Disclosures for the Backtested Performance of Model Index Portfolios and Indexes

  1. Past performance does not guarantee future results. There is a potential for loss in any investment. Index Fund Advisors, Inc. (IFA) does not guarantee any minimum level of investment performance or the success of any index portfolio or investment strategy. All investments involve risk and investment recommendations will not always be profitable.

  2. Index Fund Advisors, Inc. (IFA) is an SEC registered Investment Adviser. Information pertaining to IFA’s advisory operations, services, and fees is set forth in IFAs’ current Form ADV Part 2 (Brochure), a copy of which is available upon request and at www.adviserinfo.sec.gov. The performance information presented in certain charts or tables represent backtested performance based on a combination of simulated index data and live (or actual) mutual fund results from January 1, 1928 to the period ending date shown, using the strategy of buy and hold and annually rebalancing on the first of each year the globally diversified portfolios of indexes. Backtested performance is hypothetical (it does not reflect trading in actual accounts) and is provided for informational purposes only to indicate historical performance had the index portfolios been available over the relevant time period. IFA refers to this hypothetical model portfolio data as a Simulated Passive Investor Experience (SPIE). IFA did not offer the index portfolios until November 1999. Prior to 1999, IFA did not manage client assets. The IFA indexing investment strategy is based on principles generally known as Modern Portfolio Theory and the Fama and French Four Factor Model for Equities and Two Factor Model for Fixed Income. Index portfolios are designed to provide substantial global diversification in order to reduce investment concentration and the resulting potential increased risk caused by the volatility of individual companies, indexes, or asset classes. There are limitations inherent in model results, particularly that model returns do not reflect actual trading and may not reflect the impact that material economic and market factors may have had on the adviser’s decision-making had the adviser actually managed client funds.

  3. A review of the IFA Index Data Sources (ifaindexes.com), IFA Indexes Time Series Construction (http://www.ifa.com/disclosures/charts/#timeseries) and several of the Dimensional Indexes (http://www.ifa.com/disclosures/charts/#dfafunds) is an integral part of this disclosure and should be read in conjunction with this explanation of backtested performance information presented. IFA defines index funds as mutual funds that follow a set of rules of ownership that are held constant regardless of market conditions. An important characteristic of an index fund is that its rules of ownership are not based on a forecast of short-term events. Therefore, an investment strategy that is limited to the buying and rebalancing of a portfolio of index funds is often referred to as passive investing, as opposed to active investing. Simulated index data is based on the performance of indexes and live mutual funds as described in the IFA Indexes Data Sources page. The index mutual funds used in IFA’s Index Portfolios are IFA’s best estimate of a mutual fund that will come closest to the index data provided in the simulated indexes. Simulated index data is used for the period prior to the inception of the relevant live mutual fund data and an equivalent mutual fund expense ratio is deducted from simulated index data. Live (or actual) mutual fund performance is used after the inception date of each mutual fund. The IFA Indexes Times Series Construction goes back to January 1928 and consistently reflects a tilt towards small cap and value equities over time, with an increasing diversification to international markets, emerging markets and real estate investment trusts as data became available. As of January 1928, there are 4 equity indexes and 2 bond indexes; in January 1970 there are a total of 8 indexes, and there are 15 indexes in March 1998 to present. See (https://www.ifa.com/disclosures/charts/#IFA_evolution) to see the analysis of the evolution of these portfolios. This names the indexes used in the IFA Portfolios for each period, and shows the Time Series Construction of the IFA indexes. If the original 4 equity indexes from 1928 (IFA US Large Company Index; IFA US Large Cap Value Index; IFA US Small Cap Index; IFA US Small Cap Value Index) are held constant until December 2015, the annualized rate of return of this simplified version of IFA Index Portfolio 100 was 11.06%, after the deduction of a 0.9% IFA advisory fee and a standard deviation of 23.11%. The evolving IFA Indexes over the same period had a 10.98% annualized return for IFA Index Portfolio 100 after the same IFA advisory fees and a standard deviation of 22.37%. The stitching together of index and live fund data and adding international markets, emerging markets and REITs only had a slight impact on risk and return over this 88 year period. Instead, it demonstrates the value of a small cap and value tilt in global equity markets, since over the same period a Simulated S&P 500 Index had a return of 9.72% (with no fees deducted), at a standard deviation of 18.96%. Backtested performance is calculated by using a computer program and monthly returns data set that start with the first day of the given time period and evaluates the returns of simulated indexes and DFA index mutual funds. In 1999, tax-managed funds became available for many different DFA index funds. The tax-managed funds are not used in calculating the backtested performance of the index portfolios, unless specified in the table or chart. Whenever the term IFA Index Portfolio Value Data is used, it is based on a starting value of one, as of January 1, 1928.

  4. Backtested performance does not represent actual performance and should not be interpreted as an indication of such performance. Actual performance for client accounts may be materially lower than that of the index portfolios. Backtested performance results have certain inherent limitations. Such results do not represent the impact that material economic and market factors might have on an investment adviser’s decision-making process if the adviser were actually managing client money. Backtested performance also differs from actual performance because it is achieved through the retroactive application of model portfolios (in this case, IFA’s Index Portfolios) designed with the benefit of hindsight. As a result, the models theoretically may be changed from time to time and the effect on performance results could be either favorable or unfavorable. The next section includes details of changes in the models since inception.

  5. History of Changes to the IFA Indexes: 1992-2000: IFA’s Original Index Portfolios 10, 30, 50, 70 and 90 were suggested by Dimensional Fund Advisors (ifa.com/pdf/balancedstrategies.pdf), merely as an example of globally diversified investments using their custom index mutual funds, back in 1992 with moderate modifications in 1996 to reflect the availability of mutual funds that tracked the emerging markets asset class. Index Portfolios between each of the above listed portfolios were created by IFA in 2000 by interpolating between the above portfolios. Portfolios 5, 95 and 100 were created by Index Fund Advisors in 2000, as a lower and higher extension of the DFA 1991 risk and return line. On March 1, 2010, 100 IFA Index Portfolios became available to IFA clients, with IFA Index Portfolios between the shown allocations being interpolations of the 20 allocations shown. In January 2008, IFA introduced three new indexes and eighteen socially responsible portfolios constructed from these three indexes and five pre-existing IFA indexes. The new indexes introduced were: IFA US Social Core 2 Equity Index, IFA Emerging Markets Social Core Index, and IFA International Real Estate Index. All three use live DFA fund data as long as it has been available. Prior to live fund data, they use index data supplied by DFA modified for fund management fees. In April 2008, IFA introduced two new indexes and eighteen sustainability portfolios constructed from these two indexes and five pre-existing indexes. The new indexes introduced were: IFA US Sustainability Core 1 Equity and IFA International Sustainability Core Equity. In November 2011, IFA made a change to the index data used in its large growth and small growth indexes. Fama/French data was replaced with data supplied by Dimensional Fund Advisors via its Returns 2.2 program. For large growth, the difference in annualized return was about minus 1%. For small growth, the difference was about 0.2%. In November 2012, IFA changed the allocations and the historical returns for its socially responsible portfolios to reflect the introduction of the DFA International Social Core Equity Portfolio (DSCLX). Prior to this, the international developed equity asset class was unavailable in a socially responsible implementation. Although clients who were invested in the old allocation from the time it became available (January 2008) likely did better than they would have done with the new allocation, the difference is not statistically significant, and it is IFA’s advice that going forward having an exposure to international developed equities will provide a diversification benefit to socially responsible investors. As of September 2013, all new clients will be placed into the NEW IFA Index Portfolios, and all existing clients will be given the option to transition to the new portfolios. Index Portfolio 100 was held the same as it has been since 2000 and became the only 100 percent equity portfolio in the NEW Index Portfolios. The four fixed income indexes (25% each) remain the same as they have been since 2000 and will make up the fixed income allocation of all IFA index portfolios. As of June 2015, IFA introduced Profitability into the historical back-tested returns of the equity funds. IFA wanted to incorporate the new research completed by Fama/French that introduced profitability as its fourth factor in their asset pricing model. Profitability was back-tested by DFA back to 1975. As of 2015, NEW IFA Index Portfolios are referred to as IFA Index Portfolios. The previous allocations are now referred to as Original IFA Index Portfolios. In April 2016, IFA changed the allocations and the historical returns for its socially responsible portfolios to reflect the introduction of the DFA Social Fixed Income Portfolio (DSFIX). Prior to this, the fixed income asset class was composed of four unscreened bond funds as a social screened alternative did not exist. Although the duration of the unscreened bond fund mix was less than that of the socially screened bond fund, the increase in duration enhances the portfolio on a risk adjusted basis, and it enables IFA to provide a fully screened portfolio for socially responsible investors. As of July 2017, IFA changed its US Large Blend allocation from using DFA US Large Company (DFUSX) to Schwab S&P 500 Index (SWPPX). IFA has also amended its index backtested data for the IFA US Large Company Index to reflect the new selection. IFA US Large Company Index will track SWPPX live fund data going forward. Go to www.ifa.com/disclosures/history/ to see more details about changes made to the IFA Indexes and Index Portfolios up to 2013.

  6. Backtested performance results assume the reinvestment of dividends and capital gains and annual rebalancing at the beginning of each year. It is important to understand that the assumption of annual rebalancing has an impact on the monthly returns reported for IFA Index Portfolios in both the Risk and Reward Table (www.ifabigtable.com) and the IFA Index Calculator (www.ifacalc.com). For monthly rebalancing, the monthly return is calculated with the assumption that the portfolio is perfectly in balance at the beginning of each month. For annual rebalancing, the year-to-date return is calculated with the assumption that the portfolio is perfectly in balance only at the beginning of each year. The latter assumption underlies the returns shown for the IFA Index Portfolios. In actual client portfolios, however, rebalancing occurs at no set time, and such actions are dependent on both market conditions and individual client cash inflows and outflows, along with the cost impact of such transactions on the overall portfolio. Therefore actual monthly and year-to-date returns will differ from the IFA Index Calculator. The reason for this difference is that with annual rebalancing, the monthly returns are calculated from the ratio of the year-to-date growth of $1.00 at the end of the month to the year-to-date growth of $1.00 at the beginning of the month. For monthly rebalancing, the monthly return is calculated with the assumption that the portfolio is perfectly in balance at the beginning of the month. The performance of the IFA Index Portfolios reflects and is net of the effect of IFA’s annual highest investment management fee of 0.9%, billed monthly, unless stated otherwise. Monthly fee deduction is a requirement of our software used for backtesting. Actual IFA advisory fees are deducted quarterly, in advance. Depending on the amount of your assets under management and other factors, your investment management fee may be less. When IFA Indexes are shown in IFA Index Portfolios, all risk and return data reflects a deduction of 0.9% annual investment advisory fee, which is the maximum IFA fee. Unless indicated otherwise, data shown for each individual IFA Index is shown without a deduction of the IFA advisory fee. We choose this method because the creation, choice, monitoring and rebalancing of diversified index portfolios are the services of the independent investment advisor and at that point the fees are appropriate to deduct from the whole portfolio returns. Since we accept no fees from investment product firms, IFA compares funds based on net asset value returns, which are net of the mutual fund company expense ratios only. Although index mutual funds minimize tax liabilities from short and long-term capital gains, any resulting tax liability is not deducted from performance results. Performance results also do not reflect transaction fees and other expenses charged directly by custodians to the clients, which reduce returns.

  7. For all data periods, annualized standard deviation is presented as an approximation by multiplying the monthly standard deviation number by the square root of 12. Please note that the number computed from annual data may differ materially from this estimate. We have chosen this methodology because Morningstar uses the same method. In those charts and tables where the standard deviation of daily returns is shown, it is estimated as the standard deviation of monthly returns divided by the square root of 22.

  8. Performance results for clients that invested in accordance with the IFA Index Portfolios will vary from the backtested performance due to market conditions and a variety of other factors, including, but not limited to investments cash flows, mutual fund allocations, changing index allocations over time, frequency and precision of rebalancing, not following IFA’s advice, retention of previously held securities, tax loss harvesting and glide path strategies, cash balances, lower than 0.9% advisory fees, varying custodian fees, and/or the timing of fee deductions. Not all IFA clients follow IFA’s recommendations and depending on unique and changing client and market situations, IFA may customize the construction and implementation of the index portfolios for particular clients. IFA provides various index portfolio implementation strategies, such as the use of tax-managed mutual funds, global extended maturity bond funds, municipal bond funds, social or sustainable screens added to funds, diversified portfolios of various index fund providers, use of core funds or global asset allocation funds. These various implementations of IFA index portfolios will likely have risks and returns that vary from the IFA Index Portfolios. As the result of these and other variances, actual performance for client accounts have been and are likely to be materially different and maybe be less than from the results portrayed in the model IFA index portfolios. Clients should consult their account statements for information about how their actual performance compares to that of the index portfolios and ask your IFA Wealth Advisor to explain any differences.

  9. IFA licenses the use of data, in part, from Morningstar Direct, a third-party provider of stock market data. Where data is cited from Morningstar Direct, the following disclosures apply: ©2018 Morningstar, Inc. All rights reserved. The information provided by Morningstar Direct and contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

  10. IFA is not paid any brokerage commissions, sales loads, 12b1 fees, or any form of compensation from any mutual fund company or broker dealer. The only source of compensation from client investments is obtained from asset based advisory fees paid by the client. More information about advisory fees, expenses, no-load mutual fund fees, prospectuses for no-load index mutual funds, brokerage and custodian fees can be found at https://www.ifa.com/fees/. Not all IFA clients follow our recommendations, and depending on unique and changing client and market situations, we may customize the construction and implementation of the index portfolios for particular clients, including the use of tax-managed mutual funds, tax-loss-harvesting techniques and rebalancing frequency and precision. In taxable accounts, IFA uses tax-managed index funds to manage client assets.

  11. DISCLAIMER: THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION PROVIDED HEREIN OR ON THE MATERIAL PROVIDED. This document does not constitute a complete description of our investment services and is for informational purposes only. It is in no way a solicitation or an offer to sell securities or investment advisory services. Any statements regarding market or other financial information is obtained from sources which we and our suppliers believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Neither our information providers nor we shall be liable for any errors or inaccuracies, regardless of cause, or the lack of timeliness of, or for any delay or interruption in the transmission thereof to the user. All investments involve risk, including foreign currency exchange rates, political risks, market risk, different methods of accounting and financial reporting, and foreign taxes. Your use of these and all materials provided by IFA, including www.ifa.com website is your acknowledgement that you have read and understood the full disclaimer as stated above. IFA Index Portfolios, times series, standard deviations, and returns calculations are determined in the Dimensional Returns 2.0 program. © Copyright 1999-2018, Dimensional Fund Advisors, Inc. Updated 11-6-2018. For additional updates please refer to www.ifabt.com.