DFA loves indexing, with a twist
June 27, 2004
The brainiacs who manage money at Dimensional Fund Advisors in Santa Monica have been called arrogant,
smug and a few words that are unprintable.
So, why the animosity?
The guys running this investment management firm believe, from the soles of their wingtip shoes to the top
of their receding hairlines, that indexing is absolutely the only way to go.
Over Wall Street's vigorous protestations and marketing blitzkriegs, DFA argues persuasively (I think) that
nobody is smart enough, over the long haul, to beat the market with their stock picks or their precious
collection of actively managed mutual funds. And to the rare money manager who seems to walk on water,
here's what DFA would say: "Hey, pal, it was sheer dumb luck."
So why are you reading about DFA this morning? Because if you embrace the concept of indexing, DFA is an
option that you may wish to explore. If you like Vanguard index funds, you'll probably go gaga over DFA's
DFA's mutual funds behave like closet steroid users.
The firm games the system by ignoring certain tried-and-true indexing rules that the other players
respectfully follow. The classic index fund, for example, typically holds all the stocks in its underlying
benchmark. An index fund tied to the Standard & Poor's MidCap 400 Index owns all 400 stocks in this
benchmark of medium-size companies, from Abercrombie & Fitch to Tootsie Roll Industries.
When a benchmark is bursting with thousands of securities, such as the Lehman Brothers Aggregate Bond
Index, fund managers carefully buy a large representative sampling of stocks, or in this case bonds, that they
expect will closely match their index's performance.
DFA, which has been the subject of a couple of flattering case studies by Harvard Business School professors,