Brown and Company, Inc. Team Members attend the Annual DFA Conference in Santa Monica, CA
We are continually evaluating the investing landscape and seeking the best, and most cutting edge, investment solutions for our clients. To this end, we often conduct site visits to investment management companies that we are considering using for our clients. In July, Justin Cassida, Director of Client Service, and Martin Walsh, Director of Business Development, visited the headquarters of Dimensional Fund Advisors, also known as “DFA.”
The visit to DFA was a constructive one. The company and its investment strategies are based on the academic research of Dr. Eugene Fama and Dr. Kenneth French. Fama, of the University of Chicago, and French, of Dartmouth College, won a Nobel Prize in Economics for their work on the theory of efficient markets.
In addition to their work on efficient markets, Fama and French also published research on what is known as “factor investing.” Without getting too technical, their research suggests that over the long-term, stocks that are 1) small and 2) value-oriented tend to outperform all other stocks.
While some adjustments can be made that take into account that smaller stocks are typically more volatile than bigger stocks, there still exists an anomaly in the stock market. In order to take advantage of this market inefficiency, DFA has created funds that focus on small and value stocks.
Martin Walsh and Justin Cassida were able to sit down with Professor Eugene Fama and learn more about his academic research. The professor was lively, opinionated and highly engaging. He still teaches at the University of Chicago, while also spending time as a special advisor to DFA.
Fama delivered several takeaways that can be readily applied to our investment approach. He emphasized “factor” investing as a very real, and implementable, way as we seek to improve long-term client outcomes. He described the current market conditions in the U.S., and how growth stocks have outperformed over the past decade.
There was also a deep dive into DFA’s fixed income approach. What was interesting to hear is that Fama and team prefer short and intermediate maturity bonds. They don’t believe that investors are compensated enough to hold long maturity bonds. Additionally, the DFA philosophy is to take their risks on the stock side of an investor portfolio, not the bond side.
The Brown Team learned a lot on their visit to DFA and plan to use these takeaways in the pursuit of better client investment outcomes.
All investing involves risk including loss of principal. No strategy assures success or protects against loss. Past performance does not guarantee future results. The prices of small cap stocks are generally more volatile than large cap stocks. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. Dimensional Fund Advisors and LPL Financial are separate entities.