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Where to invest your capital right now


By Sam Instone - February 03, 2021

With the recent controversy surrounding the markets, it's no surprise investors are questioning where their money is invested.

We've had an influx of requests for second opinions as people seek clarity, confidence and control.

I am often asked about my own investments and the answer's very simple:

“My own money is in firms such as Dimensional Fund Advisors moving forwards.”

Here's why.

Helping me answer this is Jason Zweig, columnist for the Wall Street Journal, and his article, Making Billions With One Belief: The Markets Can’t Be Beat

Dimensional Fund Advisors' (DFA) assets under management sit at $601 billion as of 31 December 2020.

It isn’t strictly an active or passive investor, it’s both.

It’s drawing nearly $2 billion in net assets per month at a time when investors are fleeing many other firms, making it the world's 9th fastest asset manager in AuM growth.

Its founders and advisers include Nobel prize-winning economists and it’s built on the bedrock belief that active management practised by traditional stock pickers is futile, if not an absurdity.

DFA’s founders are pioneers of a passion of mine, index funds.

They believe even better returns can be achieved, than plain index funds deliver.

“We think indexing is too mechanical,”

...co-founder David Booth (who has the University of Chicago Booth School of Business named after him) said in a recent interview.

“A little bit of judgement can make a difference.”

I have also referred to them as:

“The best fund manager in the world that you have never heard of.”

This is because DFA remains all but unknown to the general public, since its funds are available exclusively through very few firms or just direct to big institutions.

Here in the Middle East, DFA is entirely unknown and I doubt they will ever catch on simply because they don't pay anyone (banks, platforms, brokers, managers and advisers) to recommend them.

Nevertheless, Dimensional Fund Advisors is one of the largest and certainly amongst the best managers in the world.

Here’s Zweig’s description of how DFA invests.

“It designs its own indexes, often of small-capitalisation stocks, then waits—for weeks, if necessary—until an eager seller is willing to unload shares at below the prevailing asking price in the market.

Such tactics can minimise (and in some cases) even erase transaction costs, providing a small but meaningful boost to returns.

The firm often emphasises cheap, small-cap stocks that are cumbersome for active managers to buy, whether because they are too tiny to make a difference for a portfolio or are costly to trade.”

And now for my favourite bit.

His evidence.

Research by Nobel laureates, Eugene Fama of the University of Chicago and Kenneth French of Dartmouth College (finance professors who also advise DFA and serve as directors there) has shown that stocks with smaller market capitalisations, as well as those trading at low prices relative to their asset values and those with above-average profitability, outperform in the long run.

DFA was the first investment manager to create an index fund of small-cap stocks after academic research conducted in the late 1970s showed that such companies had outperformed the overall market by roughly two to four percentage points annually.

So, what’s the cost?

Fees, on average about a third of a percentage point, are higher than generic index funds and low compared with traditional active funds, though individuals with access generally will already be paying a financial planner.

But with small caps, there were those big brokerage costs - often 2% or higher.

So Dimensional Fund Advisors created a type of index that it would follow closely - but not exactly.

“We don’t try to do magic,” says Professor French.

“We’re doing engineering.”

Much of DFA’s growth came after 1988, when a financial adviser named Dan Wheeler approached the firm, which then offered its portfolios exclusively to big institutional investors.

A former stockbroker, Mr. Wheeler had often seen purportedly market-beating investments generate big commissions for brokers but losses for clients

Mr. Wheeler recalled recently he could find other “advisers with a conscience” and get them to offer Dimensional funds to their clients.

So the directors took a chance on the idea of selling funds through planners who wouldn’t charge commissions.

There exists still a daunting steeplechase that planners must hurdle before they can market the funds.

Perhaps the most important hurdle?

They probe for any disqualifying signs of performance-chasing behaviour.

There must also be like-mindedness when it comes to values.

Something we also live by.

So why is more of my money in DFA going forwards?

  1. I share their philosophy on why active management, and other attempts to beat the market, fail.
  2. I am busy. I have 3 children, 3 businesses and a lot of complexity in my life. Even with over 20,000 hours of professional investing experience, DIY investing for myself can prove costly because of my natural behavioural bias and worse still, misses the far more important aspects around planning. I am not alone with this - even Ken French the Nobel-prize winner in economics uses a planner! Above all, I want safety, security and a sound investment proposition that buys me time to live the life I want with the people and activities I love. I therefore choose to go with a DFA adviser for the very reason that I must have the right type of planner and for the peace of mind and freedom it brings.

Today, DFA faces three major challenges according to competitors, clients and former employees.

Can it continue to grow without losing its edge?

Can it maintain its prestigious reputation?

And can it fend off new competitors whose funds are often cheaper?

Everyone with an interest seems to slice the data according to their own self-interest.

Like technology, investment changes

Is DFA to Vanguard as Android is to Apple?

I am not sure. 

But yesterday’s solutions likely aren’t best for today and today’s thinking may not work for tomorrow.

One thing I am sure of, is Dimensional Fund Advisors' systematic approach to investing makes sense now.

In other words, investing according to a fixed, personalised plan or system. 

Why?

Because the evidence shows that a systematic, low-cost approach to investing, provides the best chance of a successful investment experience.

I am very happy with this solution for my own money, my families money, my friends and for the many international family stewards I advise.

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