This report discusses the current situation and potential problem of Dimensional Fund Advisor (DFA), an investment firm based in California. DFA has unique investment philosophy which based on academic research conducted by Fama-French and Banz. The following report first analyses the business strategies of DFA and their sustainability. Then we discussed DFA's trading strategies and its competitive advantages generated by them. Finally, some recommendations are made to DFA in short term, long term development and its newly introduce tax managed funds as well.
The current problem
DFA was now in an unhappy situation since the large and growth stock performed very well recently and investors who listen to the bragging of their tech-heavy friends started to question the investment style. Indeed, the sustainability of DFA depends a lot on the academic research of size and value effect, which is also critiques by a lot of researchers.
DFA now needs to review its business and trading strategies and rebuild investors' confidence to the firm.
DFA business strategy
DFA's business strategy centred on the market efficiency theory. It believed that no one had the ability to consistently pick stocks that would beat the market. However, the difference of DFA from other passive investment funds is that instead passively tracking commercial indexes, DFA structures portfolios based on risk and returns relationship identified through academic research. In addition, the founders of DFA believed the ability of skilled traders to contribute to the fund's profit even when the investment was inherently passive.
Based on the academic research, DFA's small cap objective is to deliver the size effect and provide diversification of small capital stocks worldwide. The strategy was firstly realized through investing in stocks whose market capitalization fell below a cut off set by 20th percentile of all NYSE...