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“People at Dimensional care much more about getting the right answer than defending their answer.”

Kenneth French – Professor, Dartmouth College. Dimensional Director, Consultant, and Co-Chair of the Investment Research Committee

Dimensional Fund Advisors (DFA) is the only fund manager founded on the basis of obtaining a return from the market by applying decades of academic research and experience. They apply an investment strategy which provides the investor with the market return without guessing the market.

Ethos and mission 

DFA was founded in 1981 by academics David Booth and Rex Sinquefeld of The University of Chicago’s School of Business. It uses academic research to formulate investment strategy and has formal associations with prominent financial economists such as Eugene Fama who was awarded the Nobel Prize for Economics in 2013, and with Professor Kenneth French who has conducted decades of research into the empirical analysis of stock market returns.

Financial research identifies the sources of investment returns and Dimensional provides the tools and experience to target these sources and help investors achieve the return that they want. DFA do this by scientific asset allocation, diversification, reducing cost, managing risk, and applying proven trading strategies. This is quite unlike most other fund managers who guess the market and who are regularly shown to be wrong. Traditional investment approaches strive to beat the market by taking advantage of pricing “mistakes” and attempting to predict the future. Too often, these approaches prove costly and futile. Predictions go awry and managers may hold the wrong securities at the wrong time, missing the strong returns that markets can provide. When you invest with DFA your investment is no longer speculation and it becomes simply a method for consistently obtaining the market return. Guided by a strong belief in markets, DFA works to implement compelling ideas in finance for the benefit of clients. An enduring philosophy, strong client commitment, and deep working relationships with the academic community underpin their approach.

Their investment philosophy has been shaped by decades of research. They believe that security prices reflect all publicly available information as intense competition among market participants drives prices toward fair value.

They use the information in market prices, combined with fundamental data, to systematically identify differences in expected returns among securities. They seek to add value by building portfolios that target higher expected returns in a cost-effective manner. By integrating a dynamic, market-driven process with a flexible trading strategy, they manage the trade-offs that matter for performance— balancing competing premiums, diversification, and costs. This approach is applied consistently across a full suite of global and regional equity and fixed income strategies, allowing them to help meet the diverse needs of investors worldwide.

5 reasons you should get to know Dimensional Fund Advisors 

  1. Their strategies are developed using academic research
  2. They have a thoughtful implementation process that adds value to investors
  3. Their fund have some of the lowest expenses in the industry
  4. They only work with advisors who understand the research and have a disciplined approach
  5. Their funds have a long track record of outperforming

Leading the transformation 

Eugene Fama

Eugene Fama
Nobel laureate, 2013

Director and Consultant

Kenneth French

Kenneth French

Director, Consultant and Co-Chair

Robert Merton

Robert Merton
Nobel laureate, 1997

Resident Scientist

Merton Miller

Merton Miller
Nobel laureate 1990

Independent Director, 1981-2000

Myron Scholes

Myron Scholes
Nobel laureate 1997

Independent Director, 1981-2021

Douglas Diamond (1)

Douglas Diamond
Nobel laureate 2022

Independent Director

What is factor investing? 

At its most basic level, factor-based investing is about systematically following a set of rules that builds a diversified portfolio of stocks sharing certain well-defined traits/characteristics that are associated with the drivers of investment returns, and avoids (or even sells short) a diversified portfolio with the opposite characteristics. 

Factor investing grew in popularity after the Global Financial Crisis, which gave way to the longest bull market on record, with single-factor strategies attracting considerable inflows. However, more recently they have struggled to deliver market-beating returns. Factor-based investing remains a much more reliable way of delivering long-term returns than market-cap weighted strategies – but only if it is done correctly. According to Dimensional:

“Factor investing as a systematic way to design and implement investment strategies to pursue higher expected returns than the market. It’s a rules-based approach that takes some of the emotion out of investment and replaces it with rigorous research and efficient implementation.”

While many investors often choose a passive or active investment style, a systematic factor-based investment approach offers the potential for market-beating performance without manager-specific risks.

Although factor investing has become more mainstream in recent years, it is important to note that it is a style of investing rooted in academia and backed by extensive research. A factor is a purely academic construction that you can’t invest in directly, which is important because it's a long way from thinking about a factor in an abstract academic sense, and using it to invest.

Investment factor models started emerging in the 1970s and 1980s, with the first – the Capital Asset Pricing Model (CAPM) – explaining why stocks that moved with the market outperformed those that did not.

After that, academics started to identify other factors such as size, which the CAPM model did not explain, as academics found that the smaller the company, the higher the expected returns.

In the early 1980s, when this research around the size factor came out, Dimensional founder and executive chairman David Booth wanted to bring it to the market, and that is essentially where the idea of systematic investing started.

That early factor research inspired the launch of the world’s first micro-cap strategy in 1981 and it is still running today. Further research in the decades since, notably by Dimensional Directors, Gene Fama and Ken French, has identified value, profitability, and asset growth as valuable factors.

More than 600 factors have been proposed since the 1980s, but many are simply too far away from anything you could implement in the market.

Putting financial science to work 

DFA consider a ‘dimension’ to be a factor that explains differences in returns, demonstrates persistence through time and pervasiveness across markets, and is cost-effective to capture in diversified portfolios. These characteristics provide confidence that returns observed in historical data may appear in the future. From capital markets research over the past 50 years, DFA has gained a powerful understanding of the dimensions that generate higher expected returns. These dimensions include:

  • The equity premium – Stocks perform better than bonds over the long term
  • The size premium – Small companies outperform large companies over the long term
  • The value premium – Value companies outperform growth companies over the long term
  • The profitability premium – More profitable companies outperform less profitable companies over the long term

Other approaches to investing don't consider these and are based on other factors.



Does factor investing work? 

Investors in traditional index funds are buying the entire market. Capturing its returns. But data shows that investors who expose their portfolio to specific factors can (and do) beat the market over the long term. Enter factor-based investing. So, what are ‘factors’?

According to Larry Swedroe, author of What Wall Street doesn't want you to know, factors are nothing more than a characteristic, a trade or a style of investing that can be expressed even across asset classes. One example is value. Buying what’s cheap. So which factors are worth investing in and which should be ignored? This is a big and complex subject. This video explains more.

Ignoring the noise 

With so many different factors, there is a wide range of opinions about how to construct a systematic investment approach.

It might be tempting to jump on the next new factor and try to build investments or portfolios around that because ‘new’ is exciting. But if it's not founded in something rigorous, there is no reason to expect it to outperform going forward.

In the past, investors have poured money into the latest factor in search of returns. An example is low volatility, which delivers market-like returns with a much less bumpy ride.

What the research shows is that the low-volatility segment of the market is essentially just a repackaging of things we already know. They tend to be relatively large, relatively profitable companies and are more value-like with lower relative prices.

While such strategies are appealing in more volatile conditions, non-complementary factors can introduce ‘noise’ into a systematic, rules-based approach.

Diversifying across factors that complement each other can reduce volatility. Value and profitability, for instance, are excellent complements because they tend to target different market segments and have, therefore, rarely been negative together.

Multifactor investing is like having different ingredients, some sweet and salty, or sour and umami. Putting them together may give you a much better experience than just having each one by itself.

Remaining disciplined 

One of the challenges of a systematic factor-based approach is remaining disciplined, particularly when markets become more volatile.

Because of the nature of risk, and the virtual certainty that factor strategies will experience long periods of underperformance (and, with them, the behavioral problem of negative tracking variance), factor investing is hard. It requires a strong belief system that can provide the discipline needed to ignore the stress created by near-term negative performance (or relative underperformance) and allow investors to stay the course. If factor investing were easy, everyone might do it;

Changing your investment approach, by adding different types of stocks when market conditions change, can harm investors’ portfolios.

If you believe in a factor, then you should stay invested in it, even during periods when it is volatile. Otherwise, you may miss out.

A lot of so-called value funds ended up being growth funds in disguise during the decade where the value premium was not as impressive as its historical average. And that lack of discipline meant they ended up underperforming when the premium rebounded more recently.

However, investors may want to invest with a consistent portfolio manager and a firm that understands the importance of remaining disciplined when markets are more volatile. One thing that we strongly believe in is diversification. It has been called the only free lunch in finance, and it helps capture premiums because we do not know which securities will deliver on any given day.

Ultimately, investors must judge whether their managers are delivering what they promised, which is easier with a systematic approach.

Any manager can look phenomenal if they are lucky and manage to pick the right stocks or hit the market at the right point in time. And they can also look bad if they are unlucky.

While the performance itself is an important aspect of judging a manager, investors should focus on consistency of performance as that is a sign that a manager is following a process; a lack of consistency could reveal inefficiencies or the lack of a well-defined approach.

You need to judge a manager holistically, from their research to the design and management of their portfolios. Are they doing everything they can to maximise performance and minimise risk?

A comparison of investing 

Traditional investing
Attempts to identify mispricing in securities Relies on forecasting, security selection, and market timing Generates higher expenses and trading costs, and excess risk
Allows a commercial index to determine the strategy Attempts to closely track the benchmark Accepts lower returns, reduced flexibility, and higher trading costs
Uses insights about markets and returns from academic research Structures portfolios along the dimensions of expected returns Adds value by integrating research, portfolio structure and implementation

In summary:

  • Stocks have higher expected returns than bonds.

  • Relative performance among stocks largely depends on company size (small vs. large), relative price (value vs. growth), and profitability (high vs. low). When setting prices, markets effectively apply different discount rates to stocks to reflect differences in underlying risk. The variables (or dimensions) of company size, and relative price, identify differences in these discount rates.
  • In fixed income, two dimensions largely drive relative performance: term and credit. Longer-term bonds are more sensitive than shorter-term bonds to unexpected changes in interest rates. Bonds with lower credit quality have a greater risk of default than bonds with higher credit quality.

  • By considering how much of each equity and fixed income dimension to target, investors can adjust the total expected return.

Implementation makes a huge difference 

Dimensional trades differently by pursuing the systematic performance of broad market dimensions, they can regard securities with similar characteristics as close substitutes for one another. This affords flexibility in what securities to trade and when to trade them, resulting in more negotiating power. By staying patient when others are compelled to buy and sell, Dimensional can keep costs low and seek to improve results. The result is investment performance driven by a potent combination of philosophy, process, and execution. Traditionally, managers do one of two things: They focus on picking individual securities, or they attempt to mimic the performance of arbitrary benchmarks. They may hold too few securities or act on market predictions, interest rate movements, and they may rely solely on information from third-party analysts or rating services.

Dimensional chooses a different path by designing strategies based on research rather than speculation or the need to track commercial indices. DFA builds portfolios along the dimensions that drive expected returns. Dimensional chooses Advisers which is the opposite of all other fund managers. Unlike traditional fund managers where advisers can place business immediately, advisers must complete rigorous training at their own expense before they can recommend Dimensional funds to their clients. DFA want to be satisfied the adviser’s knowledge, understanding, and business processes share an affinity with their own. In addition, advisers are encouraged to follow a program of continual education and improvement.

AES recommends Dimensional Fund Advisors because of their proven investment strategy and low costs.

Shared core investment principles: 

  1. Capital markets work: investors are consistently rewarded for investing their capital in the market
  2. Risk and return are related. An investor should aim to obtain the market return without taking unnecessary risks
  3. Diversification is essential to minimise risk and achieve the market return on investment
  4. Costs must be minimised and eliminated where possible to increase investment net return
  5. Portfolio asset allocation is the key determinant of investment return
    a. Equity return is determined by market, size, value, and profitability
    b. Fixed Income return is determined by term and default risk
  6. An investor’s behaviour has a significant effect on investment return

You can read our investment philosophy in full, here.

10 Key Principles to Improve Your Odds of Success

1. Embrace market pricing 

The market is an effective information processing machine. Each day, the world equity markets process billions of dollars in trades between buyers  and sellers—and the real-time information they bring helps set prices.


10 Key Principles to Improve Your Odds of Success

2. Don’t try to outguess the market 

The market’s pricing power works against fund managers who try to outperform through stock picking or market timing. As evidence, only 18% of US-domiciled equity funds and 15% of fixed income funds have survived and outperformed their benchmarks over the past 20 years.

US-Domiciled Fund Performance, 2002–2021US-Domiciled Fund Performance, 2002–2021


10 Key Principles to Improve Your Odds of Success

3. Resist chasing performance 

Some investors select funds based on their past returns. Yet, past performance offers little insight into a fund’s future returns. For example, most funds in the top quartile of previous five year returns did not maintain a top-quartile ranking in the following five years.


Percentage of top-ranked funds that stayed on top

Percentage of top-ranked funds that stayed on top



10 Key Principles to Improve Your Odds of Success

4. Let markets work for you 

The financial markets have rewarded long-term investors. People expect a positive return on the capital they supply, and historically, the equity and bond markets have provided growth of wealth that has more than offset inflation.

Growth of a pound—MSCI World Index (net div.), 1970–2021

Growth of a pound


10 Key Principles to Improve Your Odds of Success

5. Consider the drivers of returns 

There is a wealth of academic research into what drives returns.

Expected returns depend on current market prices and expected future cash flows. Investors can use this information to pursue higher expected returns in their portfolios.

Dimensions of expected returns

Dimensions of Expected Returns


10 Key Principles to Improve Your Odds of Success

6. Practise smart diversification 

Holding securities across many market segments can help manage overall risk. But diversifying within your home market may not be enough. Global diversification can broaden your investment universe.

Diversification smooths out some of the bumps

Diversification smooths out some of the bumps


10 Key Principles to Improve Your Odds of Success

7. Avoid market timing 

You never know which market segments will  outperform from year to year. By holding a globally diversified portfolio, investors are well positioned to seek returns wherever they occur.

Annual returns by market index

Annual Returns by Market Index


10 Key Principles to Improve Your Odds of Success

8. Manage your emotions 

Many people struggle to separate their emotions from investing. Markets go up and down. Reacting to current market conditions may lead to making poor investment decisions.

Avoid reactive investing

Avoid Reactive Investing


10 Key Principles to Improve Your Odds of Success

9. Look beyond the headlines 

Daily market news and commentary can challenge your investment discipline. Some messages stir anxiety about the future, while others tempt you to chase the latest investment fad. When headlines unsettle you, consider the source and maintain a long-term perspective.


Look beyond the headlines


10 Key Principles to Improve Your Odds of Success

10. Focus on what you can control 

A financial adviser can offer expertise and guidance to help you focus on actions that add value. This can lead to a better investment experience.

Neither an active manager nor a passive manager 

DFA provide a proven investment strategy which gives clients the market return and removes speculation and guesswork. DFA is neither an active manager nor a passive manager.

It follows a scientific asset allocation process which has low operating costs and almost eliminates trading costs. DFA will provide the investor with the market return over time plus in addition DFA portfolios are expected to produce 1% to 2% above the market return. This additional return is achieved through the application of research knowledge to tilt the portfolio in terms of company value, company size, and company profitability. This has now reliably been achieved for more than 38 years since inception. The annual management charges (AMCs) are much lower than AMCs from actively managed funds but fractionally higher than some purely passive funds. A client pays only marginally higher fees than passive funds but obtains something of real value in return. AES does not believe that blindly following a tracker fund simply to save of the order of 0.1% p.a. is either prudent or productive.

Costs of trading 

In addition, the costs of trading are minimised and almost eliminated, and this could potentially reduce costs by another 1% or 2% a year. The removal of this ‘hidden’ cost means that Dimensional funds can be cheaper than most other funds because of their lower AMCs in combination with their very low trading costs. We believe that the total cost reduction of Dimensional funds in comparison with many active funds could be as much as 3% per annum.

Funds are only available through advisers because of the belief that advice is important. Research has shown that investors who do not take advice get consistently lower returns over time because of poor investor behaviour. Dalbar (www.dalbar.com) has been following investor returns since 1994 and they have consistently shown that investment results are more dependent on investor behaviour than on fund performance. They show that the average unadvised investor receives over three percent per annum (over 3% p.a.) less by making the wrong decisions and taking those decisions at the wrong times.

Average expected annual equity returns

Sharing the advantages 

The intelligent investor realises not only that costs are important, but also that they are not the only factor in making fund choices.

They also understand on-going advice is a price worth paying to ensure that guidance is available at all times.

Dimensional is the fund manager chosen by many institutional investors who have billions to invest, and AES is proud to be able to provide the ordinary investor with access to these funds so that they can share in the same advantages.


Dimensional origins

For more than 30 years, Dimensional has been translating compelling research into practical investment solutions for their clients.



Dimensional investing

David Booth, Dave Butler, Eugene Fama, John McQuown, and Ken French explain the deep connections between academic finance and Dimensional’s approach to investing and how the firm’s focus on data and implementation, and its ability to adapt as research evolves, helps investors.



Eugene Fama on modern finance

University of Chicago Booth Professor and Nobel prize-winning economist Eugene Fama talks about the evolution of modern finance.


A foundation built on great ideas

Many of the greatest advancements in finance have come from academic research. Dimensional Fund Advisors is a pioneer in translating those discoveries into practical investment solutions for clients.


The evolution of indexing and Dimensional

David Booth reflects on the development of indexing, its positive impact on the investment world, and Dimensional’s differentiated approach.


Common purpose

The firm’s leaders describe how Dimensional’s focus on honesty, integrity, and continuous improvement helps create a better investment experience for clients.

Alternatives to Dimensional 

Each individual client’s circumstances and requirements are considered before making a recommendation. For some clients cost and diversifcation may not be their main criteria. For example, ethical investments can be recommended to clients who prefer this approach and these portfolios may or may not include Dimensional. For those investing smaller amounts who do not require advice or wish to ‘DIY’, AES recommends Vanguard funds or BlackRock iShares. Other clients may require more bespoke investment portfolios and AES helps and advises those clients as they require. However, for most of our typical clients, Dimensional provides them with good value at low cost. Recommendations are kept under regular review and model portfolios assessed annually.

Dimensional vs. Vanguard 

Both are great, have strengths and weaknesses, and are better than what 99% of international investors are invested in.

If I could wave a wand and move all the trillions of dollars sat languishing in low-interest deposit accounts with banks, toxic structured products or poorly performing active funds portfolios - to either of these, I would. Pick either one and you’ll likely have made a good choice.

However, there's a deeper explanation I'd like to get into to better explain how they are individually set up to capture returns. You can read it here.

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