Introduction to Dimensional
Dimensional Fund Advisors (DFA) is a U.S. mutual fund company based in Austin, Texas whose funds employ investment strategies built around the pioneering financial market research and analysis of Nobel Prize-winning economist Professor Eugene Fama of the University of Chicago and Professor Kenneth French of Dartmouth College. Other prominent academics, including Nobel-Prize winner Robert Merton of MIT, also work closely with Dimensional.
In a 2013 survey done by Cogent Research, 1,700 financial advisors were asked how likely they were to increase their investments with twenty-four top fund companies. Dimensional came in first—for the third time in four years—beating out such very large, successful and well-known firms as Vanguard, PIMCO and T. Rowe Price. Why? With hundreds of mutual fund companies competing aggressively for the attention and business of financial advisors, what makes Dimensional’s value proposition so special?
Dimensional funds are not available to the public at large. Investors can only access them if they work through a Dimensional-approved firm. Years ago Dimensional made the decision to form strategic partnerships with a select group of independent investment advisory firms and to only make their funds available to the clients of these firms. Orion has established such a partnership with Dimensional and consequently has access, on behalf of its clients, to the full line-up of Dimensional funds.
In the mutual fund world, there is no other company—to our knowledge—that controls access to its funds in this fashion. Questions we field on this topic are: Why does Dimensional operate like this? Why not make their funds more accessible? There are two main reasons Dimensional controls and limits access to its funds.
First, Dimensional believes it is essential for its funds’ investors to understand the firm’s investment philosophy. If DFA investors do not understand (and buy into) the firm’s investment philosophy of consistently—through good markets and bad—maintaining exposure to securities with higher expected returns, they might make damaging changes to their investment plans during times of high market volatility.
Second, Dimensional seeks to keep its internal fund costs very low by minimizing turnover. If there is a lot of money sloshing in and out of a particular fund over time it drives up the fund’s costs—and thereby drives down the fund’s returns. Dimensional wants its investors to take a long term view on their investing and not attempt to trade around short term market fluctuations. By making its funds accessible only through select investment firms, Dimensional seeks to attract as many like-minded investors into its funds as possible. If all Dimensional investors adhere to the firm’s low turnover philosophy, they all benefit from it.
Many investors who have heard of Dimensional erroneously think the firm seeks to passively track commercial benchmarks. This notion is wrong. Dimensional is not an index fund company. The firm does however, believe in broad diversification of each of its funds, but within those funds it assigns higher weightings to securities that, based on their size (market capitalization) and valuation, have been shown to have higher expected future returns.
The chart below describes some of the differences between Dimensional and other types of investment managers.
Despite the fact that Dimensional is a large and successful company—it is the 8th largest mutual fund firm in the U.S. and manages in excess of $350 billion—many people outside the investment industry may be unfamiliar with it. This is partially by design: Dimensional does no public advertising. Instead, the firm’s advocates are its advisor partners who understand its research conclusions and resultant investment strategies.
We have chosen to build Orion Portfolios from Dimensional funds exclusively, as we believe Dimensional offers investors the best overall investment solution of any company when taking into account investment performance, low cost, tax-efficiency, transparency and consistency and robust data-driven investment strategy. As an independent fiduciary, we at Orion could choose to work with any fund company. In our view, however, Dimensional’s value proposition stands alone.
We encourage prospective investors to learn as much as possible about Dimensional and its investment philosophy before investing. We believe that the more time and effort that investors put in to understand what is different about Dimensional, the more likely they are to stay the course once they are invested in Orion Portfolios.
Dimensional’s website has extensive information about the company’s history, evolution, investment strategies and funds. To learn more about Dimensional, please visit www.dfaus.com.