This was the title of a Morningstar article from a year ago. It told the unfortunate tale of retirement plan that had decided to remove the DFA International Value Fund from their lineup for "performance reasons." To Morningstar and author John Rekenthaler's credit, they called foul on this move right away. Sure, international large value stocks had not had stand-out results over the previous few years, and the DFA fund, Renkenthaler correctly pointed out, was and is the purest and most targeted international value portfolio available to investors. At the time the average stock in the portfolio had a price-to-book ratio that was lower than any other international value fund in the "Foreign Large Value" category.
The DFA strategy wasn't flawed, instead, when a particular asset class experiences a random period of underperformance, by definition the fund that has the purest and most consistent exposure to that asset class (i.e. DFA) will struggle. This isn't a reason to abandon a fund. Assuming it's a core asset class with the expectation of strong long-term returns, the better decision is not only to stick with it, but also to rebalance into it (that "buy low" thing).
The last 12 months illustrates the importance of having a long-term perspective and sticking with your portfolio allocation (and holdings), even when short-term returns disappoint. Through July 31st, Morningstar reports a return of +26.1% for DFA International Value over the last 12 months. That compares to +17.3% for the MSCI World ex.US Index and +22.5% for the MSCI World ex.US Value Index. The average actively-managed fund in the Foreign Value category earned a +18.6% return. DFA International Value outperformed 94% of funds in their category. True to form, as international value stocks have come back in to "favor," the fund that targets those shares better than anyone else has flourished. What are the odds that the retirement plan replaced DFIVX with one of the 6% of the category that outperformed? Remote. How much have the retirement plan investors paid for their manager's poor decision? Probably something in the neighborhood of 3% to 5% on the international part of their portfolios.
I call attention to this story primarily because this type of investor (and plan-sponsor) behavior is far too common and woefully underreported. I often hear how easy it is to invest well, but in reality very few investors, regardless of knowledge or experience, have the ability to stick with their choices over time. Ill-advised investor decisions (performance chasing, buying high/selling low, etc.) are by far the most expensive cost of investing. But they are also easily avoidable if investors utilize an Investment Policy Statement and stick with their policy decisions. Simple, but not always easy.
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Past performance is not a guarantee of future results. Index and mutual fund performance