Performance of Dimensional Funds

retirement plan consultants discusses the performance of dimensional funds

Dimensional Funds are unique for many reasons, but performance is an important one. Dimensional Fund Advisors is currently the eighth-largest fund company. It manages assets exclusively for institutional investors and the clients of a select group of fee-based advisers. Those assets were worth $579 billion as of September 2019.

Some say Dimensional Funds are actively managed passive funds. While they’re passive in philosophy, they actively seek higher returns through researched investing. Keep in mind that Dimensional is not an index fund company.  However, they believe in broad diversification of each of its funds. Within those funds, it assigns higher weightings to securities with proven higher expected future returns based on their size (market capitalization) and valuation.

Modern Portfolio Theory (MPT)

Examining Modern Portfolio Theory (MPT) gives better insight into Dimensional Funds’ performance. Dimensional Funds are considered highly-efficient portfolio models. The principal goal of MPT is to achieve the greatest return for the amount of risk taken (or, conversely, to minimize the risk in a portfolio targeted to achieve a specific return). 

Doing so requires combining asset classes in the portfolio to achieve effective diversification. This is accomplished by measuring the correlation between specific asset classes that demonstrate a historically high rate of return and combining the asset classes in such a way that portfolio volatility is minimized. As a result, Dimensional Funds can ride through market ups and downs in the long term. 

Conclusion

Dimensional Funds’ performance is a result of conducting academic research on risk factors, utilizing a robust investment process and structuring portfolios for higher expected returns.