Dimensional Fund Advisors (DFA) Emerging Markets Portfolio (DFEMX) is popular with financial advisors who want their clients to focus on long-term capital appreciation. According to market index performance in the emerging and developed markets, time in the market, not market timing, builds wealth. DFA Emerging Markets Portfolio isn’t trying to outperform the broad-based market. Instead, it wants investors to use large-cap emerging market stocks to ride the wave of emerging markets expansion.
DFA emerging markets fund had more than $5 billion AUM invested in almost 1,100 constituents in February 2017. This meansthat it aligns to the major emerging benchmark, MSCI Emerging Markets Index (MSCI EMI). However, DFA emerging markets outperformed MSCI EMI by 90 basis points in 2016. Also, the fund slightly under-performed the MSCI EMI benchmark on a 10-year annualized basis.
What Is the DFA Emerging Markets Portfolio?
The DFA Emerging Markets Portfolio follows Fama and French’s theories about efficient markets theory and equilibrium investing. That’s why DFA emerging markets’ managers, research analysts, and traders buy value stocks as well as growth ratios. The fund’s portfolio manager says that the fund sells a stock position only when the original fundamentals exceed the criteria used to select them. This means that this disciplined approach prevents fund managers from making bets or hunches with clients’ money.
The efficient market hypothesis (EMH) theorizes that it’s impossible for investors to do better than the broad market. Stock market efficiency is reflected in current stock market prices. EMH says that stocks trade at current fair value on a stock exchange. According to the theory, it’s impossible for the investor to buy an undervalued stock or sell a stock at an inflated price. Stock selection and market timing don’t work, according to EMH. So the only possible way for the investor to achieve higher returns is to purchase higher-risk assets.
The portfolio is similarly weighted in market capitalization to the MSI EMI. However, the DFA emerging markets portfolio doesn’t allocate more than 12.5 of assets to a single country. This means the fund can’t overcommit funds to China or any emerging markets country. Advisors like the portfolio’s consistent performance. Let’s discuss several ways to profit from DFA Emerging Markets Portfolio in the next section.
7 Ways to Profit from the DFA Emerging Markets Portfolio
1. Compare the DFA Emerging Markets Portfolio to the MSI Emerging Markets Index Benchmark
Review one-year, three-year, five-year, 10-year, and life-of-fund returns. Consider the overlap with the MSCI EMI benchmark. In other words, there is alignment between the index and the DFA Emerging Markets investment. According to Zacks Research, the DFA Emerging Markets Portfolio outperformed more than 83 percent of competitors in the diversified emerging markets fund category.
2. Ask Questions about the Costs
According to the Prospectus (February 28, 2017), investors pay an 0.48 percent expense ratio and 0.52 percent management fee. If your financial adviser recommends the fee, he or she may also charge a management fee. Costs associated with purchase or sale of investments may decrease your net return.
3. Consider the DFA Emerging Markets Portfolio Structure
According to the DFA Emerging Markets Portfolio prospectus, management pursues investment objectives by committing its assets in a corresponding master fund, the Emerging Markets Series. The master fund’s investment objective is the same as the DFA Emerging Markets Portfolio. The fine print says that, as a non-fundamental policy, under normal circumstances, the fund invests a minimum of 80 percent of net assets in investments in the emerging markets (Approved Market Securities).
A master-feeder fund is commonly used by hedge funds to pool tax-exempt and taxable capital raised via investors. Investor capital is held in a central vehicle called a master fund. Separate investment vehicle structures called feeders are created for each group of investors. Ultimately, DFA invests the capital into the master fund. This fund is directed to make portfolio investments for investors and to conduct trading activity. Therefore, performance or management fees are paid by investors from the feeder fund.
The fund structure starts with the investor who feeds capital to the feeder fund. The feeder, in turn, places the money in the firm’s master fund. The fund contains all shareholder capital. So each investor’s capital buys master fund shares. Because capital from the feeder fund is used to buy into the firm’s master fund, the investor receives identical income attributes to the master fund, such as dividends, interest, tax adjustments, and gains. The master-feeder fund allows the fund manager to create niche portfolios. Investors still benefit from the major capital pool in this example.
4. Assess risks associated with the DFA Emerging Markets Portfolio
Morningstar reports that over a three-year period, investors of the DFA Emerging Markets Portfolio assumed higher risk than the average market. Commit only a reasonable percentage of your portfolio to an emerging markets investment. Hedge your investment with index options and futures if you’re concerned about a broad market downturn in the emerging markets.
5. Buy for the Long-Term
If you’re an advocate of the efficient market theory, plan to hold the DFA Emerging Markets Portfolio for one to five years.
6. Analyze the DFA Emerging Markets Portfolio
If you’re searching for a pure-play portfolio, learn that the fund currently holds more than 30 percent of assets in developed country markets.
7. Check the DFA Emerging Markets Portfolio Turnover Rate
According to the prospectus, DFA EM Portfolio has a low turn rate. In other words, specialists associate high turnover with a high investment risk.
Wrapping Things Up
Most financial professionals believe that investments in emerging markets stocks are a good bet for the long-term investor with the ability to assume risk. Therefore, you should expect volatility in the emerging markets. In addition, if you’ve committed capital to an emerging markets investment like the DFA Emerging Markets Portfolio, reduce your cost basis if markets soften. But if you’re concerned about market levels in the emerging markets, make incremental investments to aerate your cost basis.
Several factors, including rising U.S. interest rates, trade barriers, and natural market consolidation can cause stock prices to decline. All stock markets react to investor demand and sentiment. So a diversified portfolio of emerging markets stocks may reduce risks associated with these markets. However, reliable information about DFA Emerging Markets Portfolio isn’t easy to find.
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