Guess there’s money in those index funds

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It’s just been announced that David Booth, co-founder of Dimensional Fund Advisors, is giving $300 million to the University of Chicago Graduate School of Business, which will be renamed the University of Chicago Booth School of Business. Given that pretty much all of DFA’s product line has grown out of research done at the Chicago business school, the gift seems only appropriate.

It started with Rolf Bänz’s Chicago doctoral thesis, which found that small-cap stocks had outperformed the overall stock market over time. In 1981, the year Bänz’s findings were published in the Journal of Financial Economics, Chicago Ph.D Booth and MBA Rex Sinquefield started DFA as the first manager of small-cap index funds.

Funny thing is, the small-stock advantage seemed to disappear after 1983. But as Shawn Tully (another Chicago MBA) explained in a wonderful Fortune article 10 years ago, DFA’s obsession with keeping costs down made its funds still worth owning:

In addition to charging low management fees, DFA gains on the competition by sharp trading. Part of its advantage is size: As the nation’s largest market maker in small caps, DFA is the first stop for active managers desperate to buy or sell blocks of small stocks. Says Robert Deere, the head of trading: “We make it as painful for them as possible.”

In 1992, DFA added another line of business, based on research by Chicago professors Eugene Fama and Kenneth French (who has since moved to Dartmouth): value funds that buy only stocks with low price-to-book ratios. Smart investors (Roger Babson, Ben Graham, Warren Buffett) had known for going on a century that cheap stocks were a better deal than expensive ones. But doing value investing in a quantitative, low-cost fashion was a worthwhile endeavor, and a lucrative one.

DFA now manages about $220 billion. Even with very low fees, that adds up to a lot. Enough to get a business school named after you.

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