Dimensional Earns Elite Status with Upgraded Morningstar 'Parent' Rating

Over the years, Morningstar's analysts have continued to fine-tune their reviews of individual stock and bond funds. The formats used in the past tended to be fairly basic -- each portfolio was considered in terms of relative performance, risk, style and turnover data. Write-ups of methodologies for constructing and running funds were complemented with assessments of how well fund managers tracked their indexes or executed on a mandated investment strategy. 

Since helping to open a retail market for independent mutual funds portfolio research in the mid-1980s, however, Morningstar's analysis has been incrementally sharpened to include grades of entire fund families. Nowadays, these overarching reviews of a company's management of its investment lineup are offered alongside each report on a particular fund's performance-related metrics. 

More recently, the research shop has upgraded its analysis through so-called Parent Pillar ratings. And one of the few fund companies to get Morningstar's top grade is Dimensional Fund Advisors. "At this point, only five firms have met our lofty standards for a High Parent rating," noted Russel Kinnel, director of manager research for Morningstar, in a research note.¹  

Besides Dimensional, or DFA as it's commonly known, the four other fund complexes getting Morningstar's top Parent Pillar rating are: Vanguard, Dodge & Cox, American Funds and T. Rowe Price. 

Of course, Vanguard was started by a pioneer in retail index funds, John Bogle. It has over the years, though, moved aggressively into actively managed funds. As we've written in the past, this split in business priorities is one reason why our preferred funds provider is DFA, given its focus on serving investors through passive strategies. 

It's also worth pointing out that Morningstar was founded by Joe Mansueto, a former securities analyst at active management firm Harris Associates. As a result, we're not surprised that other than DFA, all of the other best-in-class winners are major players in active management. 

This makes such recognition by a large independent investment research firm even more newsworthy to the investment committee at Index Fund Advisors. In our view, there's simply little statistical evidence after studying mathematically significant sets of market data for Vanguard or any other fund complex to resort to active management -- other than to make higher fees off uneducated and unsophisticated investors. 

"Dimensional Fund Advisors continues to be an outstanding steward of its shareholders' capital … co-CEOs David Butler and Gerard O'Reilly oversee a strong culture focused on market efficiency and transaction cost management," writes Morningstar analyst Daniel Sotiroff in a separate fund review.²  

In addition, he highlights the fact that Dimensional's investment strategies are "rooted in research from the top minds in financial academia." That's important, Sotiroff suggests, since DFA's researchers apply "a rigorous vetting process when developing new strategies or modifying existing ones."

As a result, he sees the fund company's strategies as being monitored internally and new ideas "must be exploitable in a well-diversified, low-turnover and cost-effective manner."

By virtue of such an evidence-based and objective process, Sotiroff notes that at DFA "changes to existing strategies and the introduction of new funds are rare when they do occur."

Investors should also be aware, he writes, that retention rates for Dimensional's managers are high and the firm uses a multi-manager approach. "This team-oriented structure," Sotiroff states, "maintains continuity and minimizes any potential issues that could arise when managers depart." 

Given such a scientific and rigorous methodology, the veteran Morningstar analyst also highlights in his reviews of the fund company that it requires investors to access such strategies through an approved investment advisor or platform. "Limited access acts like a barrier that protects funds from short-term trading, which can increase trading costs and harm the interests of long-term shareholders," Sotiroff notes. 

In explaining the research shop's development of its Parent Pillar ratings system, Morningstar analyst Kinnel warns investors against considering funds used in their portfolios in isolation. He asks: "If it has the right combination of manager, strategy and fees, is parent so important?" Kinnel then answers: "Well, yes, in the long run, it is, and mutual funds are long-term investments."

As part of assessing a company's culture and ethical standards in managing funds with a focus on an investor's best interests, Morningstar regularly visits with corporate decision makers and makes onsite visits, according to Kinnel. The idea, he added, is to "understand where a firm is headed, what its values are and how much talent it has beyond the portfolio managers' desks."

Dave Butler Co-Chief Executive Officer and Dimensional Director

Gerard K. O'Reilly Co-Chief Executive Officer, Chief Investment Officer, and Dimensional Director

1. Morningstar, Russel Kinnel, "The Best Fund Companies and Their Ratings," Jan. 28, 2020.
2. Morningstar, Daniel Sotiroff, Parent Review, Dec. 12, 2019. 

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