Description
The PPT explains on case analysis of Dimensional Fund Advisors.
1
Agenda
• Problem Statement • Evaluating DFA’s current strategy
• DFA’s Trading Approach
• Reasons for success till date • The way forward for DFA
4
Continue with the current investment style
OR Should it aim to rise up the ladder with respect to AUM
6
Salient Features of DFA’s Strategy
• A strongly professional belief that capital markets are efficient
– Semi-strong Market Efficiency
• A passive buy-and-hold investment approach • The use of academic research to define and assess the fund’s strategies
– investments in small cap companies – investment into value companies
• A specialization in the purchase of large blocks of small stocks at discount prices
Value investing
• 2 major criterias:
– Size Effect: Small Cap versus Large Cap
– B/M ratio: Companies having high book value to market value ratio qualify as value investment and DFA focused on such companies.
• Backed by research done by Fama & French
Tax Managed Fund Family
• Emphasis on capturing after tax returns • Aim: To reduce investment taxes paid by clients • Hold dividend paying stocks but keeping portfolio dividend yield low. • Requirements of a successful tax saving fund:
– Low trading costs – Sophisticated solution for tax optimization problem
10
Did DFA possess deft trading techniques?
• Countered threat of illiquid stocks • Purchased stocks at discounts through bulk quantities • Sold stocks in small quantities • Set rules for its traders
• Advantages:
– – – – Lower transaction costs Minimization of price falls Improved operational effeciency Improved investor returns
12
• Main reasons:
– Strong academic research
– Well laid out selection process – Focus on niche markets – Deft trading techniques
The way forward for DFA
14
Alternatives
• Broaden horizon and expand into other investment styles
– Value investing – Growth investing – GARP (growth at reasonable price) investing
• Continue with current style
– Continue with value stocks – Expand global portfolios – Take advantages of current trading approach
The alternatives • Different requirements for different investors
– Opposite to current ideology – Loss in operational efficiency
Size
Large Cap Mip Cap
%of Overall Market
70 20
Average Market value($ mn) $1,21,657 $5,373
No of Companies Total Market Cap
207 630 $2,51,82,999 $33,84,990
Small Cap
Micro Cap Total
5
5 100
$1,217
$385 $1,28,632
563
3620 5020
$6,85,171
$13,93,700 $3,06,46,860
• Exhibit 1 – DFA AUM - $35719 million • 1.5% of total market capitalization • Exhibit 2 - percentage growth of through RIA’s more than for institutional investors (in last 6 years)
Continued
• Global portfolio’s advantages
– Lower fees and expenses – Reduced risk through diversification across security/sector/country
– Enhanced long term value
Risks DFA faces
• Underperformance of small companies in times of economic downturn (exhibit 6)
– Source of risk and disadvantage in current times
• Lead to decline in investor trust
• To overcome – DFA could look to invest in GARP stocks
20
• Focus on small company stocks
– High potential
• Focus on value stocks over growth stocks
– with a small percentage in GARP stocks
• Target more high net worth individuals
• Continue with its current trading policies
– Reduce costs and increase returns
• Expand internationally
– Reduced country risk
doc_553926778.pptx
The PPT explains on case analysis of Dimensional Fund Advisors.
1
Agenda
• Problem Statement • Evaluating DFA’s current strategy
• DFA’s Trading Approach
• Reasons for success till date • The way forward for DFA
4
Continue with the current investment style
OR Should it aim to rise up the ladder with respect to AUM
6
Salient Features of DFA’s Strategy
• A strongly professional belief that capital markets are efficient
– Semi-strong Market Efficiency
• A passive buy-and-hold investment approach • The use of academic research to define and assess the fund’s strategies
– investments in small cap companies – investment into value companies
• A specialization in the purchase of large blocks of small stocks at discount prices
Value investing
• 2 major criterias:
– Size Effect: Small Cap versus Large Cap
– B/M ratio: Companies having high book value to market value ratio qualify as value investment and DFA focused on such companies.
• Backed by research done by Fama & French
Tax Managed Fund Family
• Emphasis on capturing after tax returns • Aim: To reduce investment taxes paid by clients • Hold dividend paying stocks but keeping portfolio dividend yield low. • Requirements of a successful tax saving fund:
– Low trading costs – Sophisticated solution for tax optimization problem
10
Did DFA possess deft trading techniques?
• Countered threat of illiquid stocks • Purchased stocks at discounts through bulk quantities • Sold stocks in small quantities • Set rules for its traders
• Advantages:
– – – – Lower transaction costs Minimization of price falls Improved operational effeciency Improved investor returns
12
• Main reasons:
– Strong academic research
– Well laid out selection process – Focus on niche markets – Deft trading techniques
The way forward for DFA
14
Alternatives
• Broaden horizon and expand into other investment styles
– Value investing – Growth investing – GARP (growth at reasonable price) investing
• Continue with current style
– Continue with value stocks – Expand global portfolios – Take advantages of current trading approach
The alternatives • Different requirements for different investors
– Opposite to current ideology – Loss in operational efficiency
Size
Large Cap Mip Cap
%of Overall Market
70 20
Average Market value($ mn) $1,21,657 $5,373
No of Companies Total Market Cap
207 630 $2,51,82,999 $33,84,990
Small Cap
Micro Cap Total
5
5 100
$1,217
$385 $1,28,632
563
3620 5020
$6,85,171
$13,93,700 $3,06,46,860
• Exhibit 1 – DFA AUM - $35719 million • 1.5% of total market capitalization • Exhibit 2 - percentage growth of through RIA’s more than for institutional investors (in last 6 years)
Continued
• Global portfolio’s advantages
– Lower fees and expenses – Reduced risk through diversification across security/sector/country
– Enhanced long term value
Risks DFA faces
• Underperformance of small companies in times of economic downturn (exhibit 6)
– Source of risk and disadvantage in current times
• Lead to decline in investor trust
• To overcome – DFA could look to invest in GARP stocks
20
• Focus on small company stocks
– High potential
• Focus on value stocks over growth stocks
– with a small percentage in GARP stocks
• Target more high net worth individuals
• Continue with its current trading policies
– Reduce costs and increase returns
• Expand internationally
– Reduced country risk
doc_553926778.pptx