DFA sees new international opportunities

To capitalize on international investing, Dimensional Fund Advisors LP has launched an international-equity fund despite comparatively stronger U.S. stock market performance.

The International Vector Equity Portfolio invests in small-capitalization companies with attractive valuations that trade internationally and are located in developed markets. The mutual fund relies on quantitative strategies to make investment decisions.

It is the seventh fund DFA has unveiled this year.

While the U.S. stock market recently began to outperform the global stock market for the first time in 10 years, advisers do not think the timing of the launch will dampen interest in the fund.

The basis for offering the fund is not to exploit a hot sector but to identify long-term opportunities, said Ted Toal, senior partner with Triton Wealth Management Inc. of Annapolis, Md., which has $90 million in assets under management.

“I think [the fund] would be appropriate for younger clients and clients with a higher risk tolerance,” he said. “The new fund tilts more toward small and value much more than [DFA’s] main international-core fund does. Over time, value and small-cap stocks] tend to do better. But in the short term, they would have a higher volatility.”

BUY AND HOLD

To be sure, the portfolio is ag-gressive and designed as a long-term hold.

“In the short term, and that could be one [year], five years or 10 years, growth and large-cap may outperform,” said Jay Hutchins, president of Comprehensive Planning Associates Inc. of Lebanon, N.H., which has $30 million in assets under management. “But the fund would be for clients who invest for 15 years or longer, with a longer-term horizon.”

The average expense ratio for DFA’s mutual funds is 0.42%, compared with 1.25% for the average mutual fund, according to Morningstar Inc. in Chicago. Santa Monica, Calif.-based DFA had $150 billion in assets as of June 30, with 39% devoted to U.S. stocks and 44.6% to non-U.S. stocks.

The firm’s quantitative approach appeals to advisers who think that it ensures continuity. “You know what you get, and it doesn’t break when somebody leaves, which is an issue that a lot of fund shops have,” said Paul Herbert, fund analyst at Morningstar. “It’s definitely a durable [approach].”

It is a strategy that at least one adviser thinks is superior to other investment strategies.

“We feel that it’s an advantage that they are not tied to an index,” said Chuck Neff, wealth manager with Balasa Dinverno & Foltz LLC of Itasca, Ill., which has $1.5 billion in assets under management. “I would think that there would be some demand for it. They can focus on returns and not tracking an index.”

Advisers who otherwise might feel nervous about the fund are comfortable with the investment because the investment approach is based in part on research from finance professors Eugene Fama and Kenneth French of the University of Chicago, who studied valuation factors and returns.

The academic research is compelling, and that creates a “confidence that’s based on objective analysis and data,” said Andrew Orr, principal and founder of OrrGroup LLC of Orlando, Fla., which has $25 million in assets under management.

FALLING OUT OF FAVOR

Despite the seemingly sound theoretical foundation of the fund, when value investing falls out of favor, advisers will have to decide what to do with their holdings.

“If you really believe the [fund] will do well over the long run, you will keep it,” said Eduardo Repetto, chief investment officer and head of research at DFA. “We want our portfolios to have higher expected returns than the markets.”

In addition to the international fund, this year, DFA launched the Selectively Hedged Global Fixed Income Portfolio, a fund that provides exposure to currencies that are not hedged in U.S. dollars.

“This is probably the first in a string of nuances you’ll see in the fixed-income area, where we are incrementally taking on more risk,” said Bob Deere, investment director and senior portfolio manager at DFA.

“We have been looking at our fixed-income lineup a lot because our clients are saying, ‘We want more risk in the choices that you are giving us,’” he said.

E-mail Sue Asci at [email protected].