This document provides historical return data for various investment indexes from 1926 to 2012. It discusses Dimensional Fund Advisors' evolution in response to advances in financial research. Key points include:
- Dimensional structures portfolios around dimensions of expected returns identified by research, such as market, size, value, and profitability factors.
- Recent research identified profitability as a new dimension with high profitability firms having higher average returns.
- Dimensional incorporates new research findings by evolving existing strategies and developing new ones.
- Dimensional's approach focuses on expected returns rather than attempting to time markets or capture short-term anomalies.
- Historical return data is provided for indexes spanning US and international equities
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1. Matri x Book 2 013
Historical Return Data—US Dollars
2. Matr i x Book 2 013
on the cover
Decades of financial
research underlie our
views on the capital
markets and form the
basis for how we invest.
As research progresses,
Dimensional continues
to evolve—offering new
dimensions to investors.
Historical Return Data—US Dollars
3. THE EVOLUTION OF DIMENSIONAL
Dimensional evolves as the science of investing
are based on four dimensions of expected returns
we disregarded it. As it turns out, there hasn’t
January effect. In response to that concern,
The Fama/French research led us to create our
evolves, which explains why we keep such close
that have been identified by academic research:
been a January effect since we began managing
Fama and French did two out-of-sample tests.
value strategies, which increase the exposure
the overall market (beta), company size (small
small cap strategies. This is what happens to
First, working with Jim Davis, they collected and
to low priced stocks relative to their weight in
cap/large cap), relative price (high/low), and
most anomalies—they disappear when the
analyzed the data in the US from 1926 to 1962.
benchmarks used by our clients. Recent research
direct profitability (high/low).
data set is expanded.
Second, they studied the performance of stocks
on profitability by Robert Novy-Marx has
connection to the academic community. Many,
if not most, of the major advances in portfolio
management over the last 60 years have come
average returns across portfolios and individual
identified another measure that appears to
Beginning in the mid-1960s, asset pricing models
from academic research.
have been developed to explain differences in
securities. Testing any model eventually produces
anomalies, because no model can perfectly
describe reality. But eventually, most anomalies
We believe that the best way to add value over
benchmark returns is by structuring portfolios
associated with conventional management, drives
the performance of portfolios.
model that revealed them.
replicated his work, and, once again, we find the
results persistent and pervasive around the world.
Evaluating the research
confidence when patterns are persistent across
the pre-1963 data and the non-US data were
Using valuation models
Our evolution parallels the evolution of research.
time periods and pervasive across markets.
consistent with the patterns they had observed
The finding that firms with high direct
The multifactor research of Eugene Fama and
in the US returns from 1963 to 1990. More
profitability have higher stock returns is not
Ken French is a good example. When Fama
recent returns continue to support their earlier
surprising to most people. But to some, a higher
and French first presented their research on
conclusions. As a result, we are confident that
expected return must mean greater risk.
the dimensions of equity returns in 1991, their
the size and value factors are, in fact, dimensions
evidence was based on US stocks from 1963
of expected returns.
In 1981, when we started our firm offering
to figure out what structure works best for
average returns than could be explained by the
them. Often, this involves trading off increased
single-factor market model used at the time.
expected returns against costs and tracking error.
Nevertheless, we felt comfortable launching a
small cap fund, because the size effect was so
view of investing. These characteristics give
than low profitability firms. Our research team has
world. They found the return patterns in both
was an anomaly. Small cap stocks had higher
pervasive, and is consistent with an equilibrium
profitability firms have higher average returns
in developed and emerging markets around the
investment dimensions. We work with clients
explains differences in returns, is persistent and
is consistent with an equilibrium view of investing.
margin as the gauge of profitability, high
patterns in returns. As a result, we have more
small cap investment strategies, the “size effect”
We consider a dimension to be a factor that
differences in returns, is persistent and pervasive, and
returns. Using a measure of gross operating
Data mining is a big concern when we look for
Clients vary in their preferences toward these
Identifying dimensions
of expected returns
We consider a dimension to be a factor that explains
disappear, get explained away, or sink the pricing
around the dimensions of expected returns.
Portfolio structure, rather than the tactical shifts
meet our standards for a dimension of expected
A parallel may be drawn between direct
to 1990. Some people wondered if their results
profitability and term premiums for fixed income
might be due to data mining, similar to the
obligations. It is well known that buying 1-month
persistent and pervasive. We didn’t have a good
explanation for the higher returns, but it seemed
reasonable that the smaller the firm, the higher its
costs of capital; and the return to an investor
Dimensional’s Rich History
is the company’s cost of capital.
Key breakthroughs in finding and pursuing dimensions of equity returns
Not long after we started Dimensional, Don Keim
discovered another anomaly, “the January effect.”
Relative Price
Fama/French research
identifies market, size, and
value factors as the principal
drivers of equity returns.
Total Market Solutions
Advancement in portfolio
design provides value-added,
efficient total market solutions
that focus on dimensions of
higher expected returns.
Direct Profitability
Research identifies a robust
proxy for a new investable
dimension of higher expected
return—expected profitability.
observed in the past to repeat in the future.
His research showed that most of the size effect
Our fixed income portfolios are structured
occurred in January. We could see no sensible
Company Size
Dimensional offers investors
diversified, cost-efficient
access to small companies.
equilibrium explanation for a January effect, so
1981
1992
2004
2012
Small Cap
Strategies
Value
Strategies
Applied Core
Equity Strategies
Opens the door to new strategies
and potential enhancements to
existing strategies
us confidence that we can expect the relations
around two generally accepted dimensions of
fixed income expected returns: term (maturity)
and credit spread (quality). Our equity portfolios
4. priced stocks have higher returns than high
In our view, the size effect went from being
Higher expected returns are the result of having
more likely to underperform in the next period;
priced stocks because of market mispricing.
an anomaly to a dimension of returns in the
either higher expected cash flows or a lower price.
stocks that have outperformed have a tendency to
Interestingly, they use much of the same data
Fama/French three-factor model, even though
slightly more risky, than 1-month bills. The higher
The direct profitability dimension is tied to the
continue to outperform. If the momentum effect
to support their view that we use to support ours.
there is still no robust explanation of why it
return for the 3-month maturities is not due to
Market
that have underperformed in a past period are
investors, 3-month bills are less risky, or only
Single-Factor Model, 1963
equities—relative price and direct profitability.
than buying 3-month Treasuries. For some
Advancements in Research
numerator and the relative price dimension to
were large enough to trade on profitably, then it
Clients who want to hire a money manager to
exists. Their research also identified the value
the denominator. Stated another way, if two
would be evidence of market mispricing.
capture mispricings have a difficult challenge:
effect as a dimension and led to the creation
First, they have to be able to identify successful
of our value funds.
Treasuries produces a lower return, on average,
mispricing; it is just the result of market forces.
stocks sell at the same price, then the one with
Similarly, it is perfectly reasonable that equity
higher expected cash flows must have a higher
We believe that momentum is a factor affecting
markets have dimensions of returns that may
expected return.
returns, but it is too small and sporadic to
actively induce trading. Momentum is stronger
be particularly attractive to some investors and
not others. Our confidence that we have correctly
direct profitability, can be combined to improve
which is consistent with our view that it is best
it to a basic valuation model, such as the
portfolio structure. For example, the explanatory
power of direct profitability is fairly weak.
rule. Momentum is also quite variable; in 2009,
However, when conditioned on the relative
it was sharply negative for US stocks.
Large
Price =
Small
The best way to add value is to structure portfolios
considered a trading cost rather than a trading
equation below.
Size
in small cap stocks than in large cap stocks,
identified a dimension goes up if we can connect
Size Effect, 1981
These two dimensions, relative price and
Expected Cash Flows
Discount Rate
However, by trading carefully, it is possible
managers in advance, and second, they have to
The latest research has identified profitability
hope that any such managers don’t raise their fees
price dimension, the explanatory power
becomes much stronger.
along the dimensions of expected returns.
as a dimension of expected returns, with highly
to keep the bulk of any alpha for themselves.
profitable firms having higher average returns
to use momentum to increase returns. For
than can be explained by the three-factor model.
The value of a stock or bond is the sum of future
example, momentum has explained most of
We believe that our philosophy provides a
So the evolution of financial science continues.
cash flows discounted back to present value.
contradictory. They both are structured around
the outperformance of our small cap strategies
better investment experience. Our approach
We are very excited about this new research and
For example, the price of a bond is determined
Value Effect, 1991
Our growth and value strategies are not
the same dimensions of size, relative price, and
relative to small cap indices.
is transparent and easy to explain because it
will incorporate it into the investment policies
relies on basic valuation methods and extensive
of many of our existing portfolios. We also
empirical research, and it is validated by a long
have developed new portfolios based on this
track record of implementation.
research—the first of these were two US growth
by the stream of coupon payments and principal
relative prices. In our view, value and growth
Contrast with
conventional management
a low-yield bond.
are not opposite ends of one dimension, but
Dimensional’s investment philosophy is centered
two different dimensions.
Low
and the other focuses on stocks selling at low
higher coupon or sell at a lower price than
Small
focuses on stocks selling at high relative prices,
rates. A high-yield bond must either have a
Large
direct profitability. The difference is that one
repayment, discounted back at various interest
Size
on an equilibrium, or efficient market, view of
Looking forward
public markets. In this view, the best way to
Dimensional will continue to evolve as research
add value over conventional benchmarks is to
on the dimensions of returns progresses. When
structure portfolios along the dimensions of
we started the firm in 1981, academic research
Generally, the greater the risk of an investment,
High
Relative Price
the higher the discount rate and lower the price.
strategies and two international growth strategies.
The discount rate is the investment’s expected
return. Reworking the equation above to solve
Direct Profitability, 2012
Size
Large
High
Momentum is an example of a factor that does
expected returns. For equity portfolios, expected
used the single-factor market model to explain
for expected return gives us:
not meet our criteria as a dimension of returns
returns are increased by giving greater weight
average returns. The size effect was viewed as
but still impacts portfolio returns.
to small cap, low relative price, and high direct
an anomaly because small cap returns were too
profitability firms.
great to be explained by beta. Nevertheless, we
Low
Small
High
High
Small
Relative Price
Low
Large
Low
Direct
Profitability
Momentum
Expected
=
Returns
Expected Cash Flows
Price
sponsored a small cap fund because the size
Research suggests that there is momentum in stock
A competing philosophy dominates conventional
effect was persistent and pervasive, and because
Expressing the relation this way highlights
money management. In that view, value can
it gave institutional investors a tool to efficiently
two of the dimensions of expected returns for
be added through tactical shifts. For example,
diversify beyond large cap stocks.
prices in most markets around the world. Stocks
behavioral finance proponents argue that low
David Booth
Co-Chief Executive Officer,
Dimensional Fund Advisors
5. TABLE OF CONTENTS
THE EVOLUTION OF DIMENSIONAL
Annualized Rates of Returns (%)
How to Use This Book
2
8
9
Total Returns
S&P 500 INDEX
Fama/French Total US Market Index
Dimensional US Adjusted Market 1 Index
Dimensional US Adjusted Market 2 Index
Dimensional US Adjusted Market Value Index
Dimensional US Large CAP Growth Index
Dimensional US Small CAP Growth Index
Fama/French US Large Value Research Index
Fama/French US Small Value Research Index
Dimensional US Targeted Value Index
Fama/French US Small Cap Index
DOW JONES US SELECT REIT INDEX
DOW JONES-UBS COMMODITY INDEX
Dimensional International Large CAP Growth Index
MSCI EAFE INDEX
Dimensional INTERNATIONAL ADJUSTED MARKET INDEX
Dimensional INTERNATIONAL VECTOR INDEX
Fama/French INTERNATIONAL VALUE INDEX
Dimensional INTERNATIONAL SMALL CAP GROWTH INDEX
Dimensional INTERNATIONAL SMALL CAP INDEX
Dimensional INTERNATIONAL SMALL CAP VALUE INDEX
MSCI EMERGING MARKETS INDEX
Dimensional EMERGING MARKETS ADJUSTED MARKET INDEX
Dimensional EMERGING MARKETS GROWTH INDEX
ONE-MONTH US TREASURY BILLS
LONG-TERM GOVERNMENT BONDS
LONG-TERM CORPORATE BONDS
BARCLAYS US TIPS INDEX
ONE-MONTH CERTIFICATES OF DEPOSIT
BARCLAYS US AGGREGATE BOND INDEX
BARCLAYS MUNICIPAL BOND INDEX
Dimensional US Intermediate Variable Credit Index
Dimensional US Intermediate Variable Government/Credit Index
Dimensional US Intermediate Variable Maturity Government/Credit INDEX
Dimensional Global Intermediate Variable Maturity Index
1926–2012
1927–2012
1928–2012
1928–2012
1928–2012
1975–2012
1975–2012
1927–2012
1927–2012
1928–2012
1927–2012
1978–2012
1992–2012
1992–2012
1970–2012
1994–2012
1994–2012
1975–2012
1992–2012
1970–2012
1982–2012
1988–2012
1994–2012
1996–2012
1926–2012
1926–2012
1926–2012
1998–2012
1966–2012
1976–2012
1980–2012
1974–2012
1974–2012
1977–2012
1985–2012
11
13
15
17
19
20
21
23
25
27
29
30
30
31
31
32
32
33
33
34
34
35
35
35
37
39
41
42
42
43
43
44
44
45
45
1926–2012
1927–2012
1926–2012
1926–2012
1926–2012
1966–2012
1978–2012
1992–2012
47
49
51
53
55
56
57
57
1973–2012
1973–2012
1973–2012
1973–2012
1973–2012
1973–2012
58
60
60
61
61
62
62
Real Returns (Inflation Adjusted)
US INFLATION: CHANGES IN US CONSUMER PRICE INDEX
Fama/French US Small Cap Index
S&P 500 INDEX
LONG-TERM GOVERNMENT BONDS
ONE-MONTH US TREASURY BILLS
ONE-MONTH CERTIFICATES OF DEPOSIT
DOW JONES US SELECT REIT INDEX
DOW JONES-UBS COMMODITY INDEX
Balanced Strategies
Balanced
Balanced
Balanced
Balanced
Balanced
Balanced
Balanced
Strategies: Weights and Summary Statistics
Strategy: Fixed
Strategy: Conservative
Strategy: Moderate
Strategy: Normal
Strategy: Aggressive
Strategy: Equity
GLOBAL STRATEGIES
World market capitalization
Sources and Descriptions of Data
63
64
66
MATR IX BOOK 2013
7
6. ANNUALIZED RATES OF RETURNS (%)
HOW TO USE THIS BOOK
One
Year
2012
Five
Years
2008–2012
Ten
Years
2003–2012
Fifteen
Years
1998–2012
Twenty
Years
1993–2012
Fifty
Years
1963–2012
Eighty
Years
1933–2012
S&P 500 Index
16.0
1.7
7.1
4.5
8.2
9.8
11.1
Fama/French Total US Market Index
15.1
2.3
7.9
5.0
8.4
10.0
11.2
Dimensional US Adjusted Market 1 Index
17.1
2.9
8.9
6.1
9.4
11.0
12.2
Dimensional US Adjusted Market 2 Index
17.9
2.9
9.2
6.7
9.9
11.7
12.9
Dimensional US Adjusted Market Value Index
19.3
3.7
10.4
8.2
11.2
13.2
14.2
Dimensional US Large CAP Growth Index
15.3
5.1
7.8
5.3
8.5
—
—
Dimensional US Small CAP Growth Index
15.6
4.8
10.3
8.3
9.9
—
—
Fama/French US Large Value Research Index
24.9
-0.8
7.8
5.6
8.6
12.4
14.0
Fama/French US Small Value Research Index
21.9
5.9
12.3
10.9
14.0
16.7
17.6
Dimensional US Targeted Value Index
20.0
6.3
12.5
10.4
13.3
15.1
15.8
Fama/French US Small Cap Index
17.4
5.4
11.4
7.7
10.2
12.4
14.3
Dow Jones US Select REIT Index
17.1
5.1
11.5
9.0
10.9
—
—
Dow Jones-UBS Commodity Index
-1.1
-5.2
4.1
4.0
5.4
—
—
Dimensional International Large CAP Growth Index
17.9
-1.2
9.9
6.3
7.0
—
17.3
-3.7
8.2
4.4
6.1
—
17.8
-2.2
11.3
7.6
—
—
18.1
-1.8
12.1
8.4
—
—
—
Fama/French International Value Index
21.2
-1.5
12.8
9.9
11.4
—
—
Dimensional International Small CAP Growth Index
20.1
-0.2
13.2
8.5
7.7
—
—
Dimensional International Small Cap Index
16.8
-1.8
12.4
8.3
7.8
—
—
Dimensional International Small Cap Value Index
18.2
0.3
14.4
11.1
10.3
—
—
MSCI Emerging Markets Index
3 The return can be found where the first year’s column meets the last year’s row.
In this example, the Fama/French US Large Value Research Index
had a compound rate of return of 10.2% per year for the nine-year period.
—
Dimensional International Vector Index
Locate the row for the last year of the interval (2004).
2
Years are labeled at the beginning of each row.
—
Dimensional International Adjusted Market Index
1 Locate the column for the first year of the interval (1996).
Years are labeled at the top and bottom of each column.
—
MSCI EAFE Index
(net dividends)
18.6
-0.6
16.9
9.2
8.8
—
—
Dimensional Emerging Markets Adjusted Market Index
21.1
1.5
19.9
11.8
—
—
—
Dimensional Emerging Markets Growth Index
19.7
0.8
16.3
8.8
—
—
—
One-Month US Treasury Bills
0.1
0.4
1.7
2.5
3.0
5.2
3.6
Long-Term Government Bonds
3.3
9.3
7.5
7.9
8.6
7.5
5.8
(gross dividends)
Long-Term Corporate Bonds
10.7
10.5
7.8
7.9
8.1
7.7
6.2
Barclays US TIPS Index
7.0
7.0
6.7
7.3
—
—
—
One-Month Certificate of Deposit
0.2
0.8
2.0
2.9
3.4
—
—
Barclays US Aggregate Bond Index
4.2
5.9
5.2
6.0
6.3
—
—
Barclays Municipal Bond Index
6.8
5.9
5.1
5.4
6.0
—
—
Dimensional US Intermediate Variable Credit Index
8.8
7.1
5.9
6.4
6.7
—
—
Dimensional US Intermediate Variable Govt/Credit Index
5.4
5.9
5.1
5.9
6.1
—
—
Dimensional US Intermediate Variable Maturity Govt/Credit Index
3.9
5.2
4.7
5.6
5.9
—
—
Dimensional Global Intermediate Variable Maturity Index
4.8
6.2
5.5
6.4
7.1
—
—
US Consumer Price Index
1.7
1.8
2.4
2.4
2.4
4.1
3.7
DFA Fixed Balanced Strategy Index
1.1
2.5
2.9
4.0
4.5
—
—
DFA Conservative Balanced Strategy Index
4.7
2.9
4.8
5.1
6.0
—
—
DFA Moderate Balanced Strategy Index
8.4
3.0
6.6
6.1
7.3
—
—
12.1
2.8
8.2
6.9
8.5
—
—
DFA Normal Balanced Strategy Index
DFA Aggressive Balanced Strategy Index
15.8
2.4
9.7
7.6
9.6
—
—
DFA Equity Balanced Strategy Index
19.6
1.7
11.0
8.1
10.5
—
—
All returns are in US dollars. For balanced strategy weights, see page 58. For a detailed description of returns series, see page 66.
Past performance is no guarantee of future results.
Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.
8
For example, to find the annualized compound rate of return for
the Fama/French US Large Value Research Index for the interval 1996–2004:
D I M E N S I O N A L F U N D A D VI S O R S
2
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
1993
1
22.2 1994
7.3 -5.8 1995
16.3 13.4 36.6 1996
15.9 13.8 25.2 14.7 1997
18.1 17.1 25.9 20.8 27.3 1998
18.6 17.8 24.6 20.9 24.1 21.0 1999
15.5 14.4 19.0 14.9 15.0
9.3 -1.3 2000
16.0 15.1 19.0 15.8 16.1 12.6
8.6 19.5 2001
14.1 13.1 16.1 13.0 12.7
9.3
5.6
9.3
0.0 2002
9.4
8.1
9.9
6.6
5.3
1.4 -3.0 -3.6 -13.4 -25.0 2003
11.0
9.9 11.8
9.0
8.3
5.4
2.5
3.5 -1.4 -2.1 27.8 2004
11.7 10.8 12.6 10.2
9.7
7.4
5.2
6.6
3.6
4.8 23.9 20.1 2005
11.7 10.9 12.5 10.4
9.9
7.9
6.2
7.5
5.2
6.6 19.8 16.0 12.0 2006
12.6 11.8 13.5 11.6 11.3
9.6
8.2
9.7
8.1
9.8 20.8 18.6 17.8 24.0 2007
11.9 11.2 12.6 10.9 10.5
9.0
7.7
8.9
7.4
8.7 17.1 14.6 12.8 13.2
3.3 2008
7.7
6.8
7.8
5.9
5.2
3.3
1.7
2.1
0.1
0.1
5.0
1.0 -3.3 -8.0 -20.7 -39.1 2009
8.6
7.8
8.7
7.0
6.4
4.8
3.5
4.0
2.4
2.7
7.4
4.3
1.4 -1.1 -8.2 -13.5 22.9
8.7
7.9
8.8
7.2
6.7
5.2
4.0
4.5
3.1
3.5
7.7
5.1
2.8
1.1 -3.9 -6.2 16.4
7.8
7.0
7.8
6.3
5.7
4.3
3.2
3.5
2.2
2.4
6.0
3.6
1.4 -0.3 -4.5 -6.4
8.1
8.6
7.9
8.7
7.3
6.8
5.6
4.6
5.0
3.9
4.3
7.8
5.7
4.1
3.0 -0.1 -0.8 12.0
2010
10.2
1.4
8.7
2011
-6.8
7.9
2012
24.9
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
2010
2011
2012
3
MATR IX BOOK 2013
9