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San Francisco Employees’ Retirement System Drops DFA for Underperformance

The pension fund said Dimensional Fund Advisors’ value bias underperforms “during periods of strong outperformance of growth, which has been the case for much of the last 10-plus years.”

After ten years of investing with Dimensional Fund Advisors, the $34.6 billion San Francisco Employees’ Retirement System is giving the manager the boot.  

On Wednesday, the SFERS board voted in favor of dropping the fund’s $155.1 million allocation to DFA’s emerging markets core equity fund, as well as exiting a $120 million investment in its small-cap emerging markets fund, a spokesperson confirmed via email. Both funds have underperformed their benchmarks for the three- and five-year periods.

DFA, a $679 billion firm that made its name on factor investing, has recently had a rough go of it. As SFERS’s meeting documents note, the asset management firm’s “value bias will underperform during periods of strong outperformance of growth, which has been the case for much of the last 10-plus years.” 

In 2020, Dimensional faced billions in outflows, according to Institutional Investor’s sister publication RIA Intel. It reported that between November of 2019 and October of 2020, the firm’s assets under management fell 10.36 percent.

DFA’s emerging markets core equity fund had been under review at SFERS since the second quarter of 2020, while the small-cap emerging markets fund has been under review since the fourth quarter of that year. SFERS was a longtime DFA investor, having first allocated about $80 million to DFA’s small-cap emerging markets strategy in October 2011, and $75 million to the emerging markets core strategy the following month.

But SFERS has shifted its focus in recent years, which prompted the review. The organization now “favors smaller, more nimble firms that have specialty skills, a singular investment focus, and niche strategies,” and “believes that exceptional managers have a unique, significant, and sustainable edge and a high degree of alignment with investors.”  

DFA’s emerging markets core strategy fund had underperformed its benchmark — the MSCI emerging markets investable market index — by 6 basis points on an annual basis since 2011. It underperformed the benchmark by 9 basis points over a trailing 7-year period. “Outperformance has been highly cyclical and more recently has been trending downwards,” SFERS documents showed. 

Meanwhile, DFA’s small-cap emerging markets strategy has actually outperformed its benchmark by 89 basis points on an annualized basis since the initial investment. However, more recent performance “has been challenging,” as the strategy underperformed its benchmark by 375 basis points in the first three quarters of 2021.   

It also underperformed its benchmark by 50 basis points over the 7-year trailing period.  

According to SFERS meeting documents, DFA’s funds are “not consistent” with the pension’s plan for its public equity portfolio. Both funds closely track their benchmarks, indicating that their “return profile is quite similar to the benchmark,” the meeting documents said. 

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