Thomas Easton

Can you get past the bouncer?

DFA sells a very useful mix of targeted index funds.
Unfortunately, it`s a hassle to buy them.
Can you get past the bouncer?

Forbes, (edited by IFA with updated facts)

JUST LIKE ANY OTHER consumer products company, fund sponsors slug it out for attention: Meet Mr. Top Return. Hear Ms. Emerging Markets. If you had only put $10,000 with us back when, you`d have enough to send your child to college. Send us a check. Now.

The carnival atmosphere is missing from a handful of fund families. The frugal Vanguard Group, for example, scarcely advertises at all; it counts on investors who like low-cost funds to beat a path to its door.

Dimensional Fund Advisors, a Santa Monica, Calif.-based sponsor with $37 billion in fund assets, takes this aloofness a step further. Beat a path to DFA`s door, and you may find it slammed in your face.

Who would want to get in? The same sort of people who like Vanguard. DFA runs passive index funds and near-index funds. Their fees are fairly low, their frictional costs from trading are low, and they don`t pay out much in taxable capital gains. A passively managed fund is almost never going to top the charts in any given year, but it can easily beat out most actively managed funds over long holding periods-10 or 20 years, that is.

Like Vanguard, DFA has a very low cost fund to track the S&P 500 index. It has 19 other passive funds, some specializing in foreign stocks, some in small stocks, some in bonds. A few of the funds are modified index funds: They follow investing themes, such as value stocks or small-company stocks. But the stock selection is always mechanical.

The themes come from academia-for example, the theory that stocks selling at low multiples of earnings and book value beat growth stocks over time. The eminent finance professors Merton Miller, Myron Scholes and Eugene Fama sit on the boards of the DFA funds.

The other part of the DFA formula is transactional dexterity. The 22 people managing DFA`s portfolios are all traders. By making markets in many of the thousands of stocks that populate the funds, DFA claims, it enjoys negative transaction costs. Suppose a small over-the-counter stock is quoted at 20 bid, 20 3/4 asked. Even if DFA wants the stock, it may hold off buying until some trader puts in a big sell order, say, for 200,000 shares (to be spread among funds and institutional accounts). DFA may offer to take the block for 18 or 19. When the DFA traders sell a thinly traded stock, in contrast, they dribble the shares out a few hundred at a time.

Intrigued? Be prepared for a battle to get in. Originally an institutional manager with a $2 million minimum, it now accepts individual money only if referred by approved financial advisers. And not just any adviser will do.

No carnival barkers at DFA. Only the advisers jumping through hoops are customers.

Why does DFA play hard to get? One reason: to screen out hot money. A flood of new purchases, followed a few months later by a rush of redemptions, would wreak havoc on DFA`s efforts to keep trading to a minimum. The funds would be chasing after stocks one day and unloading them at distress prices the next, says Rex Sinquefield, a founder and cochairman of DFA.