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The Power of Dimensional Fund Advisors — With Philipp Meyer-Brauns

When I bring up Dimensional Fund Advisors, I’m often met with a blank stare. Not only do many people not know who Dimensional Fund Advisors are, but they also don’t know what makes them so unique. In episode 48 of the Retire Right Podcast, I had a chance to pick the brain of Philipp Meyer-Brauns, a senior researcher at Dimensional Fund Advisors who conducts empirical asset pricing research. Not only did Phillip answer my questions throughout the podcast, but he also shared how Dimensional works and what sets them apart from other investment firms. Today, I’m sharing a little about what he had to say with you.



About Dimensional Fund Advisors


According to Philipp, Dimensional Fund Advisors’ roots lie in the scientific revolution that happened in the middle of the 20th century around the markets. It was a time where, for the first time, researchers had good data available on capital markets, stocks and bonds, and returns. Economists like Merton Miller and Eugene Fama were key figures in that revolution and are actually two of the people who helped found Dimensional Fund Advisors. After starting as a small-cap investing company in 1981, Dimensional has now grown into a global firm managing just under 600 billion in assets and is ranked eighth in Morningstar’s ranking U.S. mutual fund families.


Research-Driven Investing


Most people outside of the investing world don’t understand how mutual funds work. Instead, they give their money to a money manager and they hope they outperform their index or benchmark. However, this isn’t what Dimensional Fund Advisors do. 

Dimensional Fund Advisors is all about world-class, deep, rigorous research and careful implementation of that research to serve clients. They put together investment solutions that will provide better outcomes for clients, and in turn, give them better lives.

As an investment firm, Dimensional believes it’s better to work with the market rather than against it by trying to outguess market prices. They have an enduring belief in the power of markets and work closely with some of the leading financial economists in the world. They also have a research team of about 100 people, who work to learn things like what drives returns, what they can learn from the markets, and most importantly, how they can use the insights they gain to better serve clients.


The Three-Factor Model


One of the ways Dimensional Fund Advisors invests is using the three-factor model. The three-factor model is a widely used model that helps explain a lot of what’s happening with stock returns and explains about 90 percent of return variations. The model expands on the capital asset pricing model (CAPM), which has the idea that a stock’s return depends on how sensitive its move and its returns are to market moves. With the three-factor model, they’ve added size risk and value risk factors to account for the fact that value and small-cap stocks tend to outperform markets on a regular basis. 


How Dimensional Differs from Active and Passive Managers


Dimensional Fund Advisors is unique because they don’t fall into the categories of active or passive fund managers. Instead, they take the best of both worlds and use low-cost, evidence-based theory and academic strategies to get an advantage on selecting stocks that will outperform over a long period of time. 

At Dimensional, they take market prices as fair. They view market prices as an input to what they do, and they know it’s incredibly difficult to reliably outguess the market. Many active stock pickers try to identify mispriced stocks or securities, and then try to exploit those mispricings before everybody else does. Dimensional’s approach differs greatly from this since their research has found that it’s virtually impossible to reliably benefit from those mispricings and you’re almost always better off working with the market. 

As for index funds and passive managers, they don’t have much of a philosophy to begin with since they outsource much of their investment decision-making to whoever puts the index together. Unlike them, Dimensional is not constrained by the same limitations, as they don’t have to replicate an index or rebalance as infrequently as once a year or a quarter. 

However, Dimensional is still in a position to achieve the same benefits that are associated with index funds, like being a well-diversified, low-cost, transparent, and rules-based investment solution. For example, they can pursue size, value, and profitability premiums and many other things with the goal of increasing expected returns above what you could achieve with an index approach, using flexibility, bargaining power, and research-backed trading data.


The Proof Is In The Numbers


If you want more concrete proof about Dimensional’s methods, here it is. Over the last 20 years, 85 percent of their funds (both equity and fixed income) outperformed their benchmarks. Compared to the industry’s 17 percent, Dimensional is looking pretty good. And it’s not because they have the magic touch or because they can time the market — it's because they work from the ground up, thinking about how they can apply research to build better investment solutions for clients — plus, they only work with advisors who share the same philosophy as them! 

If you’d like to learn more about Dimensional Fund Advisors and the work they do, I invite you to go check out their website at https://www.dimensional.com
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