey thinks DFSVX is not a good mutual fund for individual investors. We don’t know about the fees they demand from institutional investors. If these fees aren’t excessive, institutional investors might consider investing in DFA funds if they want to match the performance of indexes. In our article titled Best Mutual Funds: LSV Value Equity Fund Returns and Alpha, we showed that Josef Lakonishok was able to generate about 120 basis points of alpha per year.

Behavioral Finance Professors: 1

Efficient Markets Hypothesis Professors: 0

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

6 Films About the Financial World You Need To Watch (While “The Wolf” is Not Around)

Warren Buffett and Billionaires Are Crazy About These 7 Stocks

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top Businesses to Invest In

Top 5 Things You Might Be Doing Wrong With Your Business

Top 5 Strategic Technology Trends in 2014

Top Rags to Riches Stories

Parenting Behavior That Promotes Future Leaders

Top 5 Mistakes Made by Small Businesses

Top 5 Most Common and Potentially Devastating Financial Blunders

Top 5 Highest Paying Jobs for Web Designers

Top 6 Most Respected Professions that Also Pay Well

Top 5 Pitfalls Investors Should Avoid

Top 6 Lawyers and Policy Makers Under 30

Top 6 New Year’s Resolutions for Entrepreneurs

Top 7 Locations to Check in on Facebook

Top 5 Mistakes made by Rookie eBay Sellers

Top 7 eBook Publishers in 2013

Top 6 Health Industry Trends in 2014

5 Lessons for Entrepreneurs from Seth Godin

Top 5 Success Tips from Jordan Belfort – the Wolf of Wall Street

Best Master’s in Finance Degree Programs

Top 6 Earning Celebrities Over 50

The most expensive sports to play

Top 7 Earning Celebrities Under 25

Best 7 Online Courses to Take: Free Finance MOOCs

Top 6 Bad Habits that Promote Failure

20 Most Valuable Soccer Teams in the World in 2013

12 Most Expensive Countries for Foreign Students

Top 30 Most Influential Women in the World

Top 20 Most Expensive New Year Eve Shows

Top 5 Best Vocational Careers

Top 10 Jobs for 2014 by Salary Gain (Predictions)

Top 5 Digital Trends for 2014

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!