The investment philosophy that convinced advisers to stop chasing winners
The investment manager that every adviser knows, but many individual investors don’t.
Investors are bombarded with information. Investing success often comes down to knowing what information is valuable and what to ignore.
I recently wrote on this conundrum in detail. We are surrounded by market predictions, economic forecasts, and investment products designed to appeal to the latest tantalising trend. AI, commodities, crypto, space tech, emerging markets – there’s always a compelling story vying for our attention.
One of Australia’s largest advice firms changed direction more than two decades ago. Instead of trying to find the next winning fund manager for their clients, they decided to lean in to building portfolios around a different idea – successful investing is less about predicting the future and more about understanding the forces that drive returns over time.
That decision led Shadforth, one of Australia’s largest wealth management firms, to become one of the earliest and largest clients of Dimensional Fund Advisors (DFA).
Today, Dimensional manages a significant portion of Shadforth’s client assets. Shadforth is not alone. Some in the industry refer to DFA’s adviser following as ‘cult-like’. The interesting part of the story is not simply that advisers use Dimensional. It is the level at which they ‘buy in’, and what individual investors can learn from that process.
The problem with chasing winners
This piece was born from a question I had about DFA’s large presence in both the US and Australian market. In the US, they’re the largest active ETF manager (31 March 2026). In Australia, they are one of the largest managed fund companies.
There is little to no interaction with retail investors in Australia. Advisors that do invest in DFA trend towards having most of their clients’ funds invested.
What are advised clients getting that self-advised investors aren’t?
When Shadforth first began working with Dimensional in 1999, the firm was taking a very different approach. ‘We were using active management and various versions of multi-managers,’ says Terry Dillon, CEO of Shadforth.
The idea was logical and what clients would expect their financial adviser to do. Find the best investment managers, combine them together, and create a portfolio that captured the strengths of each. The problem was that success was difficult to sustain over the long-term.
Shadforth found that while some managers continued to perform well, others fell behind. The challenge was identifying which ones would succeed before the performance occurred. ‘We were paying for active management, and we were putting together competent teams of investors, typically after they’d performed well,’ Dillon says.
Dimensional solved a problem for Shadforth and other financial advisers who buy in to their philosophy. Core to this is their approach, and its strength is what drives advisers to often saturate their clients’ portfolios with Dimensional’s funds. I’ve come up with some lessons that all investors can take from Dimensional’s approach after speaking to both the CEO of DFA Australia and the CEO of Shadforth.
Build a repeatable philosophy
DFA’s process is ‘academically’ driven. Their website boasts 5 Nobel Laureates associated with the firm, and 29 PhDs on staff. The approach is rooted in research from Nobel Laureate, Eugene Fama who is also a Dimensional Director. Most of the overviews of their philosophy and views are written by Professors, those holding Doctorates or Nobel Laureates themselves.
When I was researching this piece, I spoke to our Manager Research Analysts who assess DFA’s funds. They sent me a ream of information with a disclaimer – it is ‘dense’. It is unusual in a world where many investment managers are trying to appeal to everyday investors, DFA are still releasing papers that tend to be aimed at research peers. DFA and Dillon maintain that the importance of an adviser includes distilling these processes for their clients.
At its simplest, Dimensional’s equity strategies tilt portfolios towards companies with characteristics that academic research has historically linked with higher expected returns.
These include factors such as:
- Value: companies trading at lower prices relative to fundamentals
- Profitability: companies with stronger operating performance
- Size: smaller companies, which historically have had higher expected returns than larger companies
Bhanu Singh, CEO of Dimensional Australia, describes the philosophy as beginning with two simple ideas: prices and cash flows. ‘If you’re able to buy something at a lower price and get the same cash flows, you get a better return,’ he says.
The argument is not that investors can easily identify bargains that everyone else has missed. Instead, it is that investors can use market prices as information and systematically target areas where expected returns are higher.
It may not be the right philosophy for you, or the goals that you are trying to achieve – but the philosophy is clear. This is the first part of their success.
This clear philosophy is matched with Dimensional’s approach to education. Advisers that put their clients into DFA’s products go to conferences, seminars, and join education groups. Consistently. DFA is heavily invested in ensuring that advisers understand the investment philosophy and are taken on the journey through differing market conditions.
Dimensional works for advisers because it has a repeatable philosophy that they can communicate to clients and keep them focused on the long-term outcomes. Their popularity among advisers comes partly from the fact that it provides a consistent framework. It replaces prediction with process and gives advisers a good base to explain investment performance through market cycles.
Avoid the temptation to constantly search for the next winner
One of the hardest parts of investing is accepting that the future is uncertain. Investors are naturally drawn to stories - the company changing an industry, the technology transforming the world or the asset class that has recently delivered exceptional returns.
Rather than trying to identify tomorrow’s winners in advance, Dimensional starts with the idea that markets already reflect the collective knowledge and expectations of millions of participants. The Dimensional process recognises how difficult it is to consistently identify winners before they become obvious.
The success of their funds do not hinge on a star fund manager choosing the right opportunity.
For individual investors, the lesson is that successful investing often involves resisting the urge to constantly improve a portfolio. Adding a new fund, chasing a recent outperformer or switching strategies can feel productive. If this decision is made without a concerted alignment to an established investment philosophy, it can hinder more than help.
A portfolio does not need to be exciting to be successful. In many cases, the hardest investment decision is staying committed to a sensible strategy when another approach appears to be working better.
The primal challenge is that markets reward patience, but human nature encourages action. Consistency can be a competitive advantage, even when it feels unnatural.
The importance of behaviour
Investing is not only an analytical exercise. Investors often focus on finding the best fund, the best stock or the best market opportunity. Even a good investment strategy can fail if investors abandon it at the wrong time.
Singh highlights the behavioural challenge investors face: many investors do not capture the returns available in markets because they buy after prices rise and sell after declines. Dillon makes a similar point. He believes many investors underestimate the value of having a clear philosophy before markets become difficult.
Dillon believes that many portfolios, are a ‘product of circumstance’ – usually a collection of investments over a long period of investing.
A philosophy acts as a decision-making framework. It helps investors decide not only what to buy, but what not to chase. The uncomfortable part is that it can look different to the market and it’s not always easy sticking to it. Advisers help in ensuring that their clients keep a long-term view. Studies have shown that this is where advisers add significant value.
This was an area where my view significantly diverged from Bhanu’s. He believed that all investors are better off with a financial adviser, given reasonable costs. I believe that there’s a place for advisers in the Australian investor landscape. I also know that there are many self-advised investors in Australia who are achieving their financial goals without advice.
There are many self-advised investors that understand what is in their best interests and are able to form and follow a repeatable investment philosophy that aligns with their financial goals – and be disciplined over the long term.
DFA often performs differently to the market. Advisers know why due to their simple and repeatable philosophy and strong focus on education. They communicate this to their clients. The clients understand why they are invested. They stay invested. This is the secret to their success. It’s not revolutionary, but the key has been building a strong framework.
Self-advised investors, can achieve success with the same key principles. Build a repeatable investment philosophy. Successful investing is less about finding the perfect prediction and more about building a process that can survive the unpredictability of markets. Understand how it is connected to the financial goals that you are looking to achieve. Stay invested.
