Can you get past the bouncer?
By Thomas Easton
The carnival atmosphere is missing from a handful of fund families. The frugal Vanguard Group, for example, scarcely advertises at all; it counts on investors who like low-cost funds to beat a path to its door.
Dimensional Fund Advisors, a Santa Monica, Calif.-based sponsor with $9 billion in fund assets, takes this aloofness a step further. Beat a path to DFA's door, and you may find it slammed in your face.
Who would want to get in? The same sort of people who like Vanguard. DFA runs passive index funds and near-index funds. Their fees are fairly low, their frictional costs from trading are low, and they don't pay out much in taxable capital gains. A passively managed fund is almost never going to top the charts in any given year, but it can easily beat out most actively managed funds over long holding periods—10 or 20 years, that is.
Like Vanguard, DFA has a very low cost fund to track the S&P 500 index. It has 19
other passive funds, some specializing in foreign stocks, some in small stocks, some in
bonds. A few of the funds are modified index funds: They follow investing themes, such as
value stocks or small-company stocks. But the stock selection is always mechanical.
The other part of the DFA formula is transactional dexterity. The 22 people managing DFA's portfolios are all traders. By making markets in many of the thousands of stocks that populate the funds, DFA claims, it enjoys negative transaction costs. Suppose a small over-the-counter stock is quoted at 20 bid, 20 3/4 asked. Even if DFA wants the stock, it may hold off buying until some trader puts in a big sell order, say, for 200,000 shares (to be spread among funds and institutional accounts). DFA may offer to take the block for 18 or 19. When the DFA traders sell a thinly traded stock, in contrast, they dribble the shares out a few hundred at a time.
It works well enough. Look at DFA's U.S. 6-10 Small Company Fund, which mechanically buys stocks that are ranked in the bottom 50% in market value on the New York Stock Exchange. This fund has outperformed Vanguard's comparable Small Capitalization index fund by a fraction of a percent over the three years of its existence.
Intrigued? Be prepared for a battle to get in. Originally an institutional manager with
a $2 million minimum, DFA in 1989 lowered its account minimum to $25,000. But it accepts
only money referred by financial advisers. And not just any adviser will do.
No carnival barkers at DFA. The only ones jumping through hoops are customers.
"My wife said she couldn't believe I was flying anywhere to get a mutual fund," says Oldham. "Everyone else is willing to come to us."
Why does DFA play hard to get? One reason: to screen out hot money. A flood of new purchases, followed a few months later by a rush of redemptions, would wreak havoc on DFA's efforts to keep trading to a minimum. The funds would be chasing after stocks one day and unloading them at distress prices the next, says Rex Sinquefield, a founder and cochairman of DFA.
There's also a paternalistic motivation. Sinquefield wants his investors to balance holdings among several different passive funds. By lecturing the advisers he can get that result.
Consider the volatile DFA Japanese Small Company Fund: It took off in the 1980s, and then skidded in the 1990s. "It's probably been the worst investment in the galaxy recently," says Sinquefield. "Suppose an individual wanted to put all their money into that? We wouldn't want to be responsible."
If you want in, find a financial planner to make an introduction. Oldham charges 0.25%
to place anything over $500,000. That's a bargain if you really need advice, but what if
you have selected the funds and all you want is for the planner to stick a check in an
envelope? If you hunt long enough, you might find an adviser who will charge by the hour.
Call 888-333-6659 to get a directory of planners from the National Association of Personal
Financial Advisers in Buffalo Grove, Ill. 