Dfa While free essay sample

While DFA had never viewed maximizing assets under management as a goal, the ranking did suggest that it might be possible for DFA to achieve more as a firm than it currently was. Should Booth and DFA continue on the path that had brought them this far? Or was this the time for a major initiative that could catapult DFA to a status among the largest firms in the business? The Company and its Clients DFA was an investment firm based in Santa Monica, California. Founded in 1981 by Booth and Rex Sinquefield, two former students at the University of Chicago Graduate School of Business, DFA was dedicated to the principle that the stock market was â€Å"efficient†Ã¢â‚¬â€that is, while over any given period some investors by luck would outperform the market and others would underperform, no one had the ability to consistently pick stocks that would beat the market. Such beliefs were associated with proponents of index funds, and, indeed, Sinquefield had run one of the very first SP 500 index funds while at another firm. But DFA was not simply an index fund manager. In addition to efficient markets, DFA’s founders believed passionately in two other principles: the value of sound academic research, and the ability of skilled traders to contribute to a fund’s profits even when the investment was inherently passive. At its founding, DFA surmised that acting on these core beliefs would make it unique among investment companies. By 2002, DFA had 130 employees, over 100 of whom worked in the main office by the sea in California. Most of the rest worked in a Chicago office and two other trading offices, in London and Sydney. Cohen prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Professor Jay Light prepared â€Å"Dimensional Fund Advisors: 1993,† HBS Case No. 294-025. Copyright  © 2002 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www. hbsp. harvard. edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. 203-026 Dimensional Fund Advisors, 2002 DFA had started with a single investment fund that held small stocks, but it now offered a fairly broad product line (see Exhibits 8 and 9 for information on DFA’s equity products; DFA also had about $2 billion of fixed-income investments). Still, small stocks continued to be DFA’s primary business. DFA’s fees tended to be lower than those of most actively managed funds but higher than those of pure index funds (see Exhibit 5). This was fitting given DFA’s position in the market as a passive fund that still claimed to add value. DFA began by managing money for major institutions, and these original clients continued to make up the majority of its business. The total amount invested in DFA by institutions was about $25 billion. Such clients numbered over 125 and included corporate, government, and union pension funds, college endowments, and charities. Nearly all of DFA’s institutional clients were tax exempt, either because of their not-for-profit status or because of the tax exemptions granted to retirement plans. In 1989, DFA decided to pursue high-net-worth individuals, in addition to institutions, as clients. Because of the illiquid nature of many DFA holdings, it decided that direct accounts with individual investors would likely lead to intolerably high costs. Instead, DFA offered investment services to individuals through a limited number of investment and accounting firms that acted as intermediaries known as registered investment advisors (RIAs). The RIAs chosen shared DFA’s core beliefs, especially the importance of diversification, low turnover, and low transaction costs. The advisors received no payment directly from DFA, but DFA’s low fees enabled them to charge a moderate advising fee to the client while still keeping total charges reasonable. These arrangements benefited both DFA and the advisors. DFA provided the RIAs with a low-fee product that the clients would not be able to obtain on their own. In addition, DFA educated its RIAs by providing them with access to top researchers who were developing innovative theories and empirical analyses. The RIAs then used what they had learned to advise their clients. In many cases, this advice generated questions that DFA delivered back to the academics for continued research. For their part, the RIAs brought DFA a pool of wealthy clients whose overall investments in DFA were quite substantial. Since DFA did not advertise, the RIAs were a crucial conduit enabling DFA to reach this market. DFA’s RIA business had grown rapidly, from its start in 1989 to over $15 billion in assets under management in 2002 (see Exhibit 2 for historical data on DFAs assets under management). 0 Years of Investing Based on Academic Research DFA took pride in the belief that its investment strategies were based on sound academic research. When the firm began in 1981, its main product was a â€Å"small-stock† fund; that is, the fund invested in stocks whose market capitalization fell below a cutoff set by the 20th percentile of all NYSE stocks (this fund was known as the U. S. 9-10 Small Compa ny Portfolio because it contained stocks in the ninth and tenth NYSE deciles based on size). The fund was later renamed the U. S. Micro Cap Portfolio.