DFA’s investment strategy is based on their belief in the principle that stock market is efficient. They attempt to match a broad-based, value-weighted small-stock index and position themselves in the market as a passive fund manager that still claimed to add value by capturing specific dimensions of risks identified by financial science. DFA’s investment strategy incorporates elements of both passive and active management. It is passive in the sense that like many other index managers, it focuses on the importance of diversification, lower turnover and lower fees than actively managed portfolios. It is active in the sense that it develops its small-value stock focus based on academic research and uses certain techniques (such as its unique trading method in obtaining discounts and lower transaction cost) to contribute to a fund’s profits eve when the investment is inherently passive.
DFA’s clients are mainly major institutions (including corporate, government, union pension funds, college endowments and charities) and high-net-worth individuals. The main concern of their existing clients is potential high costs due to illiquid nature of many DFA holdings. DFA’s new product is a family of funds managed to reduce tax payments and the new clients it tries to serve are investors who are eventual taxpayers on any taxable flower received by a DFA fund they hold. To serve this new client base, DFA needs to continue its strength in keeping trading costs low and focus on reducing the taxes paid by clients. Some new issues that DFA will face include the complication of tax-optimization (such as handling the trade-off between putting more weight on non dividend-paying stocks and assuming more portfolio tracking error and volatility) as well as the possibility that tax management may lead to higher transactions costs.
Based on information given in the case, DFA accepts semi-form efficiency which indicates that stock prices fully reflect all past...
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