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Is There a Manager Risk Premium?

8,522
by IFA Contributors
Friday, June 20, 2014

A risk premium is the return in excess of a reference rate that an investment is expected to provide. At Index Funds Advisors, Inc., we often speak of three different equity-related risk premiums. First, the market risk premium is the expected excess return of the total ...Read More

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  • Tough Times for the Bond King

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    by Mark Hebner and IFA Contributors — Thursday, June 19, 2014

    While patience is a virtue, it appears to be one that is not possessed by many investors in actively managed funds. It is this difficult lesson that PIMCO’s Bill Gross aka “The Bond King” has had to learn lately. According to this article/video, the PIMCO Total ...Read More

  • FINRA Calls Out Merrill Lynch

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    by Mark Hebner and IFA Contributors — Thursday, June 19, 2014

    When reviewing retirement plans for our clients or for retirement plan sponsor clients, we often see the presence of mutual funds with front-end loads (Class A shares). However, we have always made the assumption that the load is waived for retirement plan accounts, but after ...Read More

  • Passive vs. Active: Yet another Milestone Is Reached

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    by Mark Hebner and IFA Contributors — Monday, June 16, 2014

    According to this Bloomberg article, Vanguard just passed up Fidelity to become the number one provider of 401(k) assets, thus continuing the long-term trend of migration from passive to active that we have documented in several articles such as this one. The current size of the ...Read More

  • The NACUBO Study

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    by Mark Hebner — Thursday, June 12, 2014

    You may think that college endowments, with all their access to academic knowledge and brainpower, would regularly hit home runs. You would be ...Read More

  • A Graphical View of the Mutual Fund Landscape

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    by Mark Hebner and IFA Contributors — Wednesday, June 11, 2014

    Since IFA began operations in 1999, we have published articles detailing how incredibly stacked the odds are against successfully picking a manager who will beat his benchmark (i.e., deliver alpha). See here and here for recent examples. However, as we like to say at IFA, a good ...Read More

  • Tough Times for Alternative Investment Strategies and Hedge Funds

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    by Mark Hebner and IFA Contributors — Tuesday, June 10, 2014

    At Index Fund Advisors, we are always distressed when we read articles such as this one that discusses a state pension plan increasing its exposure to alternative investments (i.e., investments beyond stocks, bonds, and real estate). A recent article in the Wall Street Journal ...Read More

  • Q&A with IFA: Dividends—Is Bigger Better?

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    by Mark Hebner and IFA Contributors — Friday, June 6, 2014

    Question: Does an equity strategy focusing on stocks with above-average dividend yield offer an appealing risk/reward tradeoff? Have dividend-paying stocks outperformed non-dividend payers in the U.S.? Note: The question above was taken from DFA’s Fama/French Forum. Here ...Read More

  • Q&A with IFA: Expected Returns and Socially Responsible Investing

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    by Mark Hebner and IFA Contributors — Wednesday, June 4, 2014

    Question: Are expected returns for "socially responsible" strategies lower compared to a conventional approach? Note: The question above was taken from DFA’s Fama/French Forum. Professors Fama and French gave this response: “Our paper, "Disagreements, Tastes, ...Read More

  • Q&A with IFA: Cap Weighting or GDP Weighting

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    by Mark Hebner and IFA Contributors — Wednesday, June 4, 2014

    Question: What is the merit, if any, in using a country weighting scheme based on Gross Domestic Product (GDP) rather than market capitalization? Note: The question above was taken from DFA’s Fama/French Forum. Professors Fama and French gave this brief response: ...Read More

  • Q&A with IFA: Seeking the Inefficient Asset Class

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    by Mark Hebner and IFA Contributors — Tuesday, June 3, 2014

    Question: We often hear the claim that some markets are less efficient than others—small company stocks, emerging markets, foreign exchange, and so on. Is there any evidence to support this assertion? Note: The question above was taken from DFA’s Fama/French Forum. ...Read More

  • Q&A with IFA: Are Monthly Stock Market Returns Normally Distributed?

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    by Mark Hebner and IFA Contributors — Monday, June 2, 2014

    Question: Are Monthly Stock Market Returns Normally Distributed? What is the best way to describe the distribution of stock market returns—a normal distribution, lognormal, or something else? What should investors do with this information? Note: The question above was ...Read More

  • Dimensional Bond Funds—Doing What They Are Supposed to Do

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    by Mark Hebner and IFA Contributors — Monday, May 19, 2014

    What is the proper role of fixed income in a diversified portfolio? As far as we at Index Fund Advisors are concerned, fixed income performs two vital functions. First, it dampens the volatility of the equity side of the portfolio which facilitates the adjustment of the overall ...Read More

  • When Reality Confronts Investor Expectations

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    by Mark Hebner and IFA Contributors — Wednesday, May 14, 2014

    A recent survey of 1,050 American investors conducted by Natixis Global Asset Management found that they said they needed average annual returns of 9.8% above inflation to meet their financial needs such as providing income in retirement, housing expenses, and health care ...Read More

  • The American Enterprise Institute Honors Eugene Fama

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    by Mark Hebner and IFA Contributors — Monday, May 12, 2014

    The American Enterprise Institute for Public Policy Research (AEI) is a private not-for-profit think tank whose stated mission is "to defend the principles and improve the institutions of American freedom and democratic capitalism—limited government, private ...Read More

  • Do Active Investors Have a Gambling Problem?

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    by Mark Hebner and IFA Contributors — Wednesday, May 7, 2014

    Index Fund Advisors’ 12-Step Program for Active Investors suggests that active investing is a disease akin to alcoholism, drug addiction, or gambling addiction. While we certainly do not say that all active investors suffer from an addiction that requires treatment, we ...Read More

  • IFA's Scientific Approach to Investing

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    by Mark Hebner and IFA Contributors — Tuesday, May 6, 2014

    Since its inception, Index Fund Advisors has always strived to take a scientific or academic approach to investing. We follow the evidence (i.e., long-term returns data) to wherever it leads us and we live by the Latin motto of the Royal Society, “Nullius in ...Read More

  • Manager Picking is a Mug's Game

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    by Mark Hebner and IFA Contributors — Friday, May 2, 2014

    The search for investment managers who will deliver alpha is an activity that accounts for billions of dollars that is spent by foundations, endowments, pension plans, and other institutional investors. To determine if these dollars are well-spent, it is fair to ask how ...Read More

  • Risk Aversion vs. Ambiguity Aversion and 401(k) Plans

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    by Mark Hebner and IFA Contributors — Thursday, May 1, 2014

    In a news briefing regarding Saddam Hussein’s weapons of mass destruction before the invasion of Iraq, former Defense Secretary Donald Rumsfeld famously stated: “Reports that say there’s—that something hasn’t happened are always interesting to me, ...Read More

  • Small-Cap Face-Off: Russell 2000 vs. S&P 600

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    by Mark Hebner and IFA Contributors — Thursday, May 1, 2014

    Investors who decide to index the small-cap portion of their portfolios face a bewildering array of choices from index mutual funds and exchange-traded funds (ETFs) that track indexes from providers such as Russell, S&P Dow Jones, MSCI, and Morningstar. At Index Fund ...Read More

  • Capturing the Momentum Factor—Simple but Not Easy

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    by Mark Hebner and IFA Contributors — Tuesday, April 22, 2014

    Last year, we wrote this article about momentum, which as the name suggests, is the tendency of securities that have outperformed (or underperformed) the market over a three- to twelve-month period to continue to outperform (or underperform) the market. In other words, momentum ...Read More

  • When a Negative Is Actually a Positive

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    by Mark Hebner and IFA Contributors — Monday, April 21, 2014

    Last week, BlackRock Inc, the world’s largest money manager released its quarterly earnings report for the first quarter of 2014. Normally, we don’t pay much attention to these things, but something caught our eye in this Reuters story that we thought was worth ...Read More

  • Pension-Gate Continues: Some Good Advice for the Hawkeye State

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    by Mark Hebner and IFA Contributors — Thursday, April 17, 2014

    At Index Fund Advisors, we are always gratified to read articles such as this one which give a good airing of the arguments in favor of indexing pension funds for public employees. One fund that would clearly benefit is the $27 billion Iowa Public Employees’ Retirement ...Read More

  • Connecting the Dots

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    by Jim Parker, Dimensional Fund Advisors — Thursday, April 17, 2014

    Human beings love stories. But this innate tendency can lead us to imagine connections between events where none really exist. For financial journalists, this is a virtual job requirement. For investors, it can be a disaster. “The Australian dollar rose today after Westpac ...Read More

  • The Problem of High 401(k) Costs

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    by Mark Hebner — Monday, April 14, 2014

    In December of 2012, Demos, a liberal think tank, published The Retirement Savings Drain—The Hidden and Excessive Costs of 401(k)s. It caused quite a stir and provided much of the source material for the PBS Frontline Documentary, The Retirement Gamble. Recently, another ...Read More

  • Will "Go-Anywhere Funds" Get You to Your Destination?

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    by Mark Hebner — Monday, April 14, 2014

    When discussing the issue of style drift with prospective clients, we commonly hear an objection that goes something like, “Why should I care where my fund manager chooses to invest, as long as he is picking the asset class and securities with the highest returns?” ...Read More

  • When Mythology Is Confused with Reality

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    by Mark Hebner and IFA Contributors — Friday, April 11, 2014

    In the investment industry, the term “white paper” carries a lot of currency. As for what distinguishes an ordinary article from a full-fledged white paper, it is usually just a matter of length or the number of charts included. It is important to bear in mind that ...Read More

  • Morningstar Takes a Closer Look at Survivorship Bias

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    by Mark Hebner and IFA Contributors — Wednesday, April 9, 2014

    One of the problems with commonly cited mutual fund returns data is that it ignores the issue of survivorship bias, the tendency for mutual funds with poor performance to be merged into other funds or shut down. Specifically, if we look at the ten-year average returns of all ...Read More

  • The Gadfly from Yale Continues to Buzz the 401(k) Industry

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    by Mark Hebner and IFA Contributors — Tuesday, April 8, 2014

    Last year, we wrote about the exploits of Professor Ian Ayres of Yale Law School. You may recall him as the fellow who sent letters to 6,000 plan sponsors whom he identified as having especially high expenses. Essentially, he gave them an ultimatum to improve their plan or else ...Read More

  • Seven Ways to Fool Yourself

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    by Jim Parker — Tuesday, April 8, 2014

    The philosopher Ludwig Wittgenstein once said that nothing is as difficult for people as not deceiving themselves. But while most self-delusions are relatively costless, those relating to investment can come with a hefty price tag. We delude ourselves for a number of reasons, ...Read More

  • The First Quarter of 2014 in Review

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    by Mark Hebner and IFA Contributors — Friday, April 4, 2014

    In the first quarter of 2014, risk was rewarded, but not to the extent to which we may have become accustomed to in 2013. With the exception of emerging markets and emerging markets value, all of the specific IFA indexes had a positive return. The strongest showing came from ...Read More

  • How Concerned Should You Be about a "Rigged" Stock Market?

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    by Mark Hebner and IFA Contributors — Wednesday, April 2, 2014

    Unless you have been hiding under a rock the past few days, you have doubtlessly heard about Michael Lewis’s new book, Flash Boys: A Wall Street Revolt. Perhaps you saw the Sixty Minutes interview of Lewis along with the primary protagonist of the book, Brad Katsuyama, or ...Read More

  • The 4% Retirement Spending Rule: Is It Still Relevant?

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    by Mark Hebner and IFA Contributors — Monday, March 31, 2014

    The 4% retirement spending rule was developed 20 years ago by William P. Bengen, a financial planner who published his results in the Journal of Financial Planning. Essentially, the 4% rule says that retirees who begin with spending 4% of their portfolio and increase their ...Read More

  • International Diversification vs. Home Bias

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    by Mark Hebner and IFA Contributors — Tuesday, March 25, 2014

    In a recent article on the concept of advisor's alpha, Vanguard emphasized the importance of advisor’s putting their clients into portfolios that they are unlikely to trade under varying market conditions. One of the important factors affecting client’s tendencies to ...Read More

  • Confessions of an Active Manager

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    by Mark Hebner and IFA Contributors — Monday, March 24, 2014

    Recently, one of our fans in India sent us a fascinating article by his fellow countryman, Mehrab Irani who has had the responsibility of managing active mutual funds for a large fund family. As we have noted in prior articles, indexing in India is still in an emerging stage, ...Read More

  • How Smart is Your Beta?

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    by Mark Hebner and IFA Contributors — Sunday, March 23, 2014

    At Index Fund Advisors, we are always keeping an ear out for new terminology that appears in the investment marketplace. Recently, there has been a lot of talk about “smart beta”. Recall that beta, in its strictest sense, refers to the degree of market exposure or ...Read More

  • A New Low for CNBC

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    by IFA Contributors — Friday, March 21, 2014

    With nothing better to do the other night, I decided to try out CNBC’s new series, Money Talks, a reality show that follows the antics of one Steve Stevens and his company VIP Sports of Las Vegas which describes itself as a consulting firm to sports bettors. A ...Read More

  • Consumer Price Index and Consumption

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    by Mark Hebner and IFA Contributors — Tuesday, March 18, 2014

    Economists discuss the choices people make with their income as some allocation of consumption and savings. They remind us that we apply our human capital (our skills and time) to earn financial capital (our income or wages) and that we then need to divide that money up into ...Read More

  • The Continuing Wisdom of the Oracle of Omaha

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    by Mark Hebner and IFA Contributors — Monday, March 17, 2014

    “Games are won by players who focus on the playing field -- not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.” ...Read More

  • Capturing Portfolio Returns: Simple but not Easy

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    by Mark Hebner and IFA Contributors — Friday, March 14, 2014

    Throughout the IFA Website, you will find long-term historical returns of the IFA Index Portfolios and the asset classes that make up those portfolios. One example is the table of Simulated Passive Investor Experiences shown below for Index Portfolio 60. The highlighted line on ...Read More

  • Pension-Gate Continues: North Carolina is on Notice

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    by Mark Hebner and IFA Contributors — Thursday, March 13, 2014

    Those of you who are long-time followers of ifa.com are probably aware of the attention we have given to the very large problem of mismanagement of public pension plan funds. Thanks to diligent research that has produced reports such as this one from the Maryland Public Policy ...Read More

  • Advisor Alpha: Vanguard Estimates 3% Excess Return from Passive Advisors

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    by Mark Hebner and IFA Contributors — Wednesday, March 12, 2014

    A little more than a month ago, we published this article that introduced the concept of advisor’s alpha as the value added by passive advisors who adhere to the principles of controlling costs, maintaining discipline, and tax awareness. We also noted that Vanguard’s ...Read More

  • The Big Tease Continues

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    by Mark Hebner and IFA Contributors — Tuesday, March 11, 2014

    Take a walk past the financial section of your local newsstand, and you are likely to be greeted with headlines like “Ten Hot Stock Picks for 2014!” or “The Top Ten Mutual Funds to Buy Today!” or getting more directly to the point, “Make Money ...Read More

  • A Brief History of the Efficient Markets Hypothesis

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    by Mark Hebner and IFA Contributors — Monday, March 10, 2014

    In 2008, Nobel laureate Eugene Fama delivered a brief lecture to the American Finance Association. The entire 30-minute video is included above, and it is well worth an investment of your time. Fama was introduced by his son-in-law and colleague, John Cochrane, who explained ...Read More

  • When It Pays to Be Patient

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    by Mark Hebner and IFA Contributors — Tuesday, February 25, 2014

    One of the reasons that Index Fund Advisors advises the use of Dimensional funds is their patient and opportunistic approach to trading which differentiates them from traditional index fund providers. All too often, managers of traditional index funds require immediacy in their ...Read More

  • The Gambler's Fallacy and the Misuse of the Law of Large Numbers

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    by Mark Hebner and IFA Contributors — Friday, February 21, 2014

    If you have ever spent any time in a casino, it is likely that you have seen supposedly random events that appeared to be non-random. Perhaps the roulette wheel came up red seven times in a row, for example. If your reaction was to place a large bet on ...Read More

  • The Tax Treatment of Investment Management Fees

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    by Mark Hebner and IFA Contributors — Thursday, February 20, 2014

    Around this time of the year, we are frequently asked about the tax deductibility of investment management fees. The answer, like most things related to the tax code, is not a simple one. In general, when paid out of a taxable account, investment management fees are a ...Read More

  • The SAC Insider Trading Scandal—Yet Another Domino Falls

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    by Mark Hebner and IFA Contributors — Thursday, February 6, 2014

    Mathew Martoma, a former SAC Capital Advisors portfolio manager, was convicted today of helping his company earn more than a quarter billion dollars illegally through trades based on material, non-public information about the testing of a potentially promising drug for ...Read More

  • The Golden Ticket Trap

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    by Jim Parker — Thursday, February 6, 2014

    In a popular children’s story, the young hero pins all his hopes on finding one of a handful of “golden tickets” hidden among millions of candy bars. It seems many people approach investing the same way. The notion that the path to long-term wealth lies in ...Read More

  • Are Investors Irrational When It Comes to American Funds?

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    by Mark Hebner and IFA Contributors — Monday, February 3, 2014

    A recent edition of the Rekenthaler Report from Morningstar would have us believe that American Funds have suffered investor withdrawals due to a guilt-by-association with active management which has increasingly come under fire from both academia and from key players in the ...Read More

  • 2013: A Record Year for Indexing

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    by Mark Hebner and IFA Contributors — Friday, January 31, 2014

    At Index Fund Advisors, we are always delighted to see articles such as this one from Bloomberg.com which shows the unabated march of indexing across the investment universe. For 2013, investors poured in a record $115 billion into index mutual funds, almost double the previous ...Read More

  • Mark Hebner and IFA Contributors

    IFA.tv - 2013 Q4 Market Review Show 111

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    by Mark Hebner and IFA Contributors — Thursday, January 30, 2014

    Overall, it was a very good quarter for equities, the one exception being real estate investment trusts (REITs) which were down 1%. U.S. bonds were down slightly, but Global bonds showed a gain of 0.44%.   The quarter began with the shutdown of the U.S. government which ...Read More

  • The Alleged Inefficiency of Emerging Markets and Other Baloney

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    by Mark Hebner and IFA Contributors — Wednesday, January 29, 2014

    At Index Fund Advisors, we often hear from people all over the world who express an interest in the investment principles that we espouse. This pleases us greatly, as we have always felt that the benefits of index investing should not be limited to American investors. Recently, ...Read More

  • SEC Issues Risk Alert on Alternative Investments

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    by Mark Hebner and IFA Contributors — Tuesday, January 28, 2014

    At Index Fund Advisors, we have never advised our clients to engage with alternative investments such as hedge funds, private equity funds, or funds of private funds. A recent alert from the Securities and Exchange Commission (SEC) reinforces our stance. The alert addresses the ...Read More

  • Advisor Alpha: The View from Vanguard

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    by Mark Hebner and IFA Contributors — Monday, January 27, 2014

    At Index Fund Advisors, we have repeatedly cautioned investors to avoid getting ensnared in the never-ending pursuit of alpha by either picking stocks or hiring an active manager to pick stocks on their behalf. Nevertheless, by engaging in a few prudent practices such as ...Read More

  • Morningstar's Fund Managers of the Year

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    by Mark Hebner and IFA Contributors — Wednesday, January 22, 2014

    Can you hear it? That is the sound of millions of index fund investors yawning in response to Morningstar’s announcement of its Fund Managers of the Year for 2013. That recent performance weighs very heavily in the awarding of this distinction is evidenced by the fact that ...Read More

  • Comments on Barron's Dimensional Fund Advisors Profile [VIDEO]

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    by Mary Brunson and Mark Hebner — Friday, January 17, 2014

    "Active management is a zero-sum game, and that's before costs. That's not opinion, that's math." --Eugene Fama, 2013 Nobel Prize in Economics, Professor of Finance, Chicago Booth, as quoted in Barron's, "A New Dimension", January 4, 2014   Market Dimensions Eugene ...Read More