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Larry #64
Robert T 06-13-2007, 10:33 PM | Post #2399626 | 
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Thanks for the response and checking whether I had captured everything.

1. Block trading: My source of information was on pg 5 of this brochure. "Historically our average block purchase price is 3% below the next day's closing price.." (with a small cap example provided). If we assume 20% turnover (new purchases), then the small cap funds benefit is estimated to be 0.6% per year, and if small caps represent 25% of a portfolio the portfolio impact would be 0.15% (this is higher than I had in the previous estimate as I implicitly only assumed 10% [not 20%] new purchases annually). The 0.15% benefit assumes no small cap block trading benefit to other fund companies.

2. Screens: '..added 60bp to small/micro funds versus benchmarks'. I am not sure what screens DFA uses (excluded stocks with zero BtM, IPO?), and what benchmarks are used for the counterfactual. The Russell Indexes are used in the DFA fact sheets but these do not seem to be closely matching benchmarks for the DFA funds. In addition, I am sure other fund companies - iShares, Vanguard, and Bridgeway also use screens (Vanguard's small cap fund 10 yr returns exceed it benchmark). Assuming a 20 percent allocation to small-cap stocks the 60bp benefit translates into 0.15% at the portfolio level (coincidently the same as what I had for style consistency).

3. Trade cost savings: Turnover of non-DFA index funds including intl also have low turnover hence trade cost savings - so not sure DFA has much advantage on this.

4. Lending securities: As you indicated, other fund companies also lend securities - although perhaps not as aggressively at DFA. I looked briefly at a few Vanguard, Bridgeway, and iShares funds for comparison.

Revenue from lending securities (as close to fiscal year 2006 as possible).

.......................................% of net assets

DFA US Small Cap series.....................0.22
DFA US Small Value series...................0.10
DFA US Mirco Cap series.....................0.35

Vanguard Small Cap Index....................0.10
iShares S&P 600 Value.......................0.03
Bridgeway Ultra-small Co....................0.16

If the lending revenue presented on pg. 28 of the DFA prospectus is an indicator of the average revenue as a percent of assets received per year, then at a portfolio this works out to be 0.07% per year for the sample 'balanced strategy' used in my earlier post. If we assume that three times the revenue (as a share of asset) is generated by DFA funds versus non-DFA funds - as for some of the funds above - then the DFA advantage from security lending seems to be about 0.05%.

Adding this to the previous numbers gives:

DFA portfolio return advantage:

[1] Style consistency.......................0.15%
[2] Block trading...........................0.15%
[3] Security lending........................0.05%
[4] No reconstitution arbitrage.............0.05%
[5] Taxes...................................0.00%
[6] Expenses Ratio.........................-0.06%

Annual DFA advantage........................0.34%

So perhaps around a 0.3% advantage rather than 0.2% (for a 'balanced strategy'). As you indicate this will likely be higher the greater the factor tilt. Perhaps I have been generous to DFA on some of the categories (Gus Sauter and the folks at BGI are not amateurs at execution and don't advertise these issues as much as DFA).

Anyway - just trying to get a clearer understand of the magnitude of any advantage. Thanks again

Robert

PS: does lending securities increase portfolio risk and why do brokers, dealers, and bankers etc. borrow securities (as I understand from the DFA and Vanguard prospectus/annual report)?

Originally posted in thread: 59269
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