Like Vanguard? Love IFCMary Brunson
Monday, July 24, 2017
In my work, I see a lot of Catholic organizations placing Vanguard funds in their defined contribution (DC) plan lineups.
Vanguard’s a safe-enough bet—low-cost, diversified, etc. While, Catholic plan sponsors could do worse, they could also do better. How? By choosing a suite of funds that captures higher expected returns relative to Vanguard, while doing so in a way that is in keeping with the Catholic faith.
How can a Catholic Values portfolio capture a higher expected return than a Vanguard portfolio…especially when Vanguard is largely considered the gold standard for investing?
IFC builds its managed investment products and portfolios with funds from Dimensional Fund Advisors (DFA). If you’ve never heard of DFA, it’s time you did. They are the pioneers of factor-based investing.
Like Vanguard’s index funds, DFA’s funds are built to capture low-cost, diversified exposures to the efficient markets. The primary differences between the two companies, and in turn, the reasons for DFA’s higher expected returns are as follows:
- DFA funds take a bigger helping of small stocks and value stocks. They do so because small companies and value companies have higher expected returns than large and growth. Not for the last few years, but for the last 89 years. DFA does not shun altogether large and growth companies, but they underweight these asset classes relative to typical market indices, such as the Russell 3000 or MSCI-EAFE.
- DFA dives deeper into the small and value segments of the market. Not only does DFA overweight small value relative to large growth, their funds also carry lower weighted average market capitalization and higher book-to-market ratios relative to typical market funds, including Vanguard index funds.
Why does DFA do this? Because as Nobel Prize winner Harry Markowitz puts it: “They’re really smart guys.”
DFA was founded in 1982 with the single mission to develop investment funds that incorporate the findings of academic research and evidence of higher returns. Much of this research has been recognized with the awarding of the Nobel Prize in Economic Sciences. Several such Nobel Laureates are associated with DFA, and their research informs DFA’s investment products. Today, DFA is an industry-leading fund manager with more than $518 billion dollars in assets.
The proof of DFA’s strategy is detailed in the bar chart below, showing the returns and characteristics of DFA’s strategies vs. Vanguard’s. While the asset class labels are the same, DFA’s funds produced higher returns, the result of the characteristics of the funds themselves. For example, notice that the book-to-market ratios are higher with the DFA funds, and the weighted average market capitalization is smaller in the DFA funds. This also results in a larger number of holdings in the DFA funds, and an added benefit of broader diversification.
Click to see the full chart | (See Disclsoure)
Investing for Catholics (IFC) is proud to have played an instrumental role in working with DFA to build out their suite of Socially Responsible Funds. Currently, IFC builds and manages its custom portfolio implementations and Catholic Values Target Date Funds with funds from DFA that marry DFA’s approach to the capital markets with screens that closely align with the USCCB’s Guidelines for Socially Responsible Investing—Catholic—without Compromise.
IFC’s whole investment portfolios and funds blend risk-appropriate doses of DFA’s diversified social fund strategies, creating easy-to-own, one-step solutions ideally suited for retirement plan participants of Catholic organizations. The IFC offering includes a plan fiduciary service model with custom portfolio development and management, as well as IFC’s Target Date Fund Series of collective funds. IFC works with you and your consultant, if you have one.
The chart below shows the net of fee returns of the IFC Catholic Values Index Portfolios built with DFA’s social funds (multi-colored round buttons) vs. the same allocations built with Vanguard funds (red squares). As you can see, the IFC Catholic Values portfolios had higher returns at the same level of risk. The higher expected returns associated with the IFC Catholic Values portfolios enable an investor to expect higher income replacement rates at a similar risk level to a Vanguard portfolio, or the very similar income replacement rates.
Click to see the full chart | (See Disclsoure)
The IFC investment strategies are carefully managed to maximize expected returns at a given level of risk by implementing more than 100 discreet asset allocations comprised of a blend of diversified funds—low-cost, prudent and Catholic.
IFC’s investment products and services eliminate the guesswork, self-doubt and procrastination that employees may feel when they attempt to invest for their futures.
To learn more about IFC’s custom portfolio service for defined contribution or defined benefit plans, or please call 888-815-5025, email firstname.lastname@example.org or visit investingforcatholics.com.
If you or you consultant would like information on our IFC Target Date Fund products, please click here, or email email@example.com, or call 888-815-5025.