This case uses DFA as a setting to introduce you to the latest research in academic finance, as well as to show you how you can turn new findings into productive investment strategies. This case pays particular attention to the cornerstones of the DFA approach: the “size effect” and the “value-growth effect.” To this end, the case presents detailed information on recent research in capital markets (particularly the stock market), as well as on DFA’s history and operations. The case also explores the effect of recent research innovations on the firm, and considers DFA’s new (as of 2002) product: tax-managed passive funds. Start by reading carefully the Case Study HBS 9-203-026, “Dimensional Fund Advisors.” Next, prepare a comprehensive report on this case, covering the questions suggested below, as well as other issues that you might find pertinent.
1. What is DFA’s business strategy? What do you think of the firm? Are the DFA people really believers in efficient markets? How does DFA add value for investors? What are the pros and cons of the passive approach?
2. What are the Fama-French findings? Do they make sense? Should we expect small stocks to outperform large stocks in the future? And, should we expect value stocks to outperform growth stocks? What did Fama and French discover about the CAPM and beta? How do you reconcile the empirical findings with the CAPM theory?
3. Discuss DFA’s trading strategy. How does it work, and what are the costs and benefits? Can DFA keep the competitive advantage in the future? Why don’t competitors emulate DFA’s approach? 4. What are DFA’s products? How does DFA’s new tax-managed strategies work? Is the tax-managed fund family likely to be successful on a broad scale, or is it just for a small niche market? What is the expected gain from DFA’s tax management strategy, and what is the increase in volatility that results from it?
5. What should be the firm’s strategy going forward? Does the company need to modify its basic strategy if it wants to grow assets and/or profits?
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