DFA

这是关于DFA公司三道问答题。1) Describe the investment strategy employed by DFA. Does DFA consider itself an active or passive manager? What aspects of its strategy are active? What aspects are passive?2) Who are DFA’s clients, and what are their concerns? What new clients is DFA trying to serve, and what are some of the new issues DFA will face in meeting these clients’ needs? 3) What level of market efficiency does DFA accept? Why this level and not any other? 

关于一些DFA的相关问答题

1) Describe the investment strategy employed by DFA. Does DFA consider itself an active or passive manager? What aspects of its strategy are active? What aspects are passive?

DFA employed passive investing strategy and DFA consider itself as a passive manager. The passive aspects of its strategy are as follows:
Firstly, its investment strategies are all based upon sound academic research.
Secondly,its primary business is small stocks fund. Because small stocks had consistently outperformed large stocks over the entire history of the stock market from 1926 through the late 1970s, and if this pattern were to continue, small-stock investing could deliver substantial returns to investors.
Thirdly, DFA’s strategy was to attempt to match a broad-based, value-weighted small-stock index. The firm had no interest in attempting to bet on particular firms by taking especially large positions in them.
Fourthly, DFA traders had to keep balance between getting the stocks that they could purchase at the best discounts and keeping the fund maximally diversified and thus have minimal tracking error with the small-stock index.
Fifthly, DFA charged fees lower than those of actively managed funds but higher than those of pure index funds.
Finally, in order to minimize adverse selection, firstly, DFA generally would not buy the stocks if the company attempts to announce some news in the forthcoming future. Secondly, DFA would carefully examine the stock through looking into company reports and other news sources with an attempt to avoid stocks that were likely to negatively surprise in the near future. Thirdly, if there existed insider trade for the stocks, DFA was unlikely to buy. Finally, DFA thoroughly kept an eye on the nature of the stock bulks it traded and its seller. Combining with the strategy of minimizing adverse selection, DFA employed the investment strategy of obtaining a discount on a stock purchase in return for accepting large blocks of stock from market participants who had a strong desire to sell.
The active aspect of its strategy is that for a large enough discount, DFA was willing to take on increased risk of adverse selection or slightly decreased diversification
2) Who are DFA’s clients, and what are their concerns? What new clients is DFA trying to serve, and what are some of the new issues DFA will face in meeting these clients’ needs?
The original clients for DFA are major institutions including corporate, government, and union pension funds, college endowments and charities.In 1989, DFA decided to pursue individuals with high net worth as clients.

Their concerns are that it would be likely to incur substantially high cost if it open direct accounts with individual investors because many DFA holdings are inherently illiquid. What’ more, DFA’s small stock fund lagged behind others that had primarily invested in large stock. In particular, the fund lagged S&P 500 Index. There existed some critics that DFA did not start with small stock fund at the right moment, and DFA itself should be blamed on its poor performance.

DFA embarked on one entirely new area of business: tax-managed strategies. Its newest product was a family of funds managed to reduce tax payment. So the new clients DFA was trying to serve are investors who faced taxation.

some of the new issues DFA will face in meeting these clients’ needs are:
Firstly, it is a sophisticated and technical work to make tax optimized. There existed a trade-off, the more nondividend-paying stocks included in a portfolio, the more portfolio tracking error and volatility increased.

Secondly, tax management is highly likely to result in higher transaction cost for investors. DFA should be well equipped to take on this challenging problem.

3) What level of market efficiency does DFA accept? Why this level and not any other?
DFA advocate strong-form market efficiency in the belief that the market price fully reflect all public information. Because DFA believed in the principle that the stock market was “efficient”—that is, if all traders have exactly the same information, then arbitrage opportunities cannot exist or if they did would certainly disappear very rapidly. Thus, trying to pick individual ‘winners’
and out-guess the market is impossible.Such beliefs fitted in with proponents of index funds. And DFA prefer growth stock over value stock，as the idea that low BE/ME stocks performed poorly because they were overhyped and glamorized did not fit with its efficient markets views。

What’s more, DFA did not attempt to do any fundamental analysis of the form in question.In addition, it was of utmost significance for DFA traders and its brokers to obtain information about company profits as well as future sales of the stock given the importance of price pressure to DFA’s trading practices. So that DFA provide incentives for sellers to reveal the size of their holdings and the size of their planned sales.