Date: Mon, 9 Apr 2007 12:39:45 -0500
From: "Andrew Koenig" 
Newsgroups: misc.invest.financial-plan
Subject: Re: dimensional funds
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 wrote in message 
news:1176132716.635910.166840@o5g2000hsb.googlegroups.com...

> My question is, how can an index manager outperform the market?   by
> definition, an indexer cannot outperform the market.

They can't.  What they can do is select their markets more carefully than 
the published indices.  So, for example, their small-cap funds stick to 
smaller compmanies than most others.

As another example, just try to find an international small-cap value index 
fund that's open to new investors.

The other thing they claim to do is to deviate slightly from the index when 
it would be more expensive to stick to it.  For example, suppose a company 
in a small-cap fund grows to be a little too big for the fund.  Then if the 
fund is trying to stick to the index, it has to sell that stock immediately. 
Then the company shrinks a bit, so it fits in the index again, and so the 
index has to buy it back.  Sell high, buy low.

DFA claims to solve this problem through hysteresis.  When a company crosses 
the boundary of their index, they don't sell (or buy) it immediately. 
Instead, they wait until it has gone past the boundary by some amount.

Another thing they claim to do is pay attention to transaction costs in a 
way that index funds generally don't.  For example, when they sell stock, 
they look for buyers who are willing to pay a premium for fast execution.

There are a few other tweaks that they claim to make.  However, I think that 
the biggest advantage they offer is access to market segments that aren't 
well covered in general.