Why would anyone purposely buy the most risky, meaning volatile, asset class for their investment portfolio? Because, it will provide the highest expected return. How has that worked out for investors during 2009?

Great, actually. The Emerging Markets asset class is the most volatile broad asset class there is. How was the performance last year when it seemed the whole world was going down the toilet during the first quarter? Here are the returns for four discreet Emerging Markets mutual funds from Dimensional Fund Advisors:

Fund Name                                            Symbol         2009 Total Return
DFA Emerging Markets Core              DFCEX                    83.58%
DFA Emerging Markets Small Cap     DEMSX                   99.74%
DFA Emerging Markets Value            DFEVX                    92.28%
DFA Emerging Markets Portfolio       DFEMX                    71.77%

Were these highly concentrated portfolios with great stock picking? No. These are all very broadly diversified passively-managed asset-class funds. The chart below shows approximately how many stocks were in each of these funds during 2009. The interesting fact here is that the most concentrated (which cannot, under anyone’s analysis be considered a concentrated portfolio) was the poorest performer – if you can call a one year return of 71.77% poor.

Fund Symbol         Approx. Number of Stocks
DFCEX                                         2719
DEMSX                                        2100
DFEVX                                         1924
DFEMX                                          640

Sure, these guys had downside movement during 2008 commensurate with the upside in 2009. This indicates in stark relief the value of sticking with your asset allocation model and then rebalancing the portfolio. Those who did so over the past couple of years are back to being whole again or close to it.

So what is the take away here? Volatile asset classes, purchased broadly and managed passively, and rebalanced appropriately will enhance the risk adjusted returns of an investment portfolio and put more money in an investor’s pocket over time. It requires discipline during excruciatingly painful market moves, and it pays off.
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Dimensional Fund Advisors is an investment advisor registered with the Securities and Exchange Commission. Consider the investment objectives, risks, and charges and expenses of the Dimensional funds carefully before investing. For this and other information about the Dimensional funds, please read the prospectus carefully before investing. Prospectuses are available by calling Dimensional Fund Advisors collect at (310) 395-8005; on the internet at www.dimensional.com; or, by mail, DFA Securities LLC, c/o Dimensional Fund Advisors, 1299 Ocean Avenue, Santa Monica, CA 90401. Mutual funds distributed by DFA Securities LLC.

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