Dimensional Fund Advisors, further referred to as DFA, is an investment company that bases its strategy
mainly on academic research and related theories. They work together with proponents of the efficient
market hypothesis, indicating a relatively strong belief in this theory and thus in efficient markets.
However DFA also feels that skilled traders have the ability to contribute to a fund’s profits even when the
investment is inherently passive and DFA does adjusts its strategy to new findings in the field. In this
report we will evaluate the relevance and accuracy of the theories used by ...view middle of the document...
Growth of the company had been stable and profits high. There was no need to sell shares for
liquidity reasons and shares were only sold if they did not fit into a fund anymore. This didn’t happen very
often though as DFA had several funds that were “connected”, when a stock in the Micro Cap portfolio
grew too big it could be placed into a fund with bigger companies (Small Cap portfolio).
An important part of DFA’s strategy, that contributed to the performance of DFA so far, is aimed at
achieving discounts in trades through buying in large blocks. Results from research by Donald Keim1
show that the average discount obtained by DFA on block trades was 3.33%. These discounts were largely
responsible for the fact that DFA’s passively managed small-stock portfolio outperformed the typical
small-stock indexes by about 200 basis points per year on average. Another factor contributing to the
relative success of these small cap indexes is the thorough research that DFA performs when it trades with
other companies, preventing adverse selection and the negative implications of this phenomenon.
Despite DFA’s historic performance, the investment company is “only” ranked 96th (in Pensions and
Investments) among other investment companies, changes in certain elements of DFA’s strategy and an
increased focus on its competitive advantages will lead to a higher position on this list.