The building blocks of portfolios are the funds. If you’re building a wall, your want bricks of very high quality.
For professional managers implementing an evidence based investing experience we want “bricks” - i.e. funds, that are highly diversified, low cost and effectively cover the area of the market to be covered.
What about funds performance? How do you measure performance? Funds’ performance are compared to an index that represents the same area of the market. There are thousands of indexes out there.
Many funds, rather than seek high levels of diversification, seek to outperform the index by choosing the companies that their research reveals will perform well. Therefore they are taking a gamble by focusing the assets across fewer securities. Makes sense, but in practice is very difficult. While short term success does happen. it’s extremely rare to last over long periods. Therefore, as simple as it sounds to “beat the index” over longer periods of time, it rarely happens. Investing results are very noisy statistically, so you need a large sample size to make a valid conclusion about performance.
What really “wows” me is the performance of Dimensional funds vs. the rest of the industry. From a statistical point of view what really matter is the 10. 15 and 20 years numbers as you can see below.
At the 20 year mark, as of Sept 30 2024, 84% of Dimensional funds outperform their benchmarks while the rest of the industry only 17% of the funds outperform their benchmarks.
Long term financial planning relies upon the effects of investments compounding. This assures us that our clients’ plans have a higher probability of unfolding in a positive way over the many years that plans require.
There’s no other fund company that I know of that is remotely close to that level of consistent outperformance. It tells me that their scientific statistical based evidence based investing is working very well. It’s wonderful that it shows up in such a big way.
The sample includes funds at the beginning of each respective period. Survivors are funds that had returns for every month in the sample period. Outperformers (winner funds) are funds that survived the sample period and whose cumulative net return over the period exceeded that of their respective benchmark. Each fund is evaluated relative to its respective primary prospectus benchmark. Where the full series of primary prospectus benchmark returns is unavailable, non-Dimensional funds are instead evaluated relative to their Morningstar category index.
1. Dimensional fund data provided by the fund accountant. Dimensional funds or subadvised funds whose access is or previously was limited to certain investors are excluded.
2. US-domiciled, USD-denominated open-end and exchange-traded fund data is provided by Morningstar.