Institutional Funds (Dimensional) vs. Retail Funds Overview

There are many key differences between our institutional fund provider (Dimensional Fund Advisors) and traditional retail mutual fund companies (such as Vanguard, Fidelity, Putnam, or American). The list below are some of the ways in which Dimensional is different then a retail mutual fund:

  • Does not compete with financial advisors for clients
    • Retail mutual fund companies often work directly with both investors and financial advisors. To serve individual retail investors they have a large client service department to field questions. To serve financial advisors, they employ wholesalers who "sell" products to advisors showing an interest in their funds. In this way retail mutual fund companies compete with financial advisors for clients.
    • Dimensional Fund Advisors, as an institutional investment management company, does not work directly with retail investors and therefore does not compete with financial advisors for clients. Dimensional funds are available to institutional investors, or to individuals working with an approved financial advisor. These business strategies allow Dimensional to focus on a limited number of knowledgeable advisors who want a close working relationship with Dimensional and expect a comprehensive level of service.
  • Precise asset allocation with the strongest selection of funds choices
    • Dimensional's precise asset allocation gives investors more of what they need and less of what they don't need. Dimensional has the strongest selection of fund choices including stocks of smaller companies and of value companies. Over long periods of time, small companies have outperformed large ones, and value companies have outperformed growth companies.
    • Retail mutual fund companies have many of these funds also, but Dimensional does a better job of including U.S. and international small-cap and micro-cap companies.
    • Dimensional funds are designed to capture very specific dimensions of risk in the markets and have done so exceptionally well since their inception.
  • Better diversification
    • Dimensional puts far more stocks into their portfolios than the competition, particularly in international funds.
    • Dimensional also understand that returns come from risk and that successful investing means not only capturing risks that generate expected return, but reducing risks that do not. Avoidable risks include holding too few securities, betting on countries or industries, following market predictions, and speculating on information from rating services. Diversification is the answer to position a portfolio to capture the returns of broad economic forces.
    Click to display Portfolio Diversification Table
    Source: "The Best Mutual Funds: DFA or Vanguard?", by Paul Merriman, August 15, 2007.
  • Low portfolio turnover
    • By having a much lower average turnover than the category averages Dimensional does not drive up transaction costs or eat away at fund returns.
    Click to display Portfolio Turnover Table
    Source: "The Best Mutual Funds: DFA or Vanguard?", by Paul Merriman, August 15, 2007.
  • Accepts no hot money, but maintains a strict buy-and-hold strategy
    • Dimensional funds are not available to everybody who wants to invest in them (you must go through an approved financial advisor).
    • Dimensional funds are based on academic research that assumes long-term holding periods and a strict buy-and-hold approach that is contrary to typical investor behavior.
    • Many investors buy and sell based on emotions and swings in the market. This creates massive inflows and outflows for mutual funds, whose managers can be forced to sell stocks in order to meet redemptions. Typically that occurs when stock prices have been falling, forcing fund managers to sell when prices are relatively weak. These large cash inflows can force funds to risk paying too much for stocks as their buying drives up prices or to leave the money in cash. Both hurt investor returns and Dimensional is not interested in doing that.
    • Advisors are able to educate investors and encourage them to take a buy-and-hold approach that keeps Dimensional's operating expenses low and benefits all shareholders.
  • Does not have traditional index funds
    • Dimensional funds do not try to match any index, and that's to an investor's advantage. Indexes were designed for measurement and not as an investment vehicle.
    • A fund modeled after the Standard & Poor's 500 Index is obligated to sell each stock that drops off the index and buy each one that's added to the index and do this on the same day that every other S&P 500 Index fund is doing the same thing. On that one-day, the stocks being sold by all the index funds can be expected to sell for weak prices, since supply will suddenly be greater than demand. At the same time, the stocks being added to all those index funds can be expected to go up in price, reacting to demand.
  • Is an enhanced index fund
    • Dimensional has customly designed its indexes to capture the risk factors that explain 95% of stock market returns since 1929: company size and value. Returns correlate with risk factors like size and value.
      • Dimensional is more heavily weighted toward small-company stocks than most retail mutual funds.
      • Dimensional has a greater orientation to value (namely the lower price-book ratio of its portfolio) which makes it more likely to outperform funds that are more growth oriented.
  • Under greater regulatory scrutiny from both state and federal authorities and under greater scrutiny as to their investment performance returns and measurement of portfolio risk due to the level of clientele served.
  • Are exclusive
    • Until recently, professional money managers have been available only to the Fortune 2000-size companies or to high net worth individuals. Having portfolios in excess of several million dollars, all such managers have minimum account sizes ranging from a low of $2 million on up. Many will not take on a group unless it has a market value of $10-$25 million. Our approach has broken this high minimum to allow our clients to participate.
  • Distinguished by their fees
    • There are no front-end loads, no 12(b)(1) fees, no redemption load charges, no promotional expenses, and no marketing expenses allocated to your account. All of these types of fees are found in mutual funds and play a major role in reducing your total performance return.
  • Are selective
    • Institutional Money Managers are very selective in the clientele for whom they manage money and first do an independent analysis of that client's financial needs, goals, objectives, and risk tolerance.
  • Beats traditional company's investment return by 2% or more while maintaining below average expense ratios.
    • Dimensional funds accomplishes all of the above while maintaining annual expense ratios far below the Morningstar category averages for traditional mutual fund companies and outperforming the top mutual fund companies by 2% or more over a five-year period (July 2002 to July 2007).

Wealth Management LLC believes the best way to duplicate the ultimate investment strategy is to use Dimensional funds.