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Fund Spy: Morningstar Medalist Edition

A Unique Approach to Small Value

This fund offers investors an effective way to harness the value premium.

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In June 1992, Eugene Fama and Kenneth French published their seminal paper, "The Cross-Section of Expected Stock Returns," which showed that small-cap and value stocks consistently generated higher returns than their large-cap and growth counterparts. Less than a year later, Dimensional Fund Advisors launched  DFA US Small Cap Value (DFSVX), which targets the cheapest quartile of the U.S. small-cap market. This fund's simple approach has worked remarkably well. Over the past 20 years, it outpaced the Russell 2000 Value Index by nearly 2% annualized, net of fees. However, the fund's deep-value and micro-cap tilts may cause it to overweight distressed companies and make it one of the small-value category's more volatile options. Its younger sibling,  DFA US Targeted Value (DFFVX), offers investors similar exposure with slightly less volatility and a lower expense ratio.

This lower volatility owes to the wider net cast by DFA US Targeted Value Fund relative to DFA US Small Cap Value. It targets the cheapest fifth of the mid-cap market segment based on book value/price, and the cheaper half of the small-cap segment, which sweeps in a large helping of small-blend stocks. While in theory these mid-cap value and small-blend stocks should create a slight drag on the fund's returns relative to the pure small-value portfolio, it hasn't hurt much over the past decade (through April 2013). During that span, the targeted value fund posted an impressive 12.4% annualized return, slightly better than the small value's 12.3%, with less volatility (their standard deviations were 21.3% and 22.1%, respectively).

Alex Bryan has a position in the following securities mentioned above: VBR. Find out about Morningstar’s editorial policies.