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I believe Larry Swedroe has been recommending this rather new Bridgeway small cap value fund. Unless he has a vested interest, I don't understand why he would be pushing this one, although I feel Bridgeway is one of the better fund companies. Any thoughts?
JL: In terms of indexing, do you believe in straight market cap indexing, or do you use some of the alternative indexing strategies that have gained popularity in recent years such as Rob Arnott's RAFI indexes, or equal weight indexes offered by companies like Rydex?
LS: We like DFA's funds because they take the benefits of indexing and enhance them. Benefits like low turnover, tax efficiency, exclusion of groups of companies with certain negative characteristics.
In terms of Arnott, I've looked at the research and I'm convinced there's nothing there. All it is is a size and value tilt. And because he reconstitutes annually, he's losing exposure to the risk factors over the year. He's getting less value over the year. In contrast, DFA reconstitutes their indexes daily. We use the TM Bridgeway Small-Cap Value Fund (BOSVX) which is similar to the RAFI funds but it's reconstituted monthly.
JL: So you think you're getting alpha over a standard cap-weighted small-cap fund with BOSVX?
LS: I think we're getting more exposure to the value risk effects. It's not alpha per se. When you go deeper into value and deeper into small caps, you get higher expected returns (but more risk), but the higher expected returns you pick up allow you to lower your exposure to beta (stocks) at the same time, thus keeping the portfolio's expected return the same. However, that combination reduces the portfolio's potential dispersion of returns, cutting the risk of the fat tails (it cuts both good and the bad fat tails). Since almost all investors would prefer the potential dispersion of returns to have more of the weight of the returns to be close to the middle, and less risk of the tails showing up, this becomes a more attractive way to build portfolios.
As for the Omni version vs Standard Bridgeway sold version, has lower ER and (I speculate that) Larry having a company is able to access that at a lower minimum.
If you have more questions on why he likes these, he frequently answers questions at http://Bogleheads.org
Comments
http://seekingalpha.com/article/262546-the-active-quest-for-alpha-a-loser-s-game As for the Omni version vs Standard Bridgeway sold version, has lower ER and (I speculate that) Larry having a company is able to access that at a lower minimum.
If you have more questions on why he likes these, he frequently answers questions at http://Bogleheads.org