Response to New York Times Article Comparing DFA and Vanguard Stock Mutual Funds

A recent New York Times article profiled Dimensional Fund Advisors and its role as shareholder activists. DFA was ranked No. 1 in shareholder activism by the American Federation of State, County and Municipal Employees in June 2011. The article compared Dimensional with Vanguard, which was ranked last in shareholder activism by the same survey. It also mentioned the following performance comparison:

“What’s more, investors in Vanguard stock mutual funds have had higher actual returns than investors in Dimensional funds. On an asset-weighted basis in the 10 years through Jan. 31, the return received by Vanguard investors was 6.614 percent, annualized, compared with 5.05 percent for Dimensional funds, Morningstar calculates.”

What is the problem with this statement? Asset-weighted returns are meaningless, and an example can show why. Let’s say both companies only have two funds, a stock fund and a bond fund, and they had the following returns:

DFA Stock: 10 percent
Vanguard Stock: 9 percent

DFA Bond: 5 percent
Vanguard Bond: 4 percent

Let’s also say 80 percent of Vanguard’s assets are in the stock fund and 50 percent of DFA’s assets are in the stock fund. In this example, Vanguard’s asset-weighted return is 8 percent and DFA’s asset-weighted return is 7.5 percent. Vanguard “outperforms” on an asset-weighted basis even though DFA’s funds outperformed in both asset classes.

The proper way to make the comparison is to analyze funds in the same asset class. The table on the following page compares returns and expense ratios for the different Vanguard funds that have at least a 10-year history. You’ll notice that the returns for the different fund families are similar, with the notable exceptions being the value asset classes. DFA’s funds tend to be more tilted to value than the comparable Vanguard funds, and this shows up in the returns.