How Disciplined Are Dimensional Advisors?

Advisors who use Dimensional funds are generally believed to more likely adhere to their investment strategies than their peers. A comparison of fund and investor returns calls this conventional wisdom into question.

I chose to analyze the oldest small-cap value fund because the last 15 years haven’t been kind to that asset sub-class. As of May 6, 2022, Morningstar shows Dimensional Fund Advisors Small Cap Value Fund (DFSVX) averaged 6.69% annual returns, lagging the 9.04% performance of Vanguard’s Total Stock Fund (VTSAX). That translates to 164% cumulative growth for the Dimensional fund and 266% for the Vanguard fund.

Whenever I write about the relative performance of funds, I get comments like, “If you go back longer, DFSVX has bested the total-stock fund by three percentage points annually.” But were investors as a whole better off with the Dimensional fund?

I asked Morningstar to run the numbers since inception of the Dimensional fund on May 2, 1993. Its data went back to the beginning of 1995. Did Dimensional investors outperform since then? Though the answer is a resounding “no,” my research also uncovered some behavioral traits of the advisors who control those funds (for the most part, Dimensional’s mutual funds can only be purchased through an advisor and not directly by retail investors). Shockingly, since inception, more funds have flowed out of DFSVX than in.

A primer: Fund and investor returns

The return of any fund is the geometric annual average growth. The investor return is the internal rate of return one gets on their money. A simple illustration is as follows:

An investor puts $50,000 in a fund and earns a 30% return in year one. Feeling confident, she puts an additional $450,000 in that fund at the end of that year. But then the fund declines by 10%. The fund itself earned an 8.87% annualized return but the investor lost $36,500 or a negative 6.68% annually.