Integrity Investment Advisors, LLC and Managing Partner Todd Moerman are pleased to have recently joined an exclusive group of wealth managers offering the mutual funds of Dimensional Fund Advisors (DFA) to its clients.
Online PR News – 11-February-2013 – Denver, Colorado – Founded in 1981, Dimensional is one of the most respected names in the mutual fund industry managing over $250B, but is also largely unknown among many investors. One reason for this is that Dimensional does not advertise. In fact, they do not even allow individual investors to buy their funds. Rather, their funds are only available through select advisors who share their values-driven approach to investing and their academically-proven investment philosophies. This is a benefit to our clients because this approach tends to keep out "hot money" that chases returns.
How is DFA’s investment approach different from other mutual fund companies? First, based on academic data, DFA insists that very few fund managers can outperform the market over long periods of time. Second, investors who pay higher fees to active managers, actually lower their chances of beating the market because of the drag these higher fees inflict on performance. In 2012, a whopping 88% of hedge funds, 65% of large cap core mutual funds, 80% of large cap value mutual funds and 67% of small cap mutual funds underperformed their benchmarks for 2012. This is according to Goldman's David Kostin. Bloomberg estimates that 635 hedge funds went out of business in 2012. That number is up 8.5% YOY. This shows us that most investors would have been better in passive funds.
According to CRSP (Center for Research in Security Prices), for the 10 years ending in 2011, only 53% of equity mutual funds survived the period and most (79.51%) active equity Managers failed to beat their benchmarks. The numbers are even worse for actively managed bond funds. Over the 10 year period, only 58% of bond mutual funds survived the period and 88.60% failed to beat their benchmarks. When funds don't beat their benchmarks, they typically get shut down and merged with other funds to erase the bad track record. See my previous blog on this topic – Most active Managers fail to beat their benchmarks. http://integrityia.com/index.php/integrity-blog
Like us, DFA believes in a passive approach to investing. In other words, owning entire segments of the market, as opposed to individual stocks, and doing so with as little expense as possible. Fund fees at DFA average around 0.35% annually, which is higher than some of the index funds and exchange traded funds (ETFs) we use, but is substantially lower than the typical active mutual fund.
Unlike index funds, DFA does not seek to track an index like the S&P 500 or Russell 2000. And for that reason, DFA has far greater flexibility in managing its portfolios. For example, a DFA fund may need to increase its holdings in certain stocks, but it does not have to do it immediately and at any price. Instead, DFA gives its traders the flexibility to seek out favorable prices. DFA doesn't have to chase an index benchmark therefore it can focus on asset class returns. In addition, DFA applies its own portfolio rules, such as not owning IPO shares for the first year, eliminating bankrupt companies and other criteria. These rules enhance returns over time.
DFA views market risk as six primary factors: 1) Market risk (beta risk), 2) Size factor (small cap vs. large cap), 3) Value factor (value risk vs. growth) 4) Profitability Factor (high vs. low) and on the Bond side, 5) Maturity factor and 6) Default factor. DFA funds allow investors to capture expected premiums that the market has to offer.
After doing our due diligence, we feel DFA funds offer a distinct advantage to our clients over traditional mutual funds and index funds. That said, we expect DFA’s performance advantage to be incremental. We also feel that by using DFA funds in conjunction with the value we bring guiding clients to set realistic goals, building sensible portfolios, managing tax consequences, and helping to keep emotions from hampering intelligent decisions, we will better serve clients over the long run.
Integrity Investment Advisors, LLC is a fee only Registered Investment Advisory Firm. We serve clients on a national basis and believe investors should: 1) Use a low cost fee-only fiduciary Advisor 2) Use low cost passive investing 3) Focus on asset class investing 4) Focus on the Academic Approach to Investing. You owe it to yourself to get a 2nd opinion about your current financial strategy.
For more information or if you need a 2nd opinion about your financial strategy, please contact us.