This Mutual Fund Company Attracts a Flood of Cash

NEW YORK ( TheStreet ) -- In a year when many equity mutual funds suffered withdrawals, investors have been pouring into DFA funds. According to Morningstar, the company recorded inflows of $18.3 billion, a sizable figure for a company with total assets of $208 billion. The only competitor that attracted more money was Vanguard, which drew $60 billion and has a total of $1.8 trillion in assets.

Strong returns have put DFA on the radar screen. Funds that topped more than 75% of peers during the past 10 years include DFA Emerging Markets Small Cap (DEMSX), DFA US Small Cap (DFSTX), and DFA U.S. Large Cap Value (DFLVX). The company has proved especially attractive because it offers a version of low-cost passive investing at a time when investors have been abandoning active management.

Relying on academic research, DFA aims to deliver superior results by tweaking standard indexing approaches. The strategy is based heavily on research by Eugene Fama of the University of Chicago and Kenneth French of Dartmouth. The researchers found that over long periods small stocks outperformed large ones and low-cost value shares outdid more expensive growth names. Based on the findings, DFA funds tilt to small and value stocks.

During the past decade, the tilting has helped to boost results. "The small-cap emphasis has been driving the strong performance," says Alex Bryan, an analyst for Morningstar.

To appreciate why DFA has excelled, consider DFA U.S. Large Cap Value. While conventional value funds take the cheapest half of the market, DFA only takes the cheapest 20% and tilts to smaller stocks. The portfolio holdings of DFA U.S. Large Cap Value have an average market capitalization of $10.5 billion, compared to $69.7 billion for Vanguard Value Index (VIVAX), a conventional large value index. During the past 10 years, it paid to emphasize smaller stocks. For the decade, small value stocks returned 9.2% annually, while large value returned 7.0%. During the period, DFA U.S. Large Cap Value returned 9.0% annually, compared to 7.4% for the Vanguard competitor.

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