October 26, 2011
Dimensional Update and Lessons in Mutual Fund Flows
We were happy that Andrew Kieper, Regional Director of Dimensional Funds (DFA) could speak with many of our clients on September 30, 2011. We'd like to summarize some of the points Andrew made at our meeting and add to some of his points with information from DFA's website.
Dimensional Update
As of the meeting in September, DFA had $225 billion under management. About 60% of those assets were managed by RIAs (registered investment advisors) like ourselves. DFA has global operations in the U.S. in Austin, Texas and Santa Monica, California, and operations in Vancouver, Australia, the UK and Germany. Since DFA has trading capabilities all over the world, they are able to trade twenty four hours a day. The number of employees at DFA has increased from 150 in 2004 to 650 today.
Investing versus Speculating
Andrew spoke about redefining investment advice and the difference between investing versus speculation. Investing is a disciplined approach - you invest your capital based upon your risk tolerance and Investment Policy Statement. Speculation is getting in and out of the market or concentrating your position based upon what you think will happen. For instance, the price of gold has risen as investors seek to profit from rising prices and also seek what they think is a "safe haven" from the volatility of the stock market. But what are they really buying? Gold's prices rose due to the rise in demand, not because gold produces anything or pays out dividends. Thus, investing in gold is really speculation - you think you will get more than you paid from the gold. This implies that you know when to buy and when to sell, which has been shown to be unknowable. Investing is when you commit your capital to good companies with an expected return - i.e., you invest in capital markets.
When we invest in DFA funds, we are investing in capital markets in a diversified manner. No one knows when the market will rise or fall. DFA tries to focus on what they can control - for example, expenses, taxes, trading costs and diversification. Market volatility is not under our control, and if we react to this, we are likely to lose our capital. Since January 2008, over $266.2 billion has been withdrawn from equity mutual funds. This means the average investor has panicked and left the market when prices were falling. To a large degree, much of the money remains on the sidelines and is not invested. DFA, due to the education and training of its advisors, has seen a net inflow of $16.2 billion during this same time frame. Thus our discipline has meant that DFA can continue to invest on our behalf and not have to liquidate at just the wrong time to meet stockholder redemptions. Please click on the link Lessons in Mutual Fund Flows below for more information.
