Improving The Performance Of A Portfolio Of DFA Funds
Seeking Alpha Analyst Since 2010
The funds in the DFA family, recently highlighted in a number of articles on SA, have provided good returns since their inception, but, unfortunately, not without large drawdowns. Here I describe a quarterly rebalancing strategy of a portfolio of DFA funds and VFINX (the S&P 500 fund from Vanguard) that appears to considerably reduce the volatility without effecting the returns.
To the basket of stock funds: VFINX, DFLVX, DFSTX, DFSVX, and DFREX , I add the bond fund VBMFX, which is based on the Barclay's Aggregate Bond Index.
The basic strategy is described elsewhere ( seekingalpha.com/instablog/709762-varan/... ). It invests in three separate tranches, each with a different pair of evaluation and investment periods, and at the beginning of every quarter the funds are commingled and divided equally among the three tranches.
For each tranche I select the three stock funds that performed the best during the immediately preceding evaluation period, and if any of the funds performed worse that the bond fund, it is replaced by the bond fund. The allocation to each of the selected funds in each tranche is then computed by means of the risk parity algorithm that uses the variance matrix computed from the daily returns during the evaluation period.
The equity curve for the strategy is compared with that of the various stock funds in the following figure.
As shown in the figure, and in the table below, the various performance metrics for the strategy for the period under study (1997-2013) are better than those for each of the components of the basket.
Fund |
CAGR (%) |
Standard Deviation (%) |
Max. Draw-down (%) |
Sharpe Ratio |
Sortino Ratio |
VFINX |
7.4 |
16.0 |
51 |
.38 |
.60 |
DFLVX |
9.4 |
18.9 |
61 |
.45 |
.71 |
DFSTX |
10.5 |
21.3 |
55 |
.47 |
.78 |
DFSVX |
12.1 |
21.2 |
61 |
.53 |
.88 |
DFRESX |
9.2 |
21.5 |
69 |
.41 |
.67 |
Strategy |
12.9 |
11.6 |
23 |
.90 |
1.67 |
The Manhattan asset allocation diagram and the raw allocation diagram are shown in the following figures.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: This is not investment advice in any shape or form.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.