Last month, as investors responded to turbulent financial markets by trimming their stakes at the largest investment companies, one top mutual fund firm quietly posted its 77th consecutive month of positive net sales.
Dimensional Fund Advisors notched that victory — to the tune of $869 million — during a turbulent August, according to a Morningstar Inc. estimate, providing further validation, for now, of the Austin, Texas-based money manager's unique approach to reducing turnover and keeping advisers and their clients invested for the long run. Dimensional, which manages $406 billion in all, was one of the earliest proponents of factor investing, which blends elements of index-based investing and active investing in order to predictably exploit market returns and minimize trading costs.
Dimensional's fund-raising record is not matched even by the industry's sales leader, Vanguard Group Inc. Vanguard, which has brought an estimated $117 billion into its mutual funds this year, last suffered outflows in June 2013, according to Morningstar.
FINANCIAL CRISIS
But Dimensional, sometimes called DFA, has not posted net redemptions in more than six years, since the financial crisis reamed investment portfolios. At that time, Dimensional investors withdrew under $300 million in both February and March of 2009, though the firm kept its annual sales positive even during that tumultuous period. This year, the firm has climbed to third in sales, according to Morningstar, bringing in $15 billion, most of it from advisers.
Founded in 1981, Dimensional argues that trying to beat the market through stock and bond picking is a fool's errand, and instead uses academic research like the factor models of Kenneth R. French and the Nobel laureate Eugene F. Fama to capture previously documented sources of excess return. Messrs. Fama and French both sit on Dimensional's board of directors. Initially a money manager for institutions, the company started working with financial advisers in 1989. Many of today's smart beta products — from index providers including FTSE Russell, WisdomTree, Research Affiliates — are based on a similar premise.
The popular fund company works with a devoted group of institutions and financial advisers, who are approved to use its products after participating in conferences that teach the company's core principles. The firm said some 4,000 advisers attended its 55 conferences last year.
CHEERLEADERS
Michael Zhuang, a financial adviser and principal at MZ Capital, is among the firm's cheerleaders. He said Dimensional, like Vanguard, benefits from a move away from funds that invest based on a manager's views to products that try to perform in line with the market.
“My job is to preach the idea of Fama's efficient market to my clients, anchor their expectations and stay invested in good markets and bad,” said Mr. Zhuang, whose financial advice firm is paid on fees from clients rather than sales commissions from fund companies. The firm manages $49 million.
“Other mutual funds don't have this level of advice and support,” he said, “and their investors tend to be more fickle.”
The stock market created a difficult sales environment for funds last month. As fears over China's economic slowdown and the potential consequences of an interest-rate hike by the
Federal Reserve peaked, volatility rocked financial markets. Over the last month, the S&P 500 lost 6.7% of its value, pushing the benchmark into negative territory for the year. A negative year-end result would be the first for the S&P 500 since 2008.
Fifty-six percent of mutual fund companies saw net outflows last month, including 22 of the top 30 fund brands by total assets. Top brands that suffered outflows included
Fidelity Investments,
American Funds and
T. Rowe Price, which lost a combined $2.8 billion.
Franklin Templeton Investments saw
its worst outflows in any month in more than 20 years.
FOCUSED ON LONG TERM
Dave Butler, head of global financial adviser services at Dimensional, said his company is able to keep its investors focused on longer-term performance by helping advisers set realistic expectations for clients. Institutional-class shares of the firm's largest mutual fund, DFA US Large Cap Value (DFLVX), rank in the top quintile over three, five, 10 and 15 years when compared against similar funds by Morningstar.
“We've always thought that the adviser was a key component to the successful investment experience, and we built the business around helping advisers not only understand the capital markets better, but helping them articulate that story in a way that resonates with clients,” said Mr. Butler. “The one key is the advisers do a good job of setting expectations properly. The recognition that markets are going to move up, markets are going to move down. The recognition that an adviser does not have a crystal ball to project what's going to go on in the future.”
