DFA: 13 Years of Underperformance

Birthday wishes are in order for Dimensional Fund Advisors’ all-in-one “Core Equity” mutual funds, which recently turned 13.  It’s an awkward age, filled with heartaches and insecurity. How popular am I? Where do I fit in?

These underperforming youths, alas, are unlikely to ever date cheerleaders or find themselves voted Most Likely To Succeed.

A quick recap: Until 2005, DFA offered an ever-expanding hodge-podge of funds that covered only slices of the stock market. They started with small cap funds in 1981, and, when those underperformed, switched to so called “three factor” portfolios (overweighting small and value stocks) in the 1990s.

This revolving lineup of products made for great marketing – if a fund covering one bit of the market outperformed, as random chance would dictate, DFA highlighted those with customers, ignoring the laggards. Or they simply started new funds, making trails of poor performance disappear.

In 2005, however, DFA began offering a lineup of “Core Equity” funds that covered the entire market. Sales brochures from the time sold them as:

The result of decades of experience, integrated portfolios that deliver broad diversification and low-friction factor exposures—the synthesis of Dimensional’s investment philosophy.

Since these funds were meant to be the only US stock fund an investor needed, it was finally possible to compare a single DFA product to the simple total market index fund a Vanguard investor would make.

The three funds they created are detailed below:

Fund Symbol Strategy
DFA US Core Equity 1 DFEOX Modest small/value concentrations
DFA US Core Equity 2 DFQTX Greater tilt toward small and value stocks
DFA US Vector Equity DFVEX Heavy DFA magic

This blog has focused on DFVEX, which, if DFA really does have a market beating formula, would show the greatest evidence of outperformance.

Here are the results 13 years on. This chart from Morningstar shows the value today of $10,000 invested in both Vanguard’s Total US Market fund (VTSAX), and the DFA Vector fund (DFVEX), on Dec. 30, 2005, the day the DFA fund was incepted:

DFVEXat13

Here’s a closeup of the results from the upper left corner of the chart:

DFVEXClose

Over 13 years, the DFA Vector fund returned 6.5% per year, annualized. Meanwhile, VTSAX returned 7.7% per year.

Let’s put that 1.2% difference into perspective. Here’s what a $300,000 investment in each fund 13 years ago would be worth today:

Fund Value
DFVEX $681,300
VTSAX $790,230

That’s a loss of $108,930 versus simply holding the market as a whole. Some people call that real money.

But it gets worse: DFA funds aren’t available to purchase directly. Investors must go through financial advisors and pay an additional annual fee for the privilege of the performance above (some people can own them directly through a 401k).

Deducting the standard 1% annual advisory fee, the $300,000 investment above is is now worth only $601,773 – an almost $200,000 drop from what a simple Vanguard fund returned.

Will these ungainly teen-aged funds grow into captains of the football team? Don’t count on it. Global financial markets are far too efficient to allow easy-to-spot free lunches in “factor portfolios”. As we’ve been saying and showing here since 2014, the smart money sticks with Vanguard.

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