DFA Continental Small Company Portfolio

Class Inst (DFCSX)
Scorecard
4 / 5 Stars
Lipper
5 4 1 3 2
Zacks Investment Research
1 (Strong Buy)
Standard & Poor's
4 / 5 Stars
TheStreet.com
D+ (Sell)

#3 in Europe Stock

U.S. News evaluated 27 Europe Stock Funds. Our list highlights the top-rated funds for long-term investors based on the ratings of leading fund industry researchers.

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Performance

The fund has returned 41.47 percent over the past year, 10.37 percent over the past three years, 23.91 percent over the past five years, and 11.20 percent over the past decade.

Trailing Returns Updated 02.28.2014
Year to date 8.1%
1 Year 41.5%
3 Years (Annualized) 10.4%
5 Years (Annualized) 23.9%
10 Years (Annualized) 11.2%

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Summary

DFA Emerging Markets I fund isn’t trying to beat the market or even achieve long-term capital appreciation. Like other funds offered by Dimensional Fund Advisors, this one seeks to instead provide investors with concentrated exposure to a particular market sector—in this case smaller continental European stocks.

As of March 05, 2014, the fund has assets totaling almost $191.42 million invested in 1,199 different holdings. Its portfolio consists of a blend of value and growth stocks of micro-, small-, and mid-cap companies on the European continent.

DFA views its method as a quantitative form of investing. The company follows University of Chicago Professor Eugene Fama’s theories on “equilibrium” investing and efficient-market theory. Rather than trying to predict movements in the market or pick individual stocks based on future prospects, lead manager Karen Umland manages a team of researchers and traders that deal only stock fundamentals, disregarding all market and management information, among a particular basket of stocks. In effect, the fund offers investors pure exposure to small continental European stocks (you won’t find a single European emerging market here). Because the fund keeps stocks until they outgrow the criteria they were selected for, the fund holds the average stock for 14 years. Stocks are not sold because of market or country dynamics. The only actively managed part of the operation is that traders are given large selling windows, often several months, to close a position.

With more than 1,400 stocks and such a low turnover rate, the fund acts similarly to an index, and hews close to the MSCI European Ex UK Small Cap Index. Unlike the other DFA specialty funds, the Continental Small Company fund does not have limits on country allocations, so as of June 30, 2010, Switzerland and Germany made up roughly 30 percent of the entire portfolio, although it is underweight on the latter relative to the benchmark. It also differs from the benchmark by being overweight in Finland and underweight in Sweden, Norway, and Denmark. Because management doesn’t change course based on market uncertainties like actively managed funds, its portfolio has retained its benchmark’s weightings for the PIGS — the economies of Portugal, Ireland, Greece, and Spain that so worried investors in mid-2010.

The fund’s performance is closely in line with its emerging market peers but offers a low management fee. The fund has returned 41.47 percent over the past year and 10.37 percent over the past three years.

Investment Strategy

More so than some other DFA funds, the DFA Continental Small Company fund acts like an index by holding a large basket of Western European companies outside of the United Kingdom, chosen exclusively for their small market capitalizations regardless of their relative cheapness or growth prospects. Stocks are only sold when they no longer fit the criteria they were chose for in the first place. Managers don’t sell positions themselves. Instead, they give a separate group of traders a large selling window—as much as four months—to exit a position in order to reduce trading costs. The fund holds a stock for seven years, on average. The strategy is not to beat any index, but rather to give the sophisticated investor solid exposure to smaller mainland European companies.

“We’re all about capturing the market rate of return wherever it is,” points out Weston Wellington, a vice-president at DFA. “It’s up to the investor to decide, ‘what is the appropriate exposure for me in my portfolio?’”

Role in Portfolio

Morningstar recommends the fund play a specialty role in your portfolio.

Management

This is one of several international funds run by Karen Umland. She has managed the fund since early 1999. Portfolio managers Stephen Clark, Joseph Chi, and Jed Fogdall, who have worked on other DFA funds with Umland for years, became official co-managers of the fund in February 2010. Management differs from most other funds, because Umland and her team do not pick stocks, per say, but rather offer focused exposure to continental European small companies.

Fees

DFA Continental Small Company Portfolio has an expense ratio of 0.58 percent.

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Risk

The fund’s entire portfolio is in European small- and mid-caps and could suffer if this sector of the market underperforms large caps going forward. Because DFA doesn’t pay attention to company management, prospective earnings, or economic outlooks, the fund could lose ground to actively managed peers that shun unstable economies and companies. Additionally, small caps tend to succumb to larger market swings than large caps. Investors only have access to the fund through DFA-approved financial advisors.

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