A Conversation with DFA’s David Booth
By Robert Huebscher
April 15, 2014
It’s possible for an airplane company to manufacture excellent jets that reliably and safely reach their destination, even if some of its engineers design questionable components. Indeed, its products may be among the best ever designed. That’s my impression of Dimensional Fund Advisors (DFA), which was reinforced after meeting with DFA’s co-founder and co-CEO, David Booth.
I spoke with Booth at the Tiburon CEO Summit, held in New York on April 8. He was joined by Alex Potts, the president, founder and CEO of Loring Ward, a San Jose-based turnkey-asset management provider and long-time DFA client.
DFA’s funds have consistently outperformed virtually all similarly positioned actively managed funds and passive benchmarks in its roughly three-decade history. But what’s enabled DFA to align its goals with those of its investors is the discipline it enforces throughout its advisor network. About two-thirds of DFA’s funds are sold through advisors, who have been carefully vetted and trained to use a low-cost, low-turnover and highly diversified approach to portfolio construction.
DFA bases its approach on academic research that has argued, among other things, for weighting portfolios toward value (low market-to-book ratio) and small-capitalization stocks. Most recently – and this is where my skepticism begins – DFA has added profitability as an input to portfolio construction.
I’ll come back to that point, but first let’s look at all the things that DFA does right for advisors and investors.
The DFA edge
The mutual-fund industry in which DFA operates is highly competitive, characterized by aggressive marketing and product proliferation. The Industry emphasizes short-term performance, with the goal of gaining assets under management. I asked Booth how he positions DFA in that environment.
“We design investment strategies that we think are really important,” he said, “and look around to see if somebody else is doing them. If someone else is doing them already at a reasonable cost, then we don’t come out with it. We spend no time thinking about where the market is.”
That philosophy has been in place since Booth co-founded DFA in 1981. At that time, he said, research was first being published suggesting that small-cap stocks had a performance advantage, which formed the basis of the first funds introduced by the firm. Back then, Booth said that institutions owned only large-cap stocks, plus a few formerly large-cap stocks that had since shrunk to small-cap size. Initially, Booth said, he didn’t argue for overweighting small-cap but thought instead that clients should own the broader market.
The emphasis on value stocks was added in 1992, he said, based on the landmark research by Eugene Fama and Kenneth French. DFA was the first to introduce both U.S. and non-U.S. versions of those strategies.
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