Bloomberg recently reported the DFA Emerging Markets Small Cap Fund (DEMSX) has provided the highest risk-adjusted return among 197 similar funds so far this year.[1]  The fund outranked its peers in performance per unit of risk—a measure calculated by dividing total returns by average daily price fluctuation.
Normally, we go out of our way to ignore short-term, performance-driven distinctions such as this.  The fund, however, has played a role in most of our portfolios for many years, so the news tidbit provides us an opportunity to have a little fun while illustrating a point or two.

• First of all, Bloomberg called their comparison a “Riskless Return Ranking”—an inaccurate title at best and downright misleading at worst.  Risk and return go hand in hand.  Expecting to earn juicy returns without taking risk is like eating ice cream without gaining weight—hardly likely.  A better title for Bloomberg’s comparison might be “Risk Efficiency Ranking,”  as the analysis really measures how well investors have been compensated for the risks taken.  From this perspective, DEMSX compared well indeed.

• It should also be pointed out that all funds in this particular group are relatively high-risk investments.  Stocks in emerging countries have tended to fluctuate more dramatically than stocks in developed foreign countries and stocks in the U.S.  Despite being high-risk, such investments may actually decrease the overall risk of a carefully-constructed portfolio.  This is because stocks in emerging markets haven’t always fluctuated at the same time or in the same direction as other stocks.

• Lastly, results over a 6-month time period—good or bad—shouldn’t influence any investment decision.  We would be just as confident with DEMSX in portfolios if it had ranked poorly over the past 6 months.  The true measure of a fund is its contribution to a portfolio over many years and in different market conditions.  And it should be evaluated not by itself, but how it contributes to the entire portfolio’s risk and return profile.

The bottom line?  It is not unpleasant to have a fund in which you invest touted in the media.  It is important, however, to recognize the way in which this type of information is often exploited by fund companies and the media.  We agree DFA’s Emerging Markets Small Cap Fund (DEMSX) is a great fund, but for a host of reasons not captured in Bloomberg’s ranking.
[1] Doff, Natasha. “Dimensional Winning in Emerging Markets: Riskless Return.” Bloomberg. July 8, 2014.