There
were some changes recently announced in two of the fund families
that CCP utilizes.
Spotlight
on DFA Funds
From
time to time, we'd like to focus on some of the fund families/fund
managers that make up the core of our asset allocation/money
management services as well as comprise many of our recommendations
to our non-discretionary clients. DFA is one of those families
of funds, and is often not very well know among our clients.
We thought we'd take this opportunity to discuss their philosophies
and why CCP chooses to utilize these funds.
Dimensional
Fund Advisors or DFA is a fund company founded by Rex Sinquefield
and David Booth. Both were students of Eugene Fama, of the
University of Chicago, who champions the efficient market
theory. The board of directors consists of Nobel Prize winners
Merton Miller and Myron Scholes who won Nobel prizes for their
work in equity and options research, and master data cruncher,
Roger Ibbotson. These exceptionally talented financial minds
guide the direction and investments of DFA funds by holding
firm to one principle - DFA funds are passively managed. Their
research suggests that stocks, with very few exceptions, trade
in an efficient marketplace, meaning that all available information
is reflected in the prices, and that stock pickers really
cannot add very much value to an investment portfolio. Their
position is not to try to time the market, nor to pick the
right stock, but rather to pick an asset class and invest
in virtually all of the stocks available in that asset class.
They have volumes of research that supports the findings that
stock prices are predictable based upon the efficient market
hypothesis. Fama argues that the stock market processes information
quickly and accurately and that stocks are priced accordingly
so that a stock picker cannot consistently outperform it.
DFA
has researched and selected various asset classes to which
to apply this theory - and several of them are represented
in the funds that CCP utilizes. It was Sinquefield who started
the first S&P 500-index fund with American National Bank
in 1975. When he suggested a Small Company index he was rejected,
and eventually collaborated with Booth who had just started
Dimensional Fund Advisors. The result was the creation of
various indices to track small company stocks, as well as
other asset classes. They divided the stock market into deciles
and invested in the smallest two (or more) to create the small
company indices. They did this based upon research that proved
that although institutional investors were mostly invested
in large companies at that time, small companies actually
outperformed large companies over time. This makes sense as
investors take on a larger risk and therefore expect a higher
rate of return.
Although
CCP does use some actively managed and other index funds,
DFA represents a base for our Money Management services. Our
model portfolios are based upon the extensive research of
Fama, Sinquefield, Miller, Scholes, and Ibbotson. Their theories
are the basis for index investing which has become popular
in recent years. We feel that a passive investment strategy
allows for low turnover, low costs, and consistent diversification
and has proven successful over the long term. We have added
our own statistical research and expertise to determine the
best asset allocation and individual fund selection for each
of our model portfolios.
Acorn-
The Acorn family of funds recently sent out a proxy containing
a proposal to be acquired by Liberty Financial Companies.
At this time it appears that the funds' operations and management
will remain the same for existing shareholders, however we
will be watching these funds as well in the upcoming months.
There will be a load for new shareholders however, as Schwab
offers these funds with no transaction costs, we do not expect
any impact on our clients.
Janus
-
Many of you may know that James Craig, the Chief Investment
Officer and Director of Research at Janus announced recently
that he will be leaving Janus to manage money for a charitable
foundation. The Investment Committee at CCP will be watching
these funds, but at this point does not plan to make any changes.
Sources
- Sinquefield,
Rex: Active Vs. Passive Management: transcript of opening
statement from Schwab Institutional Conference October 12,
1995
- Tully,
Shawn. How the Really Smart Money Invests: Fortune Magazine,
July 6, 1998.
- Wellington,
Weston. Active Vs. Passive Management. Research paper, September,
1996.
