Ask David Booth, the founder of Dimensional Fund Advisors, about his firm's equity strategies, and his eyes light up. He'll go on at length about how “cool” the research behind it is and why it's the best way to invest in stocks. Ask about fixed income, however, and it's a bit of a different story.
Sure, you'll hear about how DFA has been running fixed-income strategies since 1983, and it makes up a quarter of the firm's $240 billion in assets, and it's an important part of a portfolio, but the excitement isn't the same. It's like watching a parent shift from talking about the son who's quarterback of the high school football team to talking about the son who's an accountant.
That's not a knock on DFA's fixed-income funds -- or accountants, for that matter -- but it fits the firm's investment philosophy. As far as DFA is concerned, fixed income isn't supposed to have the same zip, zap, wow of equities. It's supposed to be boring.
“The principal role of fixed income is to reduce risk in the portfolio,” said Weston Wellington, vice president and one of DFA's in-house research experts. “If you want to take on extra risk, just add more stocks.”
As a result, DFA focuses on short-term, high-quality bonds instead of high-yielding long-term or lower-quality bonds. More-exotic fixed-income asset classes, such as high yield, behave more like stocks than bonds, so in DFA's view, they aren't worth the extra risk.
Advisers who work with DFA, which requires a multistep process to be eligible to sell DFA funds, seem to have bought in to the boring-is-better idea. The firm's biggest fixed-income fund is the plain-vanilla $7.5 billion DFA One-Year Fixed-Income Fund Ticker:(DFIHX), which invests only in Treasuries and corporate bonds rated double-A or better.
DFA has been more aggressive on the fixed-income side recently, though. Three of its last five fund launches have been on the fixed-income side and Tom Goodrum, who joined DFA in January as a fixed-income specialist, said the shifting demographics of baby boomers is driving client demand for more fixed-income products. “Fixed income is going to be a much more important asset class,” he said.
DFA's strategies, both on the equity and fixed-income side, are based on academic research which comes to the conclusion there isn't a reliable way to beat the market by picking individual stocks or bonds. Instead, its funds own broad markets, similar to an index fund, but unlike an index fund, DFA trades opportunistically to keep costs down.