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the difference is striking, and the averages reflect that. Vanguard has an excellent emerging markets fund. But large and giant companies (as defined by Mormake up 72 percent of that portfolio, which has an average market capitalization of $11.3 billion. Dimensional has a core emerging markets fund with an average market capitalization of $4.8 billion; percent of its portfolio is made up of large and giant companies. Accordingly, I believe this fund has aexpected long-term rate of return than the Vanguard fund. Vanguard gets a lot of things right in its funds, but market capitalization doesn’t seem to be one of thof the nine Vanguard funds listed here, average market capitalization is greater than the category avless. VALUEOver the long run, investors have earned higher returns from value companies than from growth comValue is trickier to quantify than size. Many investors regard value companies as those that are unlovperhaps ripe for turnarounds. That’s the sort of approach that Wall Street likes, because it emphasizePage 4 of 10FundAdvice.com - The best mutual funds: DFA or Vanguard?3/17/2008...
of smart stock-picking and implies a need to pay more money for such gurus. Academic experts, on the other hand, demand a more objective approach. The generally accepted mevalue company is its price-to-book ratio, often abbreviated as price/book. This is the current price of divided by the book value per share. Book value is the total of all assets minus all liabilities on the cobooks divided by the number of shares. Book value emphasizes corporate assets. Manufacturing companies with huge investments in plants aequipment will often have relatively high book values. At the opposite end of the scale, growth companies may rely more on the brains of their employees. brains are very real assets, but they don’t have price tags, they don’t technically belong to the compaas some analysts love to say, those assets “walk out the door every night.” Growth companies tend to have lower book values and thus higher price/book ratios. Investors in Micaren’t relying on manufacturing plants and office buildings; they’re relying on brainpower and patentscreativity. To use a couple of examples in our own back yard, Microsoft’s price/book ratio was recently 8.9, well average ratio for stocks in the Standard & Poor’s 500 Index. Weyerhaeuser, which owns vast blocks otimberland, had a price/book ratio of 2.0. I’m not saying Microsoft is a bad company or that Weyerhaeuser is necessarily a better investment. Tthat if you’re looking for a value company, which we are in this example, you’ll find it in Weyerhaeusein Microsoft. The difference is in the price/book ratios. I don’t advocate investing in value companies one by one. That’s much too risky for anybody but a prinvestor. I believe in owning them by the hundreds. That’s easy to do by investing in value funds. Click here for a larger, printable version of table 4It stands to reason then that a value fund should have an average price/book ratio that’s lower than funds. The lower the ratio, the stronger the value orientation.