Updated January 2021
DIMENSIONAL FUND ADVISORS AND EVANSON ASSET MANAGEMENT
Dimensional Fund Advisors (DFA) was formed in 1981 to provide institutional investors with a way to apply academic research on portfolio risk and return in real-time portfolios. Its founders and board members have had close ties to academia and include finance academics and Nobel laureates in economics. DFA offers over 100 passively managed portfolios with precise asset class characteristics based on quantitative research. Asset class portfolios are conceptually different from committee designed index portfolios although in some asset classes they overlap closely. Another article on our website, "DFA vs. Vanguard vs. ETF's", examines these differences. An asset class is a group of securities which have more or less similar risk and return characteristics and differs in in risk and return statistically from other asset classes. DFA's asset class portfolios result from correlational and factor analytic analysis of historical financial market data. Certain slices or factors in the global equity and fixed markets produce higher expected future returns and DFA portfolios are designed to capture those returns.
DFA designs equity portfolios which are globally diversified and aim to capture additional returns from value stocks, small cap stocks, and stocks with recent strong recent price momentum and strong profitability growth. In fixed income portfolios DFA uses a variable maturity strategy and algorithm based substitution strategies. In both equity and fixed portfolios DFA is a patient buyer and adds stocks or bonds slowly and is not forced to add securities at any particular time since it aims to track asset class returns and includes a thousand or more securities in each asset class portfolio. Since index portfolios are created or modified (reconstituted) by committees that usually meet every six months index based portfolios force all portfolio managers to buy and sell at the same time. This process adds 5 to 40 basis points of portfolio expenses annually (0.05% to 0.45%) depending upon asset class.
As examined in "Active versus Passive Investing" elsewhere on this website, most asset managers do not outperform the S & P 500 either yearly or long-term. From 1973 through 2013 DFA's fully diversified 100% "balanced" equity portfolios outperformed the S & P 500 by 3.5% per year with slightly lower risk as measured by standard deviation. Although there is certainly room for disagreement, Warren Buffet comes to mind, few asset managers are likely to outperform DFA equity strategies on a risk-adjusted basis. And, Buffet is not so much a stock picker or trader as an exceptional buyer and long-term manager of companies. He recommends indexes for investors.
Evanson Asset Management® (EAM) was formed in 1995 with four aims: (a) eliminating all potential conflicts of interest between a financial advisor and their clients, (b) providing accurate unbiased evaluations of the financial and banking industries, (c) producing the very best possible risk-adjusted returns for both income and growth portfolios, and (d) offering the lowest and advisory fee structure possible, a fixed quarterly fee. We are candid but not dogmatic about portfolio construction and always discuss a variety of choices in asset class weightings since there is always more than one way to design investment portfolios. Portfolio returns net to the investor are a function of investment strategy and costs. We employ very low fixed annual fees for account management, a rarity in this business, and, depending upon the size and complexity of accounts, our fixed fees range from about $625/quarter to $2000/quarter.
How do we manage money at such low cost? We use passive and index strategies which are optimally efficient in the use of your time and our time and we keep our overhead low through extensive use of information technologies and the internet. We are a full service firm and are available at any time to review your accounts or answer questions regarding financial matters. Typically, once passive and index portfolios are set-up they don't require a great deal of time to manage thus we don't charge high fees to manage them.
DFA's asset class portfolios target equity asset classes and facilitate individually designed equity asset class allocations and weights. EAM custom designs each portfolio to match the needs of each of the families we work with. Portfolios are usually tilted towards value and small cap stocks and globally diversified. Maturity laddered bond portfolios with municipal, government, and corporate bonds are often employed for fixed income. We often recommend DFA's and Vanguard's fixed income indexes. We sometimes incorporate preexisting holdings into portfolios and clients can hold funds or securities in their portfolios which are outside the models we use if they wish. After an individual investment allocation plan has been constructed and then approved by our clients we implement it, often averaging into positions. We review all portfolios every 90 days and our quarterly reports include detailed data on returns aggregately and individually by security, a narrative summary of your accounts, a quarterly commentary on all major asset classes and what appears to be driving returns within them, and a prepaid envelope for you to return our management fee to us. We make changes only if your allocations have shifted significantly or your financial circumstances have changed or you wish to do so for other reasons. Our compensation is based primarily on the time it takes to manage your assets, not the size of your portfolio.
How well does the combination of very low fees and passive and index investment strategy work? We have grown from $20 million in assets in 1995 to over $4.4 billion in assets under management as of January 2021.. In down as well as up markets DFA portfolios preserve and grow capital better than other alternatives. For example, from April 2000 through March 2003, a period of severe sell-offs in equities, a fully diversified DFA equity portfolio was 26.6% ahead of the S & P 500 losing only 14.3% to the S & P's 40.9%. In up markets DFA's highly diversified portfolios offer substantially higher returns than the S & P 500 around 3% annually. DFA's portfolios capture market returns for a given asset class mix and never outperform or underperform their respective asset class. Over time, losing less and making more results in higher compounded portfolio returns. And, paying far less for advisory fees means more of the return goes to our clients.
EAM receives no compensation of any sort from DFA and our choice of their funds is based solely upon the excellence of their offerings. It is the only firm EAM has found which offers research based quantitative strategies and a complete selection of passive portfolios covering all equity asset classes. In addition, DFA adds value through strategic management of taxes, securities lending, trading in off-exchange markets, and applying momentum and profit factors to portfolios. And, it also evaluates all holdings in all portfolios daily for problems that might be surfacing for individual securities. DFA funds are not available directly to the public without a DFA approved advisory fimr and, with the exception of a small group of DFA approved investment advisors, are available only to institutional investors. More information about EAM and how we manage money can be found in "Fees and Services" and "FAQ" articles on our website. Additional information about DFA can be found on their public website, www.dfaus.com. If you combine DFA with EAM's low fees we think you will have the ideal investment management solution.
Further information about DFA, EAM, investment risk and return, portfolio design, questionnaire assessment, and other topics can be had by clicking on the many articles on our website. You may leave a message at 831-333-2060, or contact me at service@evansonasset.com and we can schedule a time to talk. Due to Covid we are all working from our home offices.
Please note: The above data is provided by DFA and is believed to be accurate but cannot be guaranteed. Future returns can and will be different from past returns.