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Reposted from http://www.investmentnews.com

With its data-driven models the company attracted third-most money in 2014 behind Vanguard and JPMorgan

Jan 19, 2015 @ 9:14 am

By Bloomberg News

When Molly Bernet Balunek expressed interest in putting money into mutual funds run by Dimensional Fund Advisors, she didn’t know she was in for a rigorous courtship ritual.

Before getting the go-ahead to invest in Dimensional’s products last year, Ms. Balunek, a financial adviser from Cleveland, had to submit to an interview, fill out a questionnaire and pay out of her own pocket for a two-day trip to Austin, Texas, where she listened to the company’s executives explain how they do business. The process, which Ms. Balunek described as “intense,” took about five months.

“It is a two-way evaluation process — Dimensional wanted to understand my business structure and investment philosophy as much as I wanted to understand theirs,” said Ms. Balunek.

The ritual is part of a sales process that has helped Dimensional attract the third-most money last year after Vanguard Group Inc., known for its low-cost index funds, and JPMorgan Chase & Co. Like Vanguard,

(More: Advisers’ favorite money managers)

Dimensional is capitalizing on a growing belief that stock pickers can’t consistently beat markets. Dimensional’s approach, though, comes with a twist: unlike traditional index strategies, the funds use data-driven models to beat traditional benchmarks.

Dimensional is among a small group of managers toppling the dominance of firms such as Fidelity Investments and Capital Group, which have built their reputations on picking individual stocks. Among the fastest-growing U.S. mutual fund firms after assets surged almost six-fold in the past decade, Dimensional attracted almost $28 billion in new money in 2014.

Dimensional believes beating the markets is an exercise in futility and most managers cannot justify the fees they charge. What sets Dimensional apart is its investment philosophy, using research pioneered by Nobel laureate Eugene Fama and Kenneth French, of focusing on specific factors or dimensions that have helped certain indexes beat benchmarks such as the S&P 500 Index.

Dimensional, which sells its funds only through approved advisers and never directly to the public, spends considerable effort educating investors on how its approach works. Its system of picking advisers breeds a high degree of loyalty. The firm received the highest grades in customer loyalty among mutual fund companies in a July 2014 survey of U.S. financial advisers conducted by Cogent Reports of Cambridge, Mass.

‘BRILLIANT WAY’

“They’ve developed a brilliant way of locking in money and the advisers who use them seem to love it,” said Lawrence Glazer, a managing partner at Mayflower Advisors, a Boston-based adviser that oversees $2 billion.

David Butler, who runs Dimensional’s financial adviser business, said he could “count on one hand,” the advisers who have stopped using the company’s funds in his nearly 20 years at the company.

Advisers who use Dimensional, “tend to buy into the firm’s unique philosophy and investment approach and direct a higher proportion of their mutual fund dollars to the firm,” Linda York, a Cogent vice president, wrote in an e-mail.

Dimensional’s assets have more than doubled since 2009 to $381 billion in a mix of mutual funds and institutional accounts. Part of the growth is the result of shifting client sentiment, as investors disillusioned with the ability of stock pickers to insulate them from losses during the 2008 crisis have increasingly turned to cheaper alternatives such as index mutual funds and exchange-traded funds.

Mutual funds that pick U.S. stocks experienced $98 billion in redemptions in 2014. During the same period, investors added $167 billion to domestic stock index funds and ETFs, according to data from Chicago-based Morningstar Inc.

Vanguard attracted $219 billion in mutual fund and ETF deposits last year. Fidelity had redemptions of $5.3 billion while American Funds, the mutual fund arm of Capital Group, won $345 million.

Mayflower’s Mr. Glazer said while low-cost indexing is popular at the moment, there is no guarantee it will remain so.

“If the history of asset management is any guide, the companies and styles that were the leaders in one decade, won’t be the leaders in the next decade.”

NOT DELIVERING

“Conventional active managers promised a lot that they weren’t able to deliver,” David Booth, 68, chairman and co-founder of Dimensional, said in an interview at his company’s headquarters in Austin.

Mr. Booth built his firm around the ideas of his University of Chicago mentor Mr. Fama, who won the 2013 Nobel Prize in economics for his work on efficient markets. In 2008, crediting the school for his success, Mr. Booth donated $300 million to his alma mater, which renamed its business school the University of Chicago Booth School of Business.

Mr. Fama and his research partner, Dartmouth College’s Mr. French, have argued that stock-price movements are unpredictable and that trying to pick securities that will beat the market is pointless.

“Most people are fooling themselves when they think they have the ability to hire a superior manager,” said Mr. French, in a video posted on Dimensional’s website.

The pair’s research also shows that certain factors can produce higher returns. Using historical market data, they found that over the long term, small stocks have outperformed large ones, value-oriented equities have beaten growth and more profitable companies have done better than less profitable peers. Dimensional’s funds reflect those tilts, with portfolios composed of small-cap companies, value shares and stocks of companies with above-average profits.

Over the past five, 10 and 15 years, Dimensional’s stock funds have outperformed about 70% of peers, according to Denver-based Lipper. Bond funds, a smaller piece of the business, trailed about 60%. Over the past 15 years, almost 90% of the company’s stock and bond strategies with a track record that long have topped their benchmarks, Dimensional data show.

Dimensional executives say that they can’t quantify or guarantee the amount of outperformance they can generate.

“If we can beat the benchmarks by 50 basis points a year — and in many strategies by 100 basis points — I will do handstands,” said Mr. Booth.

For the last 15 years, Dimensional’s funds have benefited from a rally in small-capitalization and value shares. Since the end of 1999, small stocks, as measured by the Russell 2000, have returned more than twice as much as large stocks, represented by the S&P 500 Index. Value stocks gained about four times as much as growth stocks.

SETTING EXPECTATIONS

The opposite pattern prevailed during the technology boom of the late 1990s, as big stocks and growth stocks outperformed, data compiled by Bloomberg show. In 2014, small cap stocks lagged behind large ones by a wide margin. They trailed again in 2015 through Jan. 13.

William Smead, a stock picker who runs the $952 million Smead Value Fund and invests in big companies, said if historical patterns hold, small cap stocks could lag behind large ones for the next six to nine years.

Setting realistic expectations for performance is just one piece of Dimensional’s close relationship with advisers, a relationship that began as an accident, according to Mr. Booth.

In the 1980s, the firm managed money exclusively for institutional investors. In 1988, an adviser approached Mr. Booth about investing in Dimensional funds.

The idea was intriguing and also somewhat disturbing, said Mr. Booth, who was concerned that advisers would move in and out of the funds too often, burdening other investors with higher costs. Minimizing trading costs is part of Dimensional’s plan for adding value. The solution was to create a system in which the company could pick advisers who bought into Dimensional’s approach and played by its rules.

“They don’t want advisers who are traders, they don’t want hot money and they don’t want people who are chasing performance,” said Ms. Balunek, who described the process of becoming a Dimensional adviser as more “invasive” than she anticipated.

Mr. Booth said the extended process — including having advisers pay their own way to the introductory seminar — has paid dividends.

“We have made it kind of a pain in the neck to buy the funds, but that has created a mutual affinity.”

Bob Rall, an adviser from Merritt Island, Fla., can speak to that affinity. He started out with a firm that tried to pick individual securities and said he got tired of client losses because of bad stock picks.

He found out about Dimensional 12 years ago and attended one of their conferences. Mr. Rall now has about 90% of the $35 million he oversees invested in Dimensional funds.

“They poured us big glasses of Kool-Aid, we drank it and haven’t looked back,” he said.

Advisers are also attracted to the credentials of the academics behind Dimensional’s investing and trading strategies. In addition to Mr. Fama and Mr. French, Nobel Prize winner Robert Merton of Massachusetts Institute of Technology is involved in designing products for the company.

Having advisers that believe in the firm creates another benefit for Dimensional and its customers, according to Michael Rosen, chief investment officer at Angeles Investment Advisors in Santa Monica, Calif., who oversees $45 billion for endowments and pensions.

‘STICKY’ ASSETS

“Educated advisers are more likely to prevent their clients from making radical changes when markets drop,” said Mr. Rosen. “The fact that those assets are sticky will add value for the investors.”

Dimensional’s approach to markets, with its tilts toward small and value stocks, at one time made it distinct in the money-management business, said Alex Bryan, an analyst with Morningstar. Many firms are now competing in the same arena including AQR Capital Management, he said, and products such as low-cost ETFs are also vying for investor capital.

“Investors have a lot of options now,” said Mr. Bryan. “They don’t have to go to Dimensional to get exposure to those strategies.”

Mr. Booth isn’t worried by the competition. He has invested in systems that will allow the firm to grow, although he refrains from projecting how big it might get. When the company passed $50 billion in assets in 2004, he said, “It was already bigger than we thought it could possibly be.”

Mr. Booth, who owns Dimensional along with other past and current employees and directors, doesn’t see that changing anytime soon. He said he has turned down repeated requests to sell Dimensional or take it public.

“The next generation of leadership is in place and they will worry about firm ownership,” said Mr. Booth. “For the time being we are ignoring the fact that we are getting older. This is what we want to be doing.”

Dimensional

9 Reasons Investors Love Vanguard & DFA Funds

*** June 2015 article with information worth repeating***

Reposted from pathwayplanning.com

Wow. Vanguard had tremendous growth in 2014. An intake of $214.5 billion last year pushed this fund giant’s total assets to $3.1 trillion as of December 31, 2014. That growth represents a 56% increase for Vanguard compared to 2013. Early this year, they passed State Street Global Advisors as the second-largest exchange-traded fund provider as they close in on the top dog BlackRock.

Dimensional Fund Advisors (Dimensional or DFA funds for short) is another fund company that has been experiencing strong inflows. DFA funds added nearly $28 billion in assets in 2014, which was the third highest dollar amount of inflows last year, trailing only Vanguard and JPMorgan Chase.

That type of growth is doubly impressive because Dimensional Fund Advisors flies under the radar of many investors. Last year’s growth, however (not to mention a relatively steady inflow of assets since its 1981 founding), makes it clear that investors are attracted to DFA. What explains its rising-rock-star appeal, given its (yawn) nerdy tagline, “putting financial science to work”? Maybe it’s the firm’s laser-like focus and steadfast approach to applying academic research into the factors or “dimensions” that are expected to generate long-term wealth – fads and fashions be damned. For this blogger, anyway, it’s hard not to prefer that level of discipline to the usual frenzy involved in active stock picking and reactionary market timing.

Then again, Vanguard’s index and exchange-traded funds are no flashes in the pan either, also built on an investment strategy of substance. Admittedly, it can be confusing at a glance to understand how these two similar, but different fund companies compare. Let’s take a closer look at nine characteristics that help differentiate them from the crowd … and from each other.

 

Reason 1

Both trust the market knows best.

Yes, we are all brilliant, of course. However, when you consider that in 2014 alone there were some 60 million daily worldwide trades representing more than $300 billion dollars, it may be wise to embrace market pricing instead of trying to outguess the market. Vast, real-time, electronic information makes the market a highly effective price-setting machine. Trying to consistently outguess 60 million of your fellow investors is not unlike expecting to find enough single needles to outweigh an entire haystack, and to succeed at it over and over again.

In contrast, if you invested $1 in 1927 in a U.S. large-cap index fund and let it ride, your investment would have grown to $3,955 by 2014. Not bad. Vanguard and Dimensional alike prefer to invest in market “haystacks,” albeit with some procedural differences in how the assets get bailed, so to speak.

Electronic Market

 

Reason 2

Both minimize trading.

Trades cost money, in both overt and clandestine ways. By trading according to plan rather than trying to time the market or jump into “hot” segments, both fund companies are well-positioned to trade less often. Since trading is expensive, we can expect lower costs with reduced drag on performance if we trade less often.

The DFA Difference

Beyond just reducing trades by avoiding market-timing or trend-chasing, DFA’s structured trading strategy is part of its secret sauce. Actually, it’s not such a secret: When it comes to trading, a trader who is in less of a rush to buy or sell can usually command better prices than one who is in a rush or under pressure to trade. By being more patient than an index fund manager can be and a market-timing manager chooses to be, Dimensional has developed a solid track record for minimizing the trading costs involved in capturing the asset class returns they are seeking.

Moreover, DFA takes it one step further and offers its funds through select financial advisors who have demonstrated a similar level of patience. The result? Less frenetic trading and even net inflows during times of market panic. For example, during the 2008-2009 market panic, most funds experienced massive redemptions, which wreaks havoc on a mutual fund management. However, DFA funds actually had net inflows during that time, and was able to put that new cash to work and buy securities at bargain basement prices. (This is a mutual fund manager’s dream!)

Patient Investing

Reason 3

Neither firm tries to guess what asset class will outperform.

Vanguard and DFA offer funds with “style purity.” They invest in the asset class they say they will–small-cap value for example–and stay there. They aren’t making any kind of tactical bets that one asset class will perform better than the other.

The chart below says it all. Each column is the year, and each colored square is a separate asset class. Follow one color, such as “red” (the S&P 500), year by year. Look how much it bounces around! The performance of each asset class each year is anyone’s guess.

 

Callan Periodic Table

Reason 4

They don’t keep betting on the horse that won the last race.

Another common investment mistake is to chase stocks that have been on a recent winning streak and/or abandon recent underdogs. This continues to happen, despite the volume of evidence that past performance does not inform us about future returns.

Both Vanguard and DFA do not make “bets” on individual stock performance. They simply hold a large basket of stocks that fall into their well-defined criteria (in DFA’s case) or follow a published index (in Vanguard’s case).

The DFA Difference

DFA does not invest in public indexes like most of Vanguard’s index funds. The problem with public indexes is, well, they are public; everyone knows when a public index will change (and how it will change). Stocks tend to rise when it’s announced they will be included in a public index, and index funds will buy that stock on the effective date at the higher price.

This forces the index funds to “buy high,” which is exactly the opposite of what investors should do. It’s why Dimensional can afford to trade more patiently, as described above.

Here’s a nice visual to explain the concept:


Index REconstruction

Reason 5

Both firms make “going global” easy.

Only about half of the global market’s capital is in the United States. That leaves a big opportunity set outside our borders. Moreover, many of those other countries respond differently to economic forces, which has many benefits to investors (a portfolio of investments that “zig” while others “zag” can actually increase return and lower risk).

Both firms offer funds that cover broad sectors of foreign markets, so you can easily stay globally diversified.

The DFA Difference

DFA offers foreign funds (and even emerging market funds) with higher “tilts” towards small-cap and value stocks, which have historically been a source of higher long-term returns. They also “tilt” towards companies that have exhibited higher profitability. As an asset class, these stocks also have a history of higher returns.

Global Investment Diversification

Reason 6

They help to manage your emotions.

When you are well diversified, both domestically and in foreign markets, you reduce the risk of any one investment taking a nosedive, which can be unnerving and cause you to panic if you are over-concentrated in that investment. With many of Vanguard and DFA’s funds holding thousands of individual securities, the impact of a few dogs isn’t going to hurt as much. You aren’t as likely to panic sell when you have a global back-up plan.

Take a breath. Talk to your advisor. Don’t react emotionally to a buy high and sell low outcome.

Investor emotions

Reason 7

Both firms help you to see beyond the headlines.

We are bombarded daily with catchy headlines about economic facts that seem to be on the verge of derailing our investment strategy. It’s easy to get swept into the hoopla about rising (or falling) oil prices, currency fluctuations, or political tensions in other countries. By participating in the market according to a disciplined, evidence-based process, turning to fund managers who help you accomplish that, it’s easier to take comfort in the fact that you are a long-term investor with a well-diversified global investment strategy.

Financial News

Reason 8

They help you focus on the real drivers of returns.

Many investors believe the factors that affect their returns are stock picking and market timing. In reality, the bulk of your returns are actually driven by how you decide to split your money between stocks and bonds. (Well, another huge determinant is your ability to stay the course once you build your sensible portfolio, without succumbing to your human behavioral biases, but that’s a subject for another post, such as this one.)

Stocks

  • Stocks have historically offered a higher long-term return compared to bonds, but are more volatile.
  • Smaller companies have historically performed better than larger companies.
  • Value stocks have historically done better than growth companies (think WalMart vs. Groupon).
  • High-profitability companies have historically performed better than low-profitability companies.

Bonds

  • Longer-term bonds have historically had higher yields compared to shorter-term bonds.
  • Lower credit quality (“junkier bonds”) have historically had higher yields compared to higher credit quality bonds.

This is an important decision, so work with your advisor to design a suitable portfolio based on these core drivers of returns.

The DFA Difference

DFA regularly and closely collaborates with academic scholars, some of whom have been awarded Nobel prizes for identifying these factors or “dimensions” of higher expected returns. As such, they have been particularly early, strong and ongoing proponents of this sort of factor-based or evidence-based investing.

DFA Financial Researchers

Reason 9

These firms help you focus on what you can control.

One of the few things you can control in investing is your costs. Both firms offer funds at significantly lower costs than many of their actively managed peers. They also offer a more disciplined approach to knowing what your own fund investments contain, so that it’s easier for you (especially with the support of an evidence-based advisor) to build and maintain a portfolio that you can stick with through thick and thin in your quest to build personal wealth. By minimizing the angst and second-guessing involved when you’re not sure just what is contained within your holdings, your own overall costs can be minimized as well.

You are in the busiest (and most profitable) time of your life. Working long hours. Struggling to figure out the best investments for your retirement. (Time, what time?) Why not work with a financial advisor who can help you clarify your goals and develop and plan to reach those goals?

An advisor will help you focus on factors you control — asset allocation, structuring a portfolio that takes into account the real drivers of expected returns and your ability to handle risk, broad diversification, low expenses, low trading costs and tax minimization.

DFA Financial Control

Summary

Both Vanguard and DFA offer low-fee funds that operate on the principle that the market is an effective, information-processing machine that is nearly impossible to outguess.

DFA takes it one step further with some distinct tactics and also allowing for “tilting” towards areas of higher expected returns like smaller stocks, value stocks and higher profitability stocks.

The growth of these firms shows that investors are waking up to the reality that investment success is about capturing global market returns and keeping costs low, not about hunting down the next “rock star” money managers.

Teresa Staker
Teresa Staker
Administrative Assistant
p // 801-494-6047
Dimensional

LETTER FROM THE CHAIRMAN, 2017

After more than 35 years in the financial services industry,
I have found that having an investment philosophy—one that
is robust and that you can stick with—cannot be overstated.

Just like a personal philosophy can act as a moral compass, an investment philosophy can guide your decisions on how to invest. While this may sound simple, the implications can be significant. People who
put their savings to work in capital markets do so with the expectation of earning a return on their investment, and there is ample evidence to support that long-term investors have been rewarded with such returns. But we also know that investors will encounter times when the results are disappointing. It is in these times that your philosophy will be tested, and being able to stay the course requires trust.
The alternative approach likely consists of moving between different strategies based on past results, which is unlikely to lead to a good outcome.  At Dimensional, our investment philosophy is based on the power of market prices and guided by theoretical and empirical research.

What does that mean?

Markets do an incredible job of incorporating information and aggregate expectations into security prices, so it does not make sense to form an investment strategy that attempts to outguess the market. Our approach focuses on using information contained in prices to identify differences in expected returns. We conduct research to help us organize our thinking, improve our understanding of what drives returns, and gain insights on how to build sensible portfolios. One such insight is looking beyond average returns. By considering the entire distribution of outcomes, we can better understand what investors should be aware of to help them stay invested when results aren’t what they expect.  As an example, the S&P 500 Index has returned about 10% annualized since 1926. But over that time period, there the S&P’s return was within two percentage points of 10%.1 If investors were to adopt a strategy that tracks the S&P 500 Index expecting 10% each year, they need to understand that returns over any given period can look different.

So what does it take to stay the course? Our view is that while there is no silver bullet, there are some basic tenets that can help. Developing an understanding of how markets work and trusting markets is a good starting point. Having an asset allocation that aligns with your risk tolerance and investment goals is also valuable. We believe financial advisors can play a critical role in this determination. Finally, it’s important that the investment manager can be trusted to execute the desired strategy.  In this regard, an index-like approach is useful because of how transparent it is.

It is easy for an investor to examine whether the returns achieved by the manager matched those of the index. This is part of the reason indexing has been a positive development for investors, offering a transparent, low-cost way to access markets. However, index funds prioritize matching an index over potentially achieving higher returns—so we believe they are too mechanical.

So what does it take to stay the course? Our view is that while there is no silver bullet, there are some basic tenets that can help. Developing an understanding of how markets work and trusting markets is a good starting point. Having an asset allocation that aligns with your risk tolerance and investment goals is also valuable. We believe financial advisors can play a critical role in this determination. Finally, it’s important that the investment manager can be trusted to execute the desired strategy.

In this regard, an index-like approach is useful because of how transparent it is.  It is easy for an investor to examine whether the returns achieved by the manager matched those of the index. This is part of the reason indexing has been a positive development for investors, offering a transparent, low-cost way to access markets. However, index funds prioritize matching an index over potentially achieving higher returns—so we believe they are too mechanical.

At Dimensional, we’ve sought to improve upon indexing, taking the best of what it offers and adding the ability to make judgments. Our experience has been that by incorporating a little bit of judgment, you can add a lot of value.

Dimensional began back in 1981 with a new idea: small cap investing. The premise was that many investors didn’t invest in small cap stocks, and that small caps behaved differently than large cap stocks and could offer diversification benefits to investors concentrating in large caps. We found clients who agreed the idea was sensible. Over the next nine years, the performance of small cap stocks was disappointing relative to large caps (at one point the S&P 500 outpaced our portfolio by about 10% annually), so on the surface it may have appeared that both we and our clients had a reason to be nervous. But clients were willing to stick with us because we were clear about our objective—providing a diversified portfolio of small cap stocks—and we delivered on it.2 Having compelling ideas is important, but the implementation of those ideas is what really counts. From the beginning, we focused on developing protocols about how to design and manage portfolios, and 35 years later we have amassed a track record of results that we believe stands out in the industry.

————————————————————————————————————————

1. Past performance is not a guarantee of future results. Indices are not available for direct
investment; therefore, their performance does not reflect the expenses associated with the
management of an actual portfolio. The S&P data is provided by Standard & Poor’s Index Services
Group.
2. Diversification does not eliminate the risk of market loss. Investing risks include loss of
principal and fluctuating value. Small cap securities are subject to greater volatility than those
in other asset categories. There is no guarantee an investing strategy will be successful.
Consider the investment objectives, risks, and charges and expenses of the Dimensional funds
carefully before investing. For this and other information about the Dimensional funds, please read
the prospectus carefully before investing. Prospectuses are available by calling Dimensional Fund
Advisors collect at
(512) 306-7400 or at us.dimensional.com. Dimensional funds are distributed by DFA Securities LLC.

Relative Performance of Equity Funds with More than 15 years of History

While our long-term results show an ability to add value over benchmarks, we still place tremendous value on helping our clients understand why we do what we do. Just like those first years, we have lived through other times when the results have looked disappointing. This is one reason our approach combines our ability to make judgments with the transparency we believe is necessary for clients to understand what they can expect from us. The solutions we provide are meant to help clients achieve their financial goals. We know that a big part of enjoying the expected benefit of long-term returns relies on the ability to stay invested. By clearly articulating what we promise to provide, and delivering on those promises with robust portfolios, our hope is that we can help increase clients’ confidence in their decision to invest with us and provide them with a more successful investment experience.
On behalf of all of us at Dimensional, we want to thank our clients for the trust you have placed in us. We will continue working hard to reinforce the decision you have made. For those of you who may not yet work with us, we look forward to the prospect of serving you in the future.

Letter from the Chairman 2017 Signature

DAVID BOOTH
Founder and Executive Chairman
DIMENSIONAL FUND ADVISORS

LETTER FROM THE CHAIRMAN, 2017

Appendix Letter from the Chairman

award winning trophy shot in black background

DFA Named “Retirement Leader of the Year”

Award presented at 24th Mutual Fund Industry Awards in New York honors firm for developing innovative retirement solutions that positively impact the retirement marketplace

NEWS PROVIDED BY

Dimensional Fund Advisors

25 Apr, 2017, 10:00 ET


AUSTIN, Texas, April 25, 2017 /PRNewswire/ — Dimensional Fund Advisors, a leading global investment management firm that has developed an innovative target date solution designed to reduce uncertainty around the consumption that a plan participant’s savings can support in retirement, is honored to be recognized as “2017 Retirement Leader of the Year” by Fund Intelligence, sponsor of the 24th Mutual Fund Industry Awards.

Presented during a ceremony at Cipriani 42nd Street® in New York City, the award is given to “a firm that has made a key impact on growing retirement assets with unique retirement solutions, marketing campaigns and significant contributions to the retirement industry at large,” according to Fund Intelligence. The judging period was from January 1, 2016, to December 31, 2016.

“We are honored to receive this kind of recognition,” said Eduardo Repetto, Dimensional’s Co-CEO and Co-Chief Investment Officer. “It represents years of dedicated research on life cycle solutions. We have worked closely with Nobel laureate Robert Merton, clients, advisors, consultants, and recordkeepers in order to provide transparent low-cost investment solutions as well as benchmarking and reporting tools designed specifically for participants saving for retirement.”

Dimensional is a well-established leader in the Defined Contribution (“DC”) arena with nearly $47 billion in dedicated DC assets as of December 31, 2016. The firm was also ranked ninth in the 2016 PLANADVISER Retirement Plan Adviser Survey of the top 20 fund families preferred by plan advisers.

Next Generation Retirement Solutions
The main challenge of retirement planning is managing the uncertainty of future income. Dimensional believes a smart income-focused solution should take into account the investment risks that affect retirement income, such as rising inflation and changes in interest rates.

Dimensional’s Target Date Retirement Income Funds are professionally managed mutual funds designed to offer a convenient, long-term solution for investors who expect to retire in or around a particular year. The Funds are diversified across a mix of asset classes that include stocks and bonds, and over time the investment emphasis of the Funds shifts from income growth to income risk management. This shift means more portfolio assets are invested in inflation-protected securities to manage future risks to retirement income.

“If we are going to have progress in the area of investing and finance, the innovation has to come from better and safer financial services,” said David Booth, Dimensional’s founder and Executive Chairman. “That’s what will lift us all up, and that’s exactly what we are trying to do with our retirement solutions. So it’s very gratifying to see our efforts celebrated.”

Measuring Effectiveness
To help measure effectiveness relative to an income-focused goal, Dimensional worked collaboratively with S&P Dow Jones Indices (S&P DJI) to develop the glide path, inflation hedging, and duration hedging techniques used in the S&P Shift To Retirement Income and DEcumulation (STRIDE) Index series, launched in January 2016. This is the first Index to blend the process of wealth creation with the need to mitigate uncertainty of in-retirement consumption. By considering both key retirement risks and post-retirement income needs for an individual in its methodology, the Index series seeks to provide an enhanced target date benchmark for strategies that follow a liability-driven investing philosophy.

About the 24th Annual Mutual Fund Industry Awards
The Mutual Fund Industry Awards recognize and reward the people and organizations whose excellence, achievements, and contributions to the industry have stood out over the past 12 months. Nominations are made by the editorial staff of industry publications Fund Action and Fund Direction, which are part of the Fund Intelligence Group, a provider of financial services sector information products. The 24th Mutual Fund Industry Awards were presented at an evening ceremony and dinner on March 30, 2017.

About Dimensional
Dimensional Fund Advisors is a leading global investment firm that has been translating academic research into practical investment solutions since 1981. Guided by a strong belief in markets, we help investors pursue higher expected returns through advanced portfolio design and careful implementation. With clients around the world, Dimensional has 12 offices in eight countries and global assets under management of $497 billion as of March 31, 2017. Learn more at us.dimensional.com.

Retirement Thought Leadership:
Harvard Business Review: The Crisis in Retirement Planning, by Robert Merton
How Much Should I Save for Retirement, by Dimensional’s Massi De Santis and Marlena Lee

Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission. Consider the investment objectives, risks, and charges and expenses of the Dimensional funds carefully before investing. For this and other information about the Dimensional funds, please read the prospectus carefully before investing. Prospectuses are available by calling Dimensional Fund Advisors collect at (512) 306-7400 or at us.dimensional.com. Dimensional funds are distributed by DFA Securities LLC.

Target date funds are designed to target a year in which an investor may withdraw funds for retirement or other purposes. Investments in target date funds are subject to the risks of their underlying funds, and asset allocations are subject to change over time in accordance with each fund’s prospectus. An investment in a retirement income from a target date portfolio is not guaranteed at any time, including on or after the target date. An investment in a target date portfolio does not eliminate the need for investors to decide –before investing and periodically thereafter–whether the portfolio fits their financial situation. For more information, please refer to the prospectus. There is no guarantee this investment strategy will be successful, and it is possible to lose money with this investment. For more information regarding Dimensional’s Target Date Retirement Income Funds, please refer to the prospectus.

Dimensional Fund Advisors LP receives compensation from S&P Dow Jones Indices in connection with licensing rights to S&P STRIDE Indices. Robert Merton provides consulting services to Dimensional Fund Advisors LP.

 

SOURCE Dimensional Fund Advisors

Related Links

http://us.dimensional.com

Interest rates

Investment Shock Absorbers

Ever ridden in a car with worn-out shock absorbers? Every bump is jarring, every corner
stomach-churning, and every red light an excuse to assume the brace position. Owning an
undiversified portfolio can trigger similar reactions.

In a motor vehicle, the suspension system keeps the tires in
contact with the road and provides a smooth ride for passengers
by offsetting the forces of gravity, propulsion, and inertia.
You can drive a car with a broken suspension system, but it
will be an extremely uncomfortable ride and the vehicle will
be much harder to control, particularly in difficult conditions.
Throw in the risk of a breakdown or running off the road
altogether and there’s a real chance you may not reach
your destination.
In the world of investment, a similarly bumpy and
unpredictable ride can await those with concentrated and
undiversified portfolios or those who constantly tinker
with their allocation based on a short-term rough patch in
the markets.
Of course, everyone feels in control when the surface is
straight and smooth, but it’s harder to stay on the road during
sudden turns and ups and downs in the market. And keep in
mind the fix for your portfolio breaking down is unlikely to be
as simple as calling a tow truck.
For that reason, the smart thing to do is to diversify,
spreading your portfolio across different securities, sectors,
and countries. That also means identifying the right mix of
investments (e.g., stocks, bonds, real estate) that aligns with
your risk tolerance, which helps keep you on track toward
your goals.
Using this approach, your returns from year to year may not
match the top performing portfolio, but neither are they likely
to match the worst. More importantly, this is a ride you are
likelier to stick with.

Just as drivers of suspensionless cars change their route to
avoid potholes, people with concentrated portfolios may
resort to market timing and constant trading as they try to
anticipate the top-performing countries, asset classes,
and securities.

Here’s an example to show how tough this is. Among
developed markets, Denmark was number one in US
dollar terms in 2015 with a return of more than 23%. But
a big bet on that country the following year would have
backfired, as Denmark slid to bottom of the table with a
loss of nearly 16%.¹

It’s true that the US stock market (by far the world’s
biggest) has been a strong performer in recent years,
holding the number three position among developed
markets in 2011 and 2013, first in 2014, and sixth in 2016.
But a decade before, in 2004 and 2006, it was the second
worst-performing developed market in the world.¹

Predicting which part of a market will do best over a
given period is also tough. For example, while there is
ample evidence to support why we should expect positive
premiums from small cap, low relative price, and high
profitability stocks, these premiums are not laid out

evenly or predictably across the map. US small cap stocks
were among the top performers in 2016 with a return
of more than 21%. A year before, their results looked
relatively disappointing with a loss of more than 4%.
International small cap stocks had their turn in the sun
in 2015, topping the performance tables with a return
of just below 6%. But the year before that, they were the
second worst with a loss of 5%.²
If you’ve ever taken a long road trip, you’ll know that
conditions along the way can change quickly and
unpredictably, which is why you need a vehicle that’s
ready for the worst roads as well as the best. While
diversification can never completely eliminate the impact
of bumps along your particular investment road, it
does help reduce the potential outsized impact that any
individual investment can have on your journey.
With sufficient diversification, the jarring effects of
performance extremes level out. That, in turn, helps you
stay in your chosen lane and on the road to your
investment destination.
Happy motoring and happy investing.

1. In US dollars. MSCI developed markets country indices (net dividends). MSCI data © MSCI 2017, all rights reserved.
2. In US dollars. US Small Cap is the Russell 2000 Index. Frank Russell Company is the source and owner of the trademarks, service marks, and
copyrights related to the Russell Indexes. International Small Cap is the MSCI World ex USA Small Cap Index (gross dividends). MSCI data
copyright MSCI 2017, all rights reserved.

‘‘Outside the Flags’’ began as a weekly web column on Dimensional Fund Advisors’ website in 2006.
The articles are designed to help fee-only advisors communicate with their clients about the principles
of good investment—working with markets, understanding risk and return, broadly diversifying
and focusing on elements within the investor’s control—including portfolio structure, fees, taxes, and
discipline. Jim’s flags metaphor has been taken up and recognized by Australia’s corporate regulator
in its own investor education program.

Past performance is no guarantee of future results. There is no guarantee an investing strategy will be successful. Diversification
does not eliminate the risk of market loss.

Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the
management of an actual portfolio. Frank Russell Company is the source and owner of the trademarks, service marks, and
copyrights related to the Russell Indexes. MSCI data © MSCI 2017, all rights reserved.

All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed
as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.
Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.
©2017 Dimensional Fund Advisors LP. All rights reserved. Unauthorized copying, reproducing, duplicating, or transmitting of this
material is prohibited.