DFA Funds. Discussion?

[OldShooter]

There is quite a good thread started last night by @FlaGator (http://www.early-retirement.org/forums/f28/how-i-chose-my-fa-89506.html) discussing his choice to hire an FA that uses DFA funds. It has attracted the usual portion of FA-bashers, of course, but his thoughtful post is worth a read IMO.

I have become interested in DFA over the past couple of years. IIRC I first learned of them in Charles Ellis' How to Win the Loser's Game. I was going to post in @FlaGator's thread but that may have turned into a hijack so I decided to start a new thread for discussion.

For those not familiar, DFA funds are sold only through FAs and those FAs go through a vetting process that includes attendance (on their own nickel) at DFA classes in Austin. In general their investment strategy is passive, with a strong bias towards the Fama/French philosophy. IIRC I looked at one of their funds that held several thousand stocks and had a 5% annual turnover. They also believe in the Fama/French models, which identify small and value stocks as having the best future potential. Their trading strategy is quite unique as well. One of many articles: http://www.investmentnews.com/artic...visors-picks-advisers-not-stocks-and-it-works

Because of my interest, I shopped around to a few "cult member" FAs last fall and ended up putting a $100K test portfolio with one of them beginning 1/1/17. (I like tests using real money; the results are hard to argue with.) Since I needed nothing from the FA besides access to the funds, we negotiated a 50bps fee. In three quarters, compared to a couple of other test portfolios I have, the DFA portfolio is hanging in there and appears to be at least covering its fund management fees and FA fees. But three quarters is really too short to come to any conclusions. I'll look more seriously after a couple of years.

So (a) Given his decision to use an FA, I think @FlaGator made a wise decision going with a DFA advisor, and (b) I am curious what others here have found in looking at or investing with DFA.

Please spare us any rants or debate here about using FAs. Those will not be helpful. Also, FWIW, when I was investigating this idea I did spot a few FAs who will "sell" access to DFA for relatively small fixed fees. So if I start thinking about investing serious money, that is the kind of relationship I will pursue.

 

[CaliKid]

I went with a DFA advisor earlier in the year. My goal was all, or mostly, DFA funds but we probably ended up with about 25% DFA funds. I went with a guy that does a flat fee regardless of account size. It's between $1k and $5k depending on what services you want. Been happy so far but monkeys throwing darts at a dart board have made money this year so too early to know much.

 

[OldShooter]

... My goal was all, or mostly, DFA funds but we probably ended up with about 25% DFA funds. ...

Interesting. Why? I am viewing the FA simply as a gatekeeper and expecting to pretty much run the money myself, with a second set of eyes. If I have funds that I can buy outside the AUM fee I would do that. So I am thinking 100% DFA if I decide my experiment is successful.

 

[ERD50]

There is quite a good thread started last night by @FlaGator (http://www.early-retirement.org/forums/f28/how-i-chose-my-fa-89506.html) discussing his choice to hire an FA that uses DFA funds. It has attracted the usual portion of FA-bashers, of course, ....

Whoah! Are we looking at the same thread? Out of 15 posts at the time, two included the following:

Why not just go with a small/value ETF, save the fees and boost your return?

So, I've been a DIYer the last 5 years. I shudder to think that during that time, if I had stuck w/ the FA, I would've paid him something approaching $100K.

Now those do go against the purpose of that thread, which was for those who do choose an FA, not a DIY vs FA discussion. But I'd hardly call that "bashing".

If the average person would consider that to be "bashing", I guess they have far thinner skin than I do. Not sure how they survive in real life.

-ERD50

 

[ERD50]

... ended up putting a $100K test portfolio with one of them beginning 1/1/17. (I like tests using real money; the results are hard to argue with.) Since I needed nothing from the FA besides access to the funds, we negotiated a 50bps fee. In three quarters, compared to a couple of other test portfolios I have, the DFA portfolio is hanging in there and appears to be at least covering its fund management fees and FA fees. But three quarters is really too short to come to any conclusions. I'll look more seriously after a couple of years. ....

Can you provide a ticker for that fund? I'd be curious to look at historical reports, I have confidence in them, even if you don't (not sure why you wouldn't). You do need to find "total return" info, not just NAV, but that's available from several sources.

-ERD50

 

[joeea]

So (a) Given his decision to use an FA, I think @FlaGator made a wise decision going with a DFA advisor, and (b) I am curious what others here have found in looking at or investing with DFA.

My FA includes some DFA funds in my portfolio (DFLVX, DFSTX, DISVX, DFALX, DFIVX, DFIGX, DFEQX, DFCEX, DFGBX).

At this point in time, they make up a bit more than half the funds. Overall my portfolio is up 11.47% over the past 1 year, net of all fees.

 

[OldShooter]

Can you provide a ticker for that fund? I'd be curious to look at historical reports, I have confidence in them, even if you don't (not sure why you wouldn't).

don't remember the specific fund, sorry.

With this test portfolio, I just let the FA run the money. It is in DFQTX 50%, DFIEX 37%, and DFCEX 13%. That is less home country bias than I have portfolio-wide but the more I read the more I think that home country bias may be a bad thing.

To be clear, too, like @FlaGator I am not expecting home runs from DFA. If they generally cover their cost and the FA cost plus give me a few tens of bps I will be very impressed.

You do need to find "total return" info, not just NAV, but that's available from several sources.

Actually, the difficulty in verifying I am really getting total return on specific funds is one of the reasons I like to play the game with real money. Plus, it's just more interesting with skin in the game.

 

[OldShooter]

Oh, not to restrict the thread but I am not a believer in bond funds so my personal interest is strictly equities.

 

[ERD50]

....
With this test portfolio, I just let the FA run the money. It is in DFQTX 50%, DFIEX 37%, and DFCEX 13%. That is less home country bias than I have portfolio-wide but the more I read the more I think that home country bias may be a bad thing.

To be clear, too, like @FlaGator I am not expecting home runs from DFA. If they generally cover their cost and the FA cost plus give me a few tens of bps I will be very impressed. ....

Sure, I wouldn't expect home runs either, but I'm skeptical that they can reliably provide value after fees (and taxes if they generate higher distributions). But if they can, that's a good thing.

I entered those symbols here (link below), and the first three Vanguard ETFs that looked to be a match. The two portfolios were within noise of tracking each other (over this time frame, DAF was ahead by ~ .16% points in the CAGR. That should include the Expense Ratios as those are factored in total return, I'm assuming the DAF funds do not include the management fee, since as you say, that is negotiable. Do these match your numbers?

Also semi-interesting, if you just went 100% VTI in that time frame, you'd be
way better off, an added ~ 4% points in CAGR. Actually better by many measures, higher lows, higher highs, lower Std Dev. But some diversification is probably good in the long run, that is likely to cycle over time.

https://www.portfoliovisualizer.com...location8_1=37&symbol9=DFCEX&allocation9_1=13

-ERD50

 

[OldShooter]

Sure, I wouldn't expect home runs either, but I'm skeptical that they can reliably provide value after fees (and taxes if they generate higher distributions). But if they can, that's a good thing.

I entered those symbols here (link below), and the first three Vanguard ETFs that looked to be a match. The two portfolios were within noise of tracking each other (over this time frame, DAF was ahead by ~ .16% points in the CAGR. That should include the Expense Ratios as those are factored in total return, I'm assuming the DAF funds do not include the management fee, since as you say, that is negotiable. Do these match your numbers?

Yup, that's the point of the experiment. To compare. I really am not bothering with numbers since I am only three calendar quarters into the experiment. That's a pretty meaningless period of time. I'm in this because I especially like the DFA trading story which has the potential to beat more rigidly-defined funds. The rest of it is just another form of passive investing though with a slight tilt. I'm actually a little suspicious of the tilt; if everybody knows small and value are better, why would Fama's own Efficient Market Hypothesis not tell me that any advantage is already reflected in the price?

Re waiting a couple of years to judge, no way is this enough for statistical validity but I think it may be enough for comparisons to other very similar passive portfolios. No way to prove that, though, but I don't have time to wait ten years. Maybe the only value in this is personal entertainment.

Also semi-interesting, if you just went 100% VTI in that time frame, you'd be way better off, an added ~ 4% points in CAGR. Actually better by many measures, higher lows, higher highs, lower Std Dev. But some diversification is probably good in the long run, that is likely to cycle over time.

Sure. Really, all you have to do to succeed is to consistently invest in the currently-winning sector. Like Will Rogers advises: "If it doesn't go up, don't buy it." My couch potato benchmark (about 70/30 US/Intl right now) is beating the ACWI all cap because of its home country bias. That does not mean it's a genius portfolio, just a currently-lucky one. Same story for VTI. Lucky.

 

[ERD50]

.... Re waiting a couple of years to judge, no way is this enough for statistical validity but I think it may be enough for comparisons to other very similar passive portfolios. No way to prove that, though, but I don't have time to wait ten years. Maybe the only value in this is personal entertainment.
...

That's probably the best way to look at it. DFA isn't going to do anything crazy, so I would not expect any great under or over-performance, but I guess a little optimism is part of human nature.

Heck, even though I talk about the studies that show active managers just aren't consistently beating the market, I can't help but look at something like a Callan chart, and wonder what if I switched sectors from the recent over-performer, to the recent under-performer (or to fixed), and/or buy the under-performer and sell when it hits the average, or....

and then I realize people with computers and more programming skills than I are doing this, and no one seems to be winning by any large degree. But I still think about it!

...Sure. Really, all you have to do to succeed is to consistently invest in the currently-winning sector. Like Will Rogers advises: "If it doesn't go up, don't buy it." My couch potato benchmark (about 70/30 US/Intl right now) is beating the ACWI all cap because of its home country bias. That does not mean it's a genius portfolio, just a currently-lucky one. Same story for VTI. Lucky.

Yep, that's why I don;t even worry anymore about holding much Int'l, or REIT or commodities. It may help from time to time, but I suspect it will all balance out. I just keep getting lazier and lazier.

Good luck with DFA, maybe they will have a good run for you.

-ERD50

 

[LOL!]

I investigated DFA and DFA-style investing several years ago. I decided that it wasn't worth it. Back in those days, one couldn't get some of the asset classes that DFA offered, but nowadays, there are plenty of low-expense-ratio ETFs that compete well with what they offer. In particular, way back in 2000, I invested in foreign small-cap funds and in the past few years emerging markets small-cap value.

Here are two things to take to a look at:

DFA vs others (not just Vanguard): DFA vs. Vanguard

Robert T's stuff on DFA at bogleheads.org:
https://www.bogleheads.org/forum/viewtopic.php?f=10&t=7353
and
https://www.bogleheads.org/forum/viewtopic.php?f=1&t=232527&p=3623244#p3623244

I will also say that some years, a DFA-style portfolio really falls behind, but there are ways to keep it performing in line with other strategies if one wants to do some market timing.

One can easily build a portfolio of non-DFA ETFs and funds that will match any DFA portfolio except it will be lower in cost. So use a DFA-advisor for their advice and not for their DFA funds.

 

[OldShooter]

... I can't help but look at something like a Callan chart, and wonder what if I switched sectors from the recent over-performer, to the recent under-performer (or to fixed), and/or buy the under-performer and sell when it hits the average, or....

"Callan Chart," eh? I've always just called it a "quilt chart." To me it illustrates the futility of chasing sectors. It also is a triumph in combining ugliness with incomprehensibility.

... and then I realize people with computers and more programming skills than I are doing this, and no one seems to be winning by any large degree. But I still think about it!

Charles Ellis, in Winning the Loser's Game, argues that there are so many smart people competing in the market that they cancel each other out and we are left with passive investing and random walks.

 

[OldShooter]

I investigated DFA and DFA-style investing several years ago. I decided that it wasn't worth it. ...

Thank you for the information and links. That's the kind of thing I was hoping to get in this thread.

At best, I hoped to see my test portfolio cover its higher costs and generate a few tens of bps extra, but so far all I am seeing on the ever-reliable internet that they maybe cover their higher fund fees and my limited results aren't looking any better. But I'm as greedy as anyone. I really would like to find an approach that beats passive investing by at least a tiny bit!

 

[LOL!]

And this thread on Asset Allocation: http://www.early-retirement.org/forums/f28/asset-allocation-tutorial-31324.html
started about 10 years ago was somewhat of an investigation into DFA-style Fama & French small-cap and value-titlted regime. Many of the links are so old they are now broken.

 

[ziggy29]

Not too many years ago I would have seen value in the DFA funds approach. But these days there are so many low cost index mutual funds and ETFs that almost all of the DFA funds can be replicated with offerings that have expenses of 0.2% or less, and often less than 0.1%.

 

[pb4uski]

I compared a prototype DFA portfolio with Vanguard (which I use) using Portfolio Visualizer. The results were very similar so I don't see much value added. Results are the growth of a $10k investment, with dividends reinvested and rebalanced annually.

	3 year (2014-2016)	5 year (2012-2016)	Jan 2012- Oct 2017
DFA	11,456	15,279	17,156
Vanguard	11,519	15,250	17,218
	0.55%	-0.19%	0.36%

DFA was

Ticker	Name	Allocation
DFEOX	DFA US Core Equity 1 I	42.00%
DFIEX	DFA International Core Equity I	18.00%
DFAPX	DFA Investment Grade I	40.00%

Vanguard was:

Ticker	Name	Allocation
VTI	Vanguard Total Stock Market ETF	42.00%
VXUS	Vanguard Total International Stock ETF	18.00%
VFIDX	Vanguard Interm-Term Investment-Grde Adm	40.00%

 

[urn2bfree]

One DFA advisor has this thoughtful analysis on the public side of their website: https://www.evansonasset.com/are-dfa-strategies-superior-20.htm

They also are noteworthy for charging a Flat Fee, NOT AUM based fees.

 

[potto0213]

You may want to go over to the Boglehead forum. Apparently Vanguard is coming out with 6 funds that will use "smart" beta funds similar to those of DFA. You may not need an FA to get what you want.