On March 3rd, the Ohio 529 Board announced changes to the college savings program fund lineup. The Board announced, "Based on extensive research, Dimensional was recommended because it offers relatively low-cost options and has many products that are ranked highly by OTTA’s investment consultant, Wilshire Associates, Inc."
This is great news for Ohio 529 plan participants. Dimensional Funds have a strong, empirical underpinning and have long been a core component of the True Wealth Design investment portfolios. For participants that well-utilize their funds, this should help provide more dollars on a tax-free basis for qualified higher education expenses.
To Your Prosperity,
Kevin Kroskey, CFP® MBA
Click here for the full news release from the Ohio 529 Board.
Click here for cover story from Baron's “A Different Dimension” for more information on Dimensional Funds and what makes them different. Selected highlights are below:
DIMENSIONAL'S FUNDS aim to capture the returns of an asset class -- be it small or
large companies, developed or emerging markets -- without slavishly adhering to
an index. And they do. For example, take the Vanguard Small Cap Value index fund (VISVX), which is based on the S&P 600 Small Cap
Value index and is the counterpart toDimensional's DFA US Small Cap Value (DFSVX). The DFA fund has a much smaller tilt -- its
average market value is $1.1 billion, versus Vanguard's $2.7 billion -- and on
all measures is much more value-oriented. So the Dimensional fund better
captures the market-beating advantage of small and value stocks. In fact, a lot
better: The DFA fund returned 42% in 2013, beating 88% of its peers in
Morningstar's small-cap value category, versus the Vanguard fund's 36% return,
which beat just 53%. Over 15 years, which includes periods that were less
favorable to small and/or value stocks, DFA's fund returned an average of 12% a
year, beating 80% of peers. The Vanguard fund returned 10% on average, beating
just 37% of peers.
The Dimensional fund costs twice as much as
Vanguard's -- 0.52% versus 0.24% -- but the significant outperformance more
than makes up for that difference.
TRADING IS ALSO a crucial factor in DFA's outperformance. Index funds trade in
baskets -- whenever a stock is added or dropped from the index, it's bought or
sold almost immediately, which can drive the price up or down. Similarly,
active managers often want to get into or out of a stock quickly. DFA, however,
takes a more methodical, opportunistic approach to trading. There's never
pressure to buy or sell a fund within a certain time frame. Instead, it serves
as a market-maker for the 14,000 stocks it owns, offering to sell when frenzied
buying has sent the bid higher, and taking a stock off another trader's hands
when the shares can be acquired cheaply. Every morning, traders get a list of
stocks the firm wants to buy or sell, but instead of mandated trading orders,
the trading desk determines if conditions are good for each transaction.
"We go into the market and see where the most anxiety is and where we can
trade at favorable prices," says Booth. "We provide liquidity."
Trade execution is critical to another
factor that Fama and French added to their model more recently: Stocks that are
falling tend to continue to fall, and those that are rising tend to continue to
rise. "So you want to trade slowly," Booth says. "We are slow to
trade most of the new names that have recently fallen into the value category,
because they are negative-momentum stocks. We're also slow to sell
positive-momentum stocks. We'll hold on for years."
Trading costs have also influenced
portfolio construction, as have the sharp advisors that work with the firm.
Dimensional's 5,000-stock international core funds, for instance, were created
at the behest of the firm's largest client, $22 billion Buckingham Asset
Management. The international core fund combines developed and emerging
markets, minimizing the trading costs that would occur, say, when a country
like Israel or South Korea "graduates" from the emerging to the
developed category. Rather than one fund selling and another buying, advisors
who want exposure to both asset classes can get it in one fund. "That
eliminates risk and costs, and we don't have to rebalance," says Larry Swedroe,
a principal at Buckingham. "That's a huge advantage, and a big
innovation." Dimensional also has a 3,000-stock U.S. core fund.
Dimensional has 76 funds, many of which
overlap because of its willingness to work with advisors to meet their needs.
"We have several versions of our core portfolios to accommodate advisors
who want more or less of a small or value tilt," Repetto says.
The latest factor, profitability, has been
steadily implemented since being introduced in four funds a year ago; it will
be a factor in all DFA funds by early this year. The profitability factor
incorporates firms with higher profitability relative to price, cash flow, or
other metrics. That's essentially the secret behind Warren Buffett's success.
Investors tend to pay too much for -- or, in other words, not apply enough of a
risk discount to -- "lottery" stocks. Think of a bell curve of stock
returns: You'll see far more returns to the left of the mean, and a few outsize
winners on the right. That market's willingness to pay for the small chance of
outsize gains means that other profitable firms, relatively speaking, have
lower prices.