Sign up  |  Log in

DFA vs. Vanguard

I’m interested to hear people’s opinions on how DFA compares to the bigger index fund players.  I know Vanguard isn’t the only one that offers index funds/ETF’s, but they’re the most notorious.  We could just as easily compare to iShares. 

Admittedly, I know little about how index funds or ETF’s are constructed or the indices that they track.  I don’t know if VFINX pays S&P a fee to track their index.  I don’t know if they have to rebalance the fund every time S&P reconstitutes the index, or how the index is rebalanced.  (From the untrained eye, it seems like rebalancing a market-value weighted index would somehow defeat the purpose.) 

If anybody has any real insight into how the two differ, I’d be delighted to hear it. 

82 > 87
Simple math.

See how TagniFi is helping investment professionals streamline their valuation and analysis process in Excel. Sign up for a fee trial today.

No real insight here, but are you looking to begin slangin’ DFA to your clients?  Many indy RIAs use them.

^Maybe someday in the future.  For the next five years, I’m focused on tax compliance and planning, and hope to get a valuation business off the ground. 

Maybe in five to seven years, I can start doing a financial planning/investment business.  And I’m seriously thinking about using DFA.  I don’t know if you have to be an RIA and have a clearing broker like Pershing, or if they have their own B-D.  I’ll cross that bridge when I get there. 

With this thread, I’m really more interested in finding out what people think about the differences between the DFA Large-cap blend fund (whatever it is) and the typical S&P 500 index fund.  Why pick one over the other? 

82 > 87
Simple math.

Lower fees.  There is such thing as a free lunch when it comes to fund selection. 

Vanguard pioneered the implementation of the index fund, and it basically created ETFs of their index funds so as not to lose market share to people who wanted to do their investing with ETFs as opposed to MFs.

When you are indexing with a long term time horizon, it’s pretty much about fees vs. tracking error.  I haven’t run the statistics on tracking error effects here, but last I checked is that Vanguard is the winner in the fees department.  iShares might do better in the tracking error department (which is actually less important in the long term, as long as it isn’t huge).  I’m not sure where DFW lands.

But the biggest value if you are a buy-and-hold type is that these strategies keep you from messing with your stuff.  I’ve seen very believable research that says that people who follow a passive strategy often end up underperforming the index by way more than fees and tracking error.  What happens is that people buy in to buy-and-hold when the market is good, then switch to cash at the gloomiest moment.  Effectively they are market timing an index, but always buying at the top and selling at the bottom… ooops!  I have occasionally made this very same mistake, which is why I now stick to a model.

You want a quote?  Haven’t I written enough already???

DFA is a quant cult, not an index shop. RIAs have to go to a “camp” for a few days on the DFA campus and then sign a pledge to turn over $25mm of their assets in the first year. Seriously.

Their products are designed to be used together, not on a one-off basis. If you go DFA you go all the way. Right until they blow up like every other quant shop eventually does.

vanguard is the king of low fee

"You want a quote? Haven’t I written enough already???"

RIP

DFA = enhanced indexing vs. Vanguard = pure indexing. DFA is driven by a bunch of academics and quants that capture the risk/return premium from tilting a portfolio towards small cap value equities, rebalancing away from high P/E’s, etc. I researched this a while ago for work, and I believe DFA funds do well for domestic equity, but EM equity, and other areas they were closely matching the returns of a regular index fund albeit with slightly higher fees. I have seen firms that mix DFA in with Vanguard and other mutual funds, but I’m not sure if DFA frowns upon that.

The biggest advantage of dfa for an ria is that they get to offer an “institutional” product to your clients as opposed to Vanguard, which they can purchase themselves. So there’s a barrier to entry which makes it easier to sell. 

Dfa doesn’t track an index, BC the index you pick is arbitrary Anyways. So they don’t pay an index provider a licensing fee. Vanguard just switched from Russell and Msci to crsp and FTSE to lower their costs and reconstitution costs. Honestly, there’s a ton of literature on this if you do a search. It’s a debate as old as schewser vs stalla and CFA vs mba. Dfa prolly won’t take you because you don’t have any clients tho. 

Also, sweep uses the word quant fund really loosely, the products are really well diversified and plain vanilla IMHO and the turnover is low. Sweep is right about it being a cult though, most fund co’s would be excited to have 1 fund in your portfolio, dfa expects almost 100‰ of your book. 

Systematic wrote:

Also, sweep uses the word quant fund really loosely, the products are really well diversified and plain vanilla IMHO

Depends on your perspective. In the mutual fund world they’re hard core quant. Compared to someone like DE Shaw, yes, they’re pretty plain vanilla.

bchad wrote:

When you are indexing with a long term time horizon, it’s pretty much about fees vs. tracking error.  I haven’t run the statistics on tracking error effects here, but last I checked is that Vanguard is the winner in the fees department.  iShares might do better in the tracking error department (which is actually less important in the long term, as long as it isn’t huge).  I’m not sure where DFW lands.

If I were to ever start my own RIA shop, I wouldn’t be concerned with tracking error.  I think most individuals only care how their portfolio performs on its own accord–not whether it deviates from a commercial index by .72% (or what have you). 

82 > 87
Simple math.

The tracking error is a small correction, but it eats away at your returns over time.  What happens is that after 10 years, the market goes up X%, and the fund goes up Y% where Y is less than X by more than can be explained by your fees, and then your clients may want to know why, since you told them you are just tracking the market.  

There is no alpha because it’s an index fund, but because it doesn’t track the index perfectly, the net effect over time is a gradual eating of returns (because being down 20% and up 20% leaves you with less money than just being down 10% then up 10%, just on a smaller scale).

If you are hoping to capture some alpha, tracking error is necessary, but if you are just tracking an index, why lose even a little bit of return if it doesn’t benefit either your client or you???

The main reasons to go with a higher tracking error index or ETF is if there are differences in transaction costs, though these tend to be more important if you have a strategy that rebalances or does some kind of tactical adjustments frequently.

You want a quote?  Haven’t I written enough already???

Greenman72 wrote:

bchad wrote:

When you are indexing with a long term time horizon, it’s pretty much about fees vs. tracking error.  I haven’t run the statistics on tracking error effects here, but last I checked is that Vanguard is the winner in the fees department.  iShares might do better in the tracking error department (which is actually less important in the long term, as long as it isn’t huge).  I’m not sure where DFW lands.

If I were to ever start my own RIA shop, I wouldn’t be concerned with tracking error.  I think most individuals only care how their portfolio performs on its own accord–not whether it deviates from a commercial index by .72% (or what have you). 

Tracking error is important for portfolio construction purposes. There are still plenty of active managers with low tracking error. They just choose to take security level bets instead of sector bets. If you don’t pay any attention to tracking error, you’re likely to end up using several star fund managers running concentrated portfolios. They may all have good performance, but you never know where they’re placing their bets. Sooner or later you’ll find they’re all betting on the same thing and when it doesn’t work you’re clients are going to have a bad time.

As an RIA you need to build well diversified portfolios. You can’t do that without have a good core group of managers. Then you build around those positions with low tracking error, concentrated portfolios.

Edit: I didn’t bother reading all the posts. Obviously I’m talking about tracking error from an active management standpoint. bchad is nicely covering why tracking error is important from an indexing perspective. That’s also why you should never buy passive fixed income instruments.

@Bchad - I think there is a fault in your assumption.  You assume that a tracking error ALWAYS leads to lower return than the index, even in a passive fund.  I don’t think that’s the case.  EG - if Dow Jones decides to replace Citigroup with Traveler’s in the DJIA, then the DIA has to sell C and buy TRV.  A similar, non-indexed passive fund would not have to make such a trade.  It is not “forced” to sell low and buy high to track the index.  In this case, it would have tracking error, but that would be a good thing. 

@STL - Regarding all managers investing in the same stocks–I would agree with you if I had a dozen managers managing my large-cap domestic part of my portfolio.  However, if I identify ONE fund that I really like (say, Davis New York Venture fund), then you don’t have that problem.  I know what he likes to invest in, and since he’s my only domestic LC manager, I don’t have to worry about other domestic LC managers duplicating his positions. 

And you say that you need to build well-diversified portfolios.  That’s a given, but it’s not useful.  Do you mean that you need to hold all stocks in the index?  That I should invest in all 6,500 companies in the US stock market?  Or can I just buy a mutual fund that has 30 stocks?  We’ve all seen the graph that after 20 or so stocks, the additional diversification benefits become almost zero. 

Let me know what you think.  I appreciate all the feedback. 

82 > 87
Simple math.

Sweep the Leg wrote:

Systematic wrote:

Also, sweep uses the word quant fund really loosely, the products are really well diversified and plain vanilla IMHO

Depends on your perspective. In the mutual fund world they’re hard core quant. Compared to someone like DE Shaw, yes, they’re pretty plain vanilla.

Owning hundreds to thousands of stocks in a portfolio with low turnover and tracking error? Lots of the research they use orginated in the 70’s and 80’s… its pretty old school and simple, its 97% the same thing as Vanguard. The **** I’m more worried about are bond funds that are $10B collateral, short 15B NP bond futures, long $19B NP swaptions, short soverign debt and long 1 share of AGG.

What company are you a wholesaler for? Totally cool, if you dont want to say tho. 

Greenman72 wrote:

@Bchad - I think there is a fault in your assumption.  You assume that a tracking error ALWAYS leads to lower return than the index, even in a passive fund.  I don’t think that’s the case.  EG - if Dow Jones decides to replace Citigroup with Traveler’s in the DJIA, then the DIA has to sell C and buy TRV.  A similar, non-indexed passive fund would not have to make such a trade.  It is not “forced” to sell low and buy high to track the index.  In this case, it would have tracking error, but that would be a good thing. 

@STL - Regarding all managers investing in the same stocks–I would agree with you if I had a dozen managers managing my large-cap domestic part of my portfolio.  However, if I identify ONE fund that I really like (say, Davis New York Venture fund), then you don’t have that problem.  I know what he likes to invest in, and since he’s my only domestic LC manager, I don’t have to worry about other domestic LC managers duplicating his positions. 

And you say that you need to build well-diversified portfolios.  That’s a given, but it’s not useful.  Do you mean that you need to hold all stocks in the index?  That I should invest in all 6,500 companies in the US stock market?  Or can I just buy a mutual fund that has 30 stocks?  We’ve all seen the graph that after 20 or so stocks, the additional diversification benefits become almost zero. 

Let me know what you think.  I appreciate all the feedback. 

Your B-chad example is correct, it costs money to reconstitute on the same day as an Index. A company like DFA will own a stock that’s not in the index, and when its added, they’ll sell it to someone like Vanguard. They earn a little liquidity premium for this. The question is, does it cover the difference in expense ratios. DFA also tilts away from the market more than vanguard, so some of the extra returns come from taking more risk, not patient trading.

Uh, maybe hold 30 stocks from every sector in every asset class is you really want to be diversified. The 20-30 stock rule means you get the same variance, returns will likely look nothing like eachother unless you match sector weights.

Strictly speaking, Greenman’s example is of a company trying to generate alpha by deliberately parting from the index and trading around it at clever times.  Tracking error without alpha does eat returns over time.

Alpha is of course the justification for taking on higher tracking error in active trading (this is just at the very low extreme of activity); you’ll want alpha > (TE^2)/2 (approximately) in order to be large enough to counteract the tracking error drag on perofrmance, and I guess if you are comparing Vanguard and other funds, you’d really just want alpha to be larger than one half the difference of the squares of the tracking errors (haven’t checked the algebra, but that’s my off-the-top-of-my-head guess).

It still doesn’t change the fact that higher tracking error will eat away at returns over time, the only real question is whether you believe there really is alpha generated and if it is enough to compensate for that.

So yes, if you have some kind of alpha generating process, and it’s large enough, it makes sense to have more tracking error.

Moreover, most index fund tracking errors are measured in basis points, and so the hurdle is probably pretty small before an some kind of alpha process makes sense.  

If Vanguard has a tracking error of 6 bps, and DFA or iShares has a tracking error of 14 bps, then you you need an alpha difference from trading of only 0.8 of a basis point annually to justify the higher tracking error.  That’s a pretty low hurdle, as long as you believe that the alpha is really there.

You’ll also recall that I said tracking error is “less important in the long term as long as it isn’t huge.”  So this is all splitting hairs pretty finely.

Low tracking error on index funds is probably more important for marketing than for choosing funds, the difference fees are almost certainly going to have way more of an effect than the difference in tracking errors, at least for cap-weighted indexes, which have the advantage of self-reblacing without trading except for when companies are added or dropped from the index.

You want a quote?  Haven’t I written enough already???

Systematic wrote:

Owning hundreds to thousands of stocks in a portfolio with low turnover and tracking error? Lots of the research they use orginated in the 70’s and 80’s… its pretty old school and simple, its 97% the same thing as Vanguard. The **** I’m more worried about are bond funds that are $10B collateral, short 15B NP bond futures, long $19B NP swaptions, short soverign debt and long 1 share of AGG.

What company are you a wholesaler for? Totally cool, if you dont want to say tho. 

Again, you’re looking at it from a hedge fund perspective. Every 40 Act mutual fund that’s labeled “quant” is going to have around 1000 names if it’s large cap or 400-800 names if it’s small cap. Generally they are lower tracking error but that doesn’t mean they don’t produce alpha. They just take small stock bets based on their black box calculations.

And…I’m not saying. 

Greenman72 wrote:

@STL - Regarding all managers investing in the same stocks–I would agree with you if I had a dozen managers managing my large-cap domestic part of my portfolio.  However, if I identify ONE fund that I really like (say, Davis New York Venture fund), then you don’t have that problem.  I know what he likes to invest in, and since he’s my only domestic LC manager, I don’t have to worry about other domestic LC managers duplicating his positions. 

And you say that you need to build well-diversified portfolios.  That’s a given, but it’s not useful.  Do you mean that you need to hold all stocks in the index?  That I should invest in all 6,500 companies in the US stock market?  Or can I just buy a mutual fund that has 30 stocks?  We’ve all seen the graph that after 20 or so stocks, the additional diversification benefits become almost zero. 

Let me know what you think.  I appreciate all the feedback. 

Buying one large cap manager is not diversified. At the very least you’ll see guys buy a style pure large growth and large value manager, then maybe add something like Yacktman or Fairholme to add alpha. The “core and explore” approach is pretty standard these days. Think about just the equity portion of your asset allocation. You’ll see lots of advisors putting 80% towards style pure funds to fill out the Morningstar boxes (mainly growth and value; blend doesn’t get much love), and use the remaining 20% on things like Ivy Asset Strategy, Blackrock Global Allocation, PIMCO All Asset, etc. 

If Davis NY Venture was your clients’ only large cap holding, you’re having tough conversations today on why their 3 and 5 year ranking is in the 79th percentile. 

Sweep the Leg wrote:

Systematic wrote:

Owning hundreds to thousands of stocks in a portfolio with low turnover and tracking error? Lots of the research they use orginated in the 70’s and 80’s… its pretty old school and simple, its 97% the same thing as Vanguard. The **** I’m more worried about are bond funds that are $10B collateral, short 15B NP bond futures, long $19B NP swaptions, short soverign debt and long 1 share of AGG.

What company are you a wholesaler for? Totally cool, if you dont want to say tho. 

Again, you’re looking at it from a hedge fund perspective. Every 40 Act mutual fund that’s labeled “quant” is going to have around 1000 names if it’s large cap or 400-800 names if it’s small cap. Generally they are lower tracking error but that doesn’t mean they don’t produce alpha. They just take small stock bets based on their black box calculations.

And…I’m not saying. 

No prob, I was just wondering so I could see how your firm views markets and invests, nothing degrogitory (sp?). I dont have any affiliation w/ DFA… just know everything about them. There are no back box calculations in their funds… they really just provide liquidity to the market when there’s a motivated buyer or seller and try to caputure a liquidity premium, its not as intense as you think.

Anyways Greenie. Go to a TAMP (Turnkey Asset Management Program) like Buckingham Asset Management, they split your fees with you but take care of your trading and operations, I guarantee you have no clue what your getting yourself into when it comes to starting one of these. Unless you already have $100m commited, your better off sharing your revenue with a TAMP and focus on growing your business or else you’ll have zero assets and be working on operations/compliance all day.

Systematic wrote:

There are no back box calculations in their funds… they really just provide liquidity to the market when there’s a motivated buyer or seller and try to caputure a liquidity premium, its not as intense as you think.

No, it’s not intense at all. Their portfolio manager is basically Windows Vista. They have no fundamental reason for investing in stock A vs stock B. If you got one of their PMs (an actual human) on the phone and asked what their investment thesis is for owning their top overweight, he wouldn’t have anything to say about it. They construct their portfolios based on multifactor models. It’s the definition of a quantitative mutual fund.

They spell out their process here:

http://www.dfaus.com/process/multifactor.html

@STL - I think we have extremely differing views on investing, but that’s another thread entirely….

@Sys - In another thread, I asked about using HD Vest.  Is this similar to one of your TAMP’s?  People said that compliance really isn’t that big of a deal.  (I have no idea–I’ve never worked in a small RIA.  I worked for Ameripoff and Morgan Stanley.) 

http://www.analystforum.com/forums/water-cooler/91323709

82 > 87
Simple math.

Greenman72 wrote:

@STL - I think we have extremely differing views on investing, but that’s another thread entirely….

Not sure why another thread is necessary. What are your views? I’m certainly a fan of active management, as anyone with a CFA should be. You mentioned using Davis NY Venture so I’m assuming you’d incorporate some sort of active management as well. Are you suggesting we would approach asset allocation differently? Maybe, but I wouldn’t be so sure. I’m just representing the industry norm. 

Sidebar: Incorporating some passive investments isn’t such a bad idea. Many advisors/consultants are recommending indexing the large cap space since it’s so tough to beat the index over time. In general, that space is just too efficient. But, there’s tons of information on why you should use active management in your domestic small caps, fixed income, and international spaces. It doesn’t have to be completely passive or active. 

In general, I think it’s more important to capture beta, not alpha.  Granted, I am a fan of some active management.  I do like Davis, Dodge and Cox, and Royce funds.  Other than that, I haven’t found a lot of funds that I really like.  (Low fees, low turnover, value tilt.)

For the vast majority of individuals, you should have a four-fund max.  That is, you should be able to achieve the desired risk/return using only four funds.  The more funds/managers you start adding, the more homogenous your risk/return becomes, and it adds additional complexity with no added benefit. 

90% of your return comes solely from your allocation to equities. 

Assuming you’re not 100% invested in stocks, you can somewhat control your volatility by buying when stocks are low, and selling when stocks are high.  (Assuming low transactions costs, that is.)  Controlling your own volatility is preferable to “picking and sticking” to an asset allocation. 

(I’m sure I could think of more, but these just pop out at me.) 

82 > 87
Simple math.

Greenman72 wrote:

For the vast majority of individuals, you should have a four-fund max.  That is, you should be able to achieve the desired risk/return using only four funds.  The more funds/managers you start adding, the more homogenous your risk/return becomes, and it adds additional complexity with no added benefit. 

This is an interesting idea, but you can’t run a business like that. If you mocked up a portfolio with four funds in it for a prospective client and they took it to a competitor for a second opinion you’d get eviscerated. Even the advisors that like to only go with “best in breed” ideas still have at least 10 funds in an average 60/40 portfolio. And that’s considered fairly concentrated. 

If you’re thinking about how you want to run your book, you need to be aware of what the corner office guy at Merrill is doing…or the RIA down the street for that matter. And, how do you think a client is going to react to paying you a fee for setting them up in four funds and calling it a day?

^I’m pretty aware of what the corner office guy at Merrill is doing.  (I see the client’s brokerage statements, because I need them to do the tax return.  Remember?)

And I’m well aware than most advisors put people into a basket of front-loaded A-share, American Funds mutual funds.  (Again–I do lots of tax returns.  I see lots of brokerage statements.)  They get GDC of 5.75% and a .25% trail.  But my point is this–sales charges aside, how well does it perform?  In my opinion, if you were to carefully select all the “best in breed” managers and allocate your equities to 10 different funds, you’d still perform no better than if you put 1/3 in a large domestic blend, 1/3 in a large foreign blend, and 1/3 in a small-mid global fund.  (Or however you want to slice the pie–this is just an example.)

And I’m not sure I’d get eviscerated.  (Had to look that one up, BTW.)  Just because the guy’s model is more complex doesn’t necessarily make it better.  He may have technical indicators/bollinger bands/market heat maps/industry intelligence from top analysts and economists, but I’m fairly convinced that most of these things (about 99%) are a bunch of fluff, and are generally useless to most individual investors. 

Another Greenman “truism” - control what you can, and don’t worry about what you can’t.  That is–you can control costs.  You can’t control the market.  If corner-office-dude charges 1% and I charge .5%, then all of his fancy tools have to generate an extra .5% just to break even.  Pretty tall order, since his funds are also charging an extra .25% to generate a trail for him.  (This is assuming that the fund expense ratios are the same, aside from the 12b-1 fees.  In reality, I try to find low-cost funds, or ETF’s.)

Plus, as noted in another thread–I have other tools besides asset management.  I have the tax code, entity structure, estate planning, gift tax planning, etc. etc. that corner-office-dude doesn’t have.  (In fact, corner-office-dude actually asks our firm to sit in on meetings and do most of his client’s asset distribution planning.  No joke.  So this might actually be a very real challenge–the brokers are a very lucrative source of referrals.) 

82 > 87
Simple math.

That’s all well and good…I’ll just leave you with this. Being a successful advisor isn’t about providing the best returns for your clients over the next 30 years. It’s about providing them with the best experience possible. Did you save them money during that last bear market? Are they invested in something that’s exciting enough to brag to their friends about? You don’t have to be wild and crazy, but you have to offer your clients something they can’t get by reading Investing for Dummies. The best advisors I know keep their clients engaged.

If your value prop is simplicity and low cost, all I have to do as your competitor is remind your client that these are complicated times. In the last 15 years we’ve had two major market crashes, huge corporate accounting scandels, a gigantic ponzi scheme, and the government printing free money with who-know-what consequences brewing down the road. Do you feel safe having your entire nest egg in four funds? How about we diversify to be sure no one thing can wipe out a quarter of your portolio.

I know that doesn’t even make much sense, but the average retail client doesn’t know any better and that’s what your competitors are going to tell them. That’s where the metaphorical disembowelment comes from.

^Not trying to be argumentative, but it sounds like you’re tacitly agreeing with me, and that you don’t even believe what you’re spewing. 

My portfolio has four holdings in it:  Dodge and Cox Stock fund, Dodge and Cox International, Dodge and Cox Income fund, and Royce Primier.  Together, they have 234 stock holdings and 707 bond holdings.  (And I don’t think any of them are duplicated.)  No one thing will wipe out a quarter of my portfolio.   

And yes, clients can read Investing for Dummies.  But they don’t want to.  They can also read Taxes for Dummies and Estate Planning for Dummies.  But they don’t want to.  They want to hire somebody to do it and get back to running their businesses. 

But I get your point–success as an advisor is less about what works and more about what you can convince the client of.  Is that what you’re saying?  Do you think that IRL my business model will ultimately fail? 

82 > 87
Simple math.

In the nicest way possible…

….and I mean NICEST….




LOL Greenie! You’re going to get laughed out of the business, you think a guy is going to give you $10mm for you to buy 4 mutual funds for him? Fuark bro, that’s a good one… that might fly for his UTMA but at some point you have to do something a slightly retarded monkey can’t do on his own. What if Small Cap stocks trade at 30% lower P/E’s than large and you want in, are you going to go call the PM at Dodge & Cox and tell him to buy some small caps or are you going to buy Vanguard US Small Cap for your clients yourself? Or tell Bill Gross that your clients need a duration of 2.5 so he needs to short some treasuries?

The way DFA works, they’ve divided the market into Large, Small, Value, Blend, and Growth… you combine these to target your specific allocation. (You can buy a “core” fund than add to that if you want). Most DFA shops probably use 10-15 funds per portfolio.

BTW, 234 stocks holdings is nothing… a lot of ppl own that in 1 asset class.

Sweep the Leg wrote:

Systematic wrote:

There are no back box calculations in their funds… they really just provide liquidity to the market when there’s a motivated buyer or seller and try to caputure a liquidity premium, its not as intense as you think.

No, it’s not intense at all. Their portfolio manager is basically Windows Vista. They have no fundamental reason for investing in stock A vs stock B. If you got one of their PMs (an actual human) on the phone and asked what their investment thesis is for owning their top overweight, he wouldn’t have anything to say about it. They construct their portfolios based on multifactor models. It’s the definition of a quantitative mutual fund.

They spell out their process here:

http://www.dfaus.com/process/multifactor.html

I’ve actually met most the people in that video… you’re just gonna have to trust me on this one, these multi-factor models just mean that different risks explain the sources of returns. They arent quant/blackbox models that recommend what to buy and sell. It really means they overweight Small and Value stocks because they’re riskier and have higher returns, these models are simple statistics used to prove the risk/reward story- I know you think that’s quant, but its not. The data is avaible on Ken French’s website:

http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library/f-f_...

@sys - I think we’re only disagreeing on the definition of what a quant shop is. I know guys at DFA too, and they sell it as a quantitative process; one that eliminates “human” biases. In the 40 Act world there are really only two types of philosophies - fundamental and quantitative. DFA doesn’t have single fundamental (neither top-down nor bottom-up) investment thesis on any of the names they own. They build their models based on what a computer spits out. For the purposes of my world, that’s text book quant. They overweight value and the computer tells them how to build a portfolio with a value tilt. That’s the gist of it. Anytime you see “multifactor model” used in the process, that’s a quant fund. 

This kind of reminds me of a conversation I had with an analyst on one of our large growth funds. A few years ago they really changed up the process to rely heavily on Barra to build a portfolio with limited factor bets. It’s got to the point they eliminate and add stocks based on where they want their factor tilts. They still believe it’s a fundamental process (because what analyst wants to admit a computer is picking their stocks?) but the reality is we have to sell it as a quant process now. (And, btw, the fund has done well since they made the change in process. Quant funds are very capable products.)

It’s the same with DFA. They can’t sell it as an index, because they do take active bets; they can’t sell it as fundamental since they do no fundamental work; so what would you call it?

@greenie - re: “do you think IRL this will fail?” YES. Sorry bro, but not only is it a really bad business plan, the more I think about it, you’d open yourself up to all sorts of lawsuits for breech of fiduciary duty. But, I think you’d find out really fast you’ll need a couple dozen funds in your bullpen anyway because all your clients will have different needs. You’ll have one that wants tax-free income so you’ll have to buy a muni fund and maybe a high-yield muni fund. Maybe they live in California and you need a state specific muni fund too. That’s just an example, but you’ll find that four funds isn’t going to cut it in a practical sense, nor will it be competitive.