These Funds Are for When the Magnificent 7 Lose Their Lustre

Does the dominance of aggressive growth stocks in your portfolio make you nervous?

Michael Dobson 26 April, 2024 | 4:45AM
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Sunset from the view of an airplane

Growth stocks, including some highfliers like Tesla TSLA and Nvidia NVDA, hit some turbulence in April, reminding investors about the importance of diversification. One of the cheapest mutual fund series in Canada provides such diversification with notable tilts towards the small and cheap.

Smaller and Cheaper on the Stock Side

The DFA Global Portfolios, a series of five strategies whose asset mixes range from 40% stocks and 60% bonds to 80% bonds, systematically tilt towards cheaper and smaller stocks in their equity portfolios. Academic research showing smaller value stocks tend to outperform over time is the foundation of the firm’s philosophy and approach. You can see it in the fund’s average holding statistics. Small caps comprise 17% of DFA Global 60EQ-40FI’s equity portion compared to 6% for its average Global Neutral Balanced peer’s equity portion. DFA’s value-growth score of 115 also falls far below 175 for the category average.

 

The funds don’t ignore larger and growthier stocks. Its top two holdings are Apple APPL and Microsoft MSFT, albeit at only a 1.7% combined weight in DFA Global 60EQ-40FI.

Shorter and Higher Quality on the Bond Side

While the funds’ equity sleeves will always lean on the value and size factors, their fixed income portions can be more flexible. Certain circumstances can cause DFA to change the profile of their bond investments here regarding both duration and credit quality. For example, as the yield curve flattens or inverts, the funds will target shorter-date bonds to lower sensitivity to interest rates. As of March 2024, the DFA Global 60EQ-40FI Portfolio has a duration of 2.6 years, far below the 6.4-year category average.

Performance Shows Some Patterns but Holds up Over Time

DFA Global Portfolios’ value leanings and shorter duration have helped in the short and long term. Value has been in and out of favour in the last five years, but DFA Global 60-EQ-40FI Portfolio F edged the Morningstar Canada Neutral Global Target Allocation Index by 0.8 percentage points annualized and ranked in the category’s top quartile performance. In 2022’s value-led market, the fund beat the benchmark by nearly 3 percentage points. In 2023’s growth market, it lagged the index by just 0.6 of a percentage point. This systematic and inexpensive series of funds is an intriguing option for those looking for portfolios that are not dominated by a handful of aggressive growth stocks.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Apple Inc189.87 USD0.02Rating
DFA Global 60EQ-40FI Portfolio F18.01 CAD-0.07Rating
Microsoft Corp420.21 USD-0.19Rating

About Author

Michael Dobson  is a Manager Research Analyst at Morningstar Canada.

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