...Would you invest in DFA? Yes due to steady returns provided by the company and as investors are generally past performance chasers, one has no reason not to invest in DFA. The company was founded on a sound investment style based on its core belief in sound academic research, passive fund management. Until almost the end of the 20th century DFA had found a way to make money actively with a passive investment strategy. But looking forward, according to me it needs to evolve with the times and look for questions regarding its own strategy and its evolution with the times and the questions facing the financial future. As highlighted by the boom in the I.T sector towards the end of the last century that DFA missed out on completely, DFA on principle is always poised to miss out on new technology companies, as they intrinsically have low book to market value. Also my another objection to DFA’s selection of small cap stocks only is that these category of companies are among the worst hit companies during a financial crisis because of their limited access to credit and most of these companies don’t survive a major recession. Even some proponents of the efficient market hypothesis have argued that due to DFA and similar companies investing in this particular style, this style’s edge had been eroded. Lastly many prominent academicians and financial institutions have called into question the efficacy of the efficient market theory due the financial bubble created in...
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...EXECUTIVE SUMMARY This report analyse the case of Dimensional Fund Advisors (DFA) which is an investment firm in Santa Monica, California. In 2002, David Booth is in dilemma considering how should he lead DFA in the future considering current success condition DFA could achieved. The aim of this report is to assess the condition and situation of DFA and help David Booth in making decision as to what to do to excel DFA performance. This report is divided into 5 parts starting from the company background and its business strategy followed by Fama-French Three Factors Model that highly influence the strategy formulation and action taken by DFA. Third part will be DFA’s trading strategy and continued by brief analysis of its new product namely Tax-Managed Funds. Finally, it will be concluded by recommendation given to David Booth considering the content in main body of this report. Overall, it can be said that the main issue is whether DFA should continue its current operational strategy or it should develop new strategy in order to increase its performance among competitors. As in conclusion, it is suggested that DFA should follow current strategy since it has been proven to work well and it brought DFA to be among top 100 companies. COMPANY BACKGROUND AND BUSINESS STRATEGY Dimensional Fund Advisors (DFA), an investment firm founded in 1981 by David Booth and Rex Sinquefield, is strong believer of Efficient Market Hypothesis (EMH). DFA has adopted EMH In both its strategic operational...
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...RANDOLPH B. COHEN Dimensional Fund Advisors, 2002 In June of 2002, David Booth faced a dilemma. His firm, Dimensional Fund Advisors (DFA), had in recent times shown stellar performance after going through some relatively rough patches in the late 1990s. Growth was steady and profits strong. Yet, Pensions and Investments ranked DFA a mere 96th in size among investment companies (see Exhibit 1). While DFA had never viewed maximizing assets under management as a goal, the ranking did suggest that it might be possible for DFA to achieve more as a firm than it currently was. Should Booth and DFA continue on the path that had brought them this far? Or was this the time for a major initiative that could catapult DFA to a status among the largest firms in the business? The Company and its Clients DFA was an investment firm based in Santa Monica, California. Founded in 1981 by Booth and Rex Sinquefield, two former students at the University of Chicago Graduate School of Business, DFA was dedicated to the principle that the stock market was “efficient”—that is, while over any given period some investors by luck would outperform the market and others would underperform, no one had the ability to consistently pick stocks that would beat the market. Such beliefs were associated with proponents of index funds, and, indeed, Sinquefield had run one of the very first S&P 500 index funds while at another firm. But DFA was not simply an index fund manager. In addition to efficient markets, DFA’s...
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...1. Discuss DFA as Fund and as a company. How does it add value to investors? What are the Pros and Cons of Passive Approach? 1. The DFA Company is a type of broker investment company that invest in Small stock. This focus is on a small niche that fits within the realms of the company. This provide limitations to the company about the type of stock they will invest in. However it provides an academic understanding as to which stock the company should select based on the formulations. The company’s growth and profit continued to grow with their academic approaches. The company’s management never set the goal to maximize assets. DFA based their approach on academic research and skilled traders. This create a essential formula for the company to create a list of possible investments that fit within the company’s ideal portfolio. DFA used a strategy to decrease the costs between the client and DFA as well as create value. DFA additionally used a value proposition of DFA by using the academic research to create specialized portfolios focusing on the small cap companies (small cap = 300 mil- 2 bill range). This investment approach focused on the Fama and French model. Their research demonstrated the small cap companies tended to outperform the large cap companies. DFA also added trading capabilities to increase variety among the competitive market while decreasing transaction costs. Passive Approach - Pros the company created low operating expenses, no initial decision...
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...Monday, January 27th, 2014 Case Summary #1 Dimensional Fund Advisors The California based investment and advisory firm, Dimensional Fund Advisors, was founded in 1981 by Chicago University students. The founders created DFA based on academic findings that stocks with small market capitalization outperformed the market and large cap stocks over a long period of time. DFA focused on selling investment funds that incorporated a bunch of small cap stocks from major stock exchanges like the NYSE. Their initial small cap funds were devised by ranking the market cap of stocks on the NYSE, AMEX and NASDAQ from top to bottom. From there, they split the ranked stocks into ten groups called deciles. They then sold different funds that would replicate buying stocks from the bottom 5 deciles. Over the years, they became one of the biggest small cap stock owners, owning over 3% of stocks in the bottom two deciles. DFA bought stocks in large blocks. They constantly looked for bargains on the market and bought in bulk. They only accepted deals that would save them several percentage points below the current market value of securities they wanted to purchase. They did not rely on any fundamental analysis in their stock purchases. They just focused on buying the small cap stocks that fell into their deciles and made sure that they didn't buy too many stocks that fell into the same industry or sector. DFA strongly believed that their funds offered enough added value to include a small...
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...Dimensional Fund Advisors 2012 Background, Principle and Strategy of DFA Dimensional is a different kind of investment firm headquartered in Austin, Texas with regional offices in Amsterdam, Berlin, London, Santa Monica, Sydney, and Vancouver now (DFA 2012) which was founded in 1981 by David G. Booth and Rex Sinquefield, both graduates of the University Of Chicago Graduate School Of Business. The underlying principle of DFA is that the stock market was “efficient” which is, on one could beat the market consistently except by luck during some periods. The founders also believed that academic research and the ability of skilled traders could contribute to a fund’s profits even when the investment was inherently passive. At the first stage, DFA was aiming single investment fund that consisted with small stocks which fit its position in the market as a passive fund. The initial clients were major for tax-exempt institutions such as government, union pension funds and charities and etc. With the time going, DFA pursued individuals while through the intermediaries known as RIAs. Although with the low turnover, low transaction costs and diversification, DFA still could make reasonable profits by charging a moderate advising fee and developed rapidly. DFA is an outstanding investment firm doing the investment based on precise academic research and strict trading strategy which will both be discussed later. Over the years, DFA have translated financial research into real world investment...
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...Dimensional Fund Advisors 1. What are the primary academic finds that DFA are trying to exploit in their funds? Dimensional Fund Advisors Investment (DFA) uses two primary academic strategies. The first is Size Effects based on the finding of Rolf Banz. Banz’ research found that small stocks consistently outperformed large stocks over the entire history of the stock market from 1926 through the late 1970s. The second academic strategy DFA used was the Book to-Market effect based on the finds of Fama/French1992 paper titled “The Cross-Section of the Expected Stock Returns”. In 1993 Fama/French expanded the research in the a titled “Common Factors in the Expected Returns of Stocks and Bonds” that is known as the “Fama-French Three-Factor Model” Studying the company’s size or the book-to-market ratio may shed light on exposure to sources of systemic risk not captured by the CAPM beta, Fama and French developed the Three Factor Model believing that small stocks may be more sensitive to changes in business conditions and that these variables may capture sensitivity to macroeconomic risk factors. Also, using international data collected by Morgan Stanley Capital International, Fama and French found that high book-to-market stocks outperformed low in almost every country studied. Fama and French also found that in certain years value portfolios were outperformed by growth portfolios across a wide array of countries. Investor cannot expect to lower their risk by diversifying their...
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...is to evaluate the relevance and accuracy of the theories used by DFA, especially the value premium and the size premium where almost all of their funds are based upon. The company used for this report is Dimensional Fund Advisors, which is an investment fund company. The source of information that is used is from websites and some journals. The main finding in this report is that DFA focusing their investment in small cap stock, as small stock tends to outperform large stock. To conclude, this report will provide evidence on the usefulness of these theories to increase return of DFA’s funds as well as recommendations about changes in strategy that will enhance the performance of DFA overall. Introduction Dimensional Fund Advisors is an investment company that uses its strategy based on academic research as well as related theories. It is based in Santa Monica, California and founded in 1981 by Booth and Rex Sinquefield. They work together with advocate of the efficient market hypothesis, indicating a relatively strong belief in this theory and thus in efficient markets. DFA believe that skilled traders have the capability to pitch in to the fund’s profits, although the investments are inherently passive. Additionally, they also adjust their strategy to new findings in the field. This report will discuss the next step that DFA should implement in order to perform better compared to the other managed funds. DFA’s Business Strategy DFA’s business strategy is based on the...
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...Introduction Dimensional Fund Advisors, further referred to as DFA, is an investment company that bases its strategy mainly on academic research and related theories. They work together with proponents of the efficient market hypothesis, indicating a relatively strong belief in this theory and thus in efficient markets. However DFA also feels that skilled traders have the ability to contribute to a fund’s profits even when the investment is inherently passive and DFA does adjusts its strategy to new findings in the field. In this report we will evaluate the relevance and accuracy of the theories used by DFA, especially the value premium and the size premium where almost all of their funds are based upon. This will lead to comments on the usefulness of these theories to increase the return of DFA’s funds and to recommendations about changes in strategy that will enhance the performance of DFA overall. Performance and strategy so far DFA has performed relatively well over the years, aside from some relatively rough patches in the late 1990s. Growth of the company had been stable and profits high. There was no need to sell shares for liquidity reasons and shares were only sold if they did not fit into a fund anymore. This didn’t happen very often though as DFA had several funds that were “connected”, when a stock in the Micro Cap portfolio grew too big it could be placed into a fund with bigger companies (Small Cap portfolio). An important part of DFA’s strategy,...
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...Case Analysis: Dimensional Fund Advisors 1. Describe the philosophy of DFA. What sort of market behavior are they counting on? * DFA believes in three principles: 1. The Efficient Market Theory. That is, the stock market is efficient and no one has the ability to consistently pick stocks that will beat the market. Over any given period, some lucky investors will outperform the market while others will underperform. DFA felt that the market price of any firm’s stock incorporated all public information and therefore did not do any fundamental analysis on the firm in question. 2. The value of sound academic research. For example, DFA’s founders believed that small-stock investing could yield high returns to investors. They formulated this belief on the Ph.D. dissertation research of Rolf Banz of the University of Chicago, which showed that small stocks had consistently outperformed large stocks between 1926 and the late 1970s. 3. The ability of skilled traders to contribute to a fund’s profits even when the investment is inherently passive. DFA’s investment fund had a semi-active strategy between those of actively managed funds and those of pure index funds. * DFA counts on market behavior that reflects the following concepts: 1. The Beta is Dead. Stocks with high-beta do not have consistently higher returns than low-beta stocks. That is, greater risk does not guarantee greater reward. 2. The Size Effect (Small Minus Big). Based on the research...
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...Building Global Portfolios Apollo D. Lupescu, PhD, Vice President This information is provided for registered investment advisors and institutional investors, and is not intended for public use. Dimensional Fund Advisors is an investment advisor registered with the Securities and Exchange Commission. Consider the investment objectives, risks, and charges and expenses of the Dimensional funds carefully before investing. For this and other information about the Dimensional funds, please read the prospectus carefully before investing. Prospectuses are available by calling Dimensional Fund Advisors collect at (512) 306-7400 or at www.dimensional.com. Dimensional funds are distributed by DFA Securities LLC. Dimensional Funds COMPONENT STRATEGIES US Large Company US Large Cap Equity Enhanced US Large Company International Large Cap Emerging Markets US Large Cap Value International Value Emerging Markets Value World ex US Value World ex US Targeted Value US Large Cap Growth International Large Cap Growth US Small Cap US Micro Cap International Small Company Emerging Markets Small Cap US Small Cap Value US Targeted Value International Small Cap Value US Small Cap Growth International Small Cap Growth As of August 31, 2013 CORE EQUITY STRATEGIES US Core Equity 1 US Core Equity 2 US Vector Equity International Core Equity International Vector Equity Emerging Markets Core Equity World ex US Core Equity SPECIALIZED CORE EQUITY STRATEGIES ...
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...INVESTMENTS - DFA Case study Introduction Dimensional Fund Advisors, further referred to as DFA, is an investment company that bases its strategy mainly on academic research and related theories. They work together with proponents of the efficient market hypothesis, indicating a relatively strong belief in this theory and thus in efficient markets. However DFA also feels that skilled traders have the ability to contribute to a fund’s profits even when the investment is inherently passive and DFA does adjusts its strategy to new findings in the field. In this report we will evaluate the relevance and accuracy of the theories used by DFA, especially the value premium and the size premium where almost all of their funds are based upon. This will lead to comments on the usefulness of these theories to increase the return of DFA’s funds and to recommendations about changes in strategy that will enhance the performance of DFA overall. Performance and strategy so far DFA has performed relatively well over the years, aside from some relatively rough patches in the late 1990s. Growth of the company had been stable and profits high. There was no need to sell shares for liquidity reasons and shares were only sold if they did not fit into a fund anymore. This didn’t happen very often though as DFA had several funds that were “connected”, when a stock in the Micro Cap portfolio grew too big it could be placed into a fund with bigger companies (Small Cap portfolio). An important...
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...FIN 6310 Case Studies Purchase Case Studies (4) • Harvard Case Studies (2) o Courses available at o https://cb.hbsp.harvard.edu/cbmp/access/18322840 • Ivey Case Studies (2) o Register for an account at Ivey Cases https://www.iveycases.com/RegisterUser.aspx o Put the following two cases studies in your cart. Make sure Digital Download is selected which will cost $3.40 per case. o Burgundy Asset Management: The Wescast Investment Decision https://www.iveycases.com/ProductView.aspx?id=31479 o Valuing Wal-mart 2010 https://www.iveycases.com/ProductView.aspx?id=48332 o Download the Wal-mart case spreadsheet for free. o Valuing Wal-mart 2010 – Spreadsheet for students https://www.iveycases.com/ProductView.aspx?id=52705 Case Report Guidelines 1. Place case title at top of first page with team member names (maximum four members per team). 2. Answer questions in numerical order. 3. Include graphs and tables if appropriate. 4. Print out case report and hand-in at the beginning of class. Harvard Management Company (2001) Questions 1. Is HMC’s recent payout policy consistent with the goal of preserving the real (adjusted for Harvard’s expense growth) value of the endowment and its distribution into perpetuity? 2. Could payout be raised to meet recent budget pressures without changing the risk-return profile of the portfolio? 3. What value has the HMC’s policy portfolio...
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...======================================================================================= Acquisition of Consolidated Rail Corp. by Benjamin C. Esty Airbus A3XX: Developing the World’s Largest Commercial Jet by Benjamin C. Esty American Chemical Corp.by William E. Fruhan, John P. Goldsberry American Home Products Corp.by David W. Mullins AQR’s Momentum Funds by Daniel B. Bergstresser, Lauren H. Cohen, Randolph B. Cohen, Christopher Malloy Arundel Partners: The Sequel Project by Timothy A. Luehrman AXA MONY by Andre F. Perold, Lucy White Beta Management Co. by Michael E. Edleson Butler Lumber Co. by Thomas R. Piper Cartwright Lumber Co.by Thomas R. Piper Citigroup 2007: Financial Reporting and Regulatory Capital by Edward J. Riedl, Suraj Srinivasan Clarkson Lumber Co. by Thomas R. Piper Cooper Industries, Inc. by Thomas R. Piper Cost of Capital at Ameritrade by Erik Stafford, Mark L. Mitchell Debt Policy at UST, Inc. by Mark L. Mitchell Dell’s Working Capital by Richard S. Ruback DermaCare: Zapping Zits Directly by Richard G. Hamermesh, Lauren Barley Diageo plc by George Chacko, Peter Tufano Dimensional Fund Advisers–2002 by Lauren H. Cohen Dividend Policy at FPL Group, Inc.by Benjamin C. Esty Dividend Policy at Linear Technology by Malcolm P. Baker, Alison Berkley Wagonfeld Equity International: The Second Act by Nicolas P. Retsinas, Ben...
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...National Chengchi University Department of Finance ETP Graduate Investments Fall 2014 Case Discussion Questions Instructor: Professor Edward H. Chow 周行一 Case study: financial bubble Case: Trouble with a bubble (9-808-067) 1. Why did Irving Fisher believe that stock prices had reached a permanently high plateau? 2. Why did the stock market crash in 1929? 3. Why did influential individuals like Fisher, Keynes and Rockefeller believe that the downturn would only be temporary? Case study: investment banking business and global financial crisis Case: Investment banking in 2008 (A): Rise and fall of the Bear (KEL378) 1. What role did Bear’s culture play in its positioning vis-à-vis its competitors, and what role might that culture have played in its demise? 2. How did Bear’s potential collapse differ from that of LTCM in the eyes of the Federal Reserve? 3. What would Bear have done differently to avoid its fate? A. - In the early 2000s? B. - During the summer of 2007? C. - During the week of March 10, 2008? 4. Who stood to benefit from Bear’s implosion? 5. Is market perception of liquidity more important for an investment bank than it is for an traditional manufacturing or distribution business? If so, why? 6. How could Bear have addressed perceptions of its liquidity? Could it have stopped the run on the bank, and if so, how? 7. Did Bear’s failure undermine the viability of so called “pure-play” investment banks? 8. What role should the Fed...
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