Clean. Simple. Pin-drop quiet. No frantic people in bold suits running around. No screaming across the room.
On my way to a recent weekend board meeting for a non-profit organization I’ve served for many years, I had the chance to visit the global headquarters of Dimensional Fund Advisors in Austin, Texas.
Dimensional, or DFA, is the primary mutual fund company we use in the investment models we build to invest client portfolios. By all accounts, theirs is a powerful success story, starting in 1982 as single fund run out of a brownstone in Brooklyn to one of the largest mutual fund companies in the world, managing nearly $600 billion in 12 offices across eight countries today.
DFA limits access to its funds solely to large institutions and independent financial advisors like us at TAAG. They do this primarily to control the outflows of cash from funds which typically are at their peak at the worst possible times. This is due to the wiring the average individual investor has in their brain which tempts them to want to do exactly what they most likely should not be doing when the market is either very high or very low.
Across more than 100 funds investing in most publicly traded companies on Earth and a vast array of bonds from corporations and governments across the globe, you would think the main hub of trading for such an institution would involve thousands of people moving at a frenetic pace to ensure their trades are taking advantage of every slight wiggle the market offers.
In fact, the day I visited the trading floor amounted to no more than 50 or 60 people by my rough count, including the research and compliance teams. As I mentioned in the blog’s opening, the room was library quiet with everyone working diligently at their desks all in open space across the large room.
During my tour, it was clear that there are no star fund managers at DFA. Their investment models are based on years of research, empirical data and evidence based testing, not one person’s whim or prognosticating. This type of active style trading is typically built around one person or group’s idea, which can cause problems with flexibility, timing and other issues that eventually cause the fund to underperform or even fail when the idea proves not to work or market trends change.
Traders at purely passive, index funds have their challenges as well, with no flexibility at all and having to constantly stay on top of the precise structure of whatever index they’re seeking to replicate.
Instead of the pitfalls described above, DFA focuses on expected returns, building highly diverse portfolios and building flexibility into their system so that they can capture any market premiums, lower trading costs, or other trading advantages that may appear.
One of the biggest benefits to trading in Dimensional funds comes from the advantages they reap by trading patiently as opposed to flying from one company to another based on what any index or market dictates. While no one of these actions creates huge home runs in their funds, over time, studies have shown that just their patient trading strategies alone can generate price differences of anywhere from 13.4 to 45.1 basis points (or 0.134% – 0.451%). While small, these differences can add up to real value to the end investor over time.
These and many other intrinsic and extrinsic factors contribute to what allows for the calm, peaceful culture of DFA’s trading room floor. Beyond just the calm, this culture also allows traders the room they need to work with Dimensional’s research, compliance and other teams within the firm and outside in academia to test theories and look for opportunities to increase efficiency, reduce costs, improve trading strategies, etc.
Having worked with Dimensional for many years, none of this came as a huge shock. Seeing the floor in action in person did exceed my expectations and reinforced just precisely how different an experience this is from trading floors we may see in financial media or made famous in various films about the market. I thought some anecdotal evidence of just what this approach is all about at its very core might be worth sharing.
I should note before closing that we’re not contractually tied, obligated or in any way affiliated with Dimensional Funds. We regularly survey the marketplace for opportunities in other areas that match up well with our investment philosophy. That said, we continue to find they match our philosophy more closely than any other and their evidence-based approach to building portfolios the smartest, most sensible way to navigate the global market.