Morningstar Stewardship Grade for Fund Firms

Dimensional Fund Advisors

A disciplined approach to investment management.

8 June 2015 DFA Stewardship Grade -- A

Alex Bryan
Analyst, Passive Strategies
Summary
alex.bryan@morningstar.com Dimensional Fund Advisors is one of the industrys best stewards, so it earns a Positive Parent
+1 (312) 244-7024 Pillar rating. All of its strategies are grounded in empirical research and an unwavering belief in
market efficiency. The firm attempts to profit from the types of risk that the market
Bridget B. Hughes, CFA compensates with simple screens that emphasize securities with characteristics that
Associate Director, Manager Research historically have been associated with higher expected returns. This disciplined approach has
bridget.hughes@morningstar.com
+1 (312) 696-6231 served investors well.

The expense ratios for most DFA funds are considerably lower than the averages for their
distribution channels. DFA builds on this cost advantage by giving its traders the flexibility to
Stewardship Grade Scorecard patently execute orders and substitute one security for another to reduce transaction costs.
Dimensional Fund Advisors Individual investors can only access DFA funds through an intermediary or financial advisor that
Corporate Culture: A the firm has screened to mitigate short-term trading.
Fund Board Quality: A
Fund Manager Incentives: C
Fees: A DFA is organized as a private partnership. It generally has been disciplined about launching new
Regulatory History: Neutral strategies and keeping its funds within their guidelines. An investment committee composed of
Overall Stewardship Grade: A senior managers meets twice a month to provide oversight for the funds. The funds board of
directors also offers good governance. While the firm does many things well, fund manager
investment in DFA funds falls short of the industrys best-practices standard.

Corporate Culture -- A
Dimensional Fund Advisors has forged a strong and distinctive culture that has served investors
well. The firms low-cost structure and disciplined approach to investing, launching new
strategies, and qualifying the financial advisors who use its funds help set it apart. It reflects a
consistent, industry-leading focus on fundholders, and thus, we are raising its Corporate Culture
grade to an A from a B.

Dimensionals investment philosophy is based on the idea that market prices reflect all publicly
available information--commonly known as market efficiency. Therefore, it is not in the business
of forecasting and individual security selection. But that does not consign it to a broad market-
cap-weighted approach. The firm offers strategies that attempt to beat the market by targeting
exposures to what it views as the types of risks that the market compensates. These are
characteristics that historically have been associated with higher expected returns, such as
credit, duration, value, small market capitalization, and profitability.

Each strategy the firm adopts must be economically sound and backed by substantial empirical
evidence that it has consistently delivered attractive returns across different markets and time
periods. DFA draws heavily on academic research to develop its strategies. For example, it
maintains consulting relationships with several finance professors, including two Nobel
laureates, to stay on the cutting edge of financial research. To bridge the gap between theory
and implementation, DFA maintains an in-house research team, which focuses on vetting and
applying academic research, testing new ideas, and improving the implementation of its
existing strategies.

2015 Morningstar. All rights reserved. The information, data, analyses, and opinions contained herein (1) are proprietary to Morningstar, Inc. and its affiliates (collectively, Morningstar), (2)
may not be copied or redistributed, (3) do not constitute investment advice offered by Morningstar (4) are provided solely for informational purposes and therefore are not an offer to buy or sell
a security, and (5) are not warranted to be accurate, complete, or timely. Certain information may be self-reported by the investment vehicle and not subject to independent verification.
Morningstar shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, this information, data, analyses or opinions or their use. Past performance
is no guarantee of future results.
Dimensional Fund Advisors Morningstar Stewardship Grade for Fund Firms 8 June 2015 2

Academic research has guided the evolution of DFA's funds throughout its history. DFA started
out specializing in small-cap and micro-cap funds, based on research suggesting that small-cap
stocks outperform their larger-cap counterparts. The firm launched its first value strategies in
1993, a year after professors Eugene Fama and Kenneth French published their seminal three-
factor asset-pricing model, which indicated that value stocks offer an additional return
premium. Most recently, the firm has incorporated a profitability tilt into its equity funds, based
on new research suggesting that profitability can help predict long-term returns. These changes
refined the strategies but did not fundamentally alter them. This research paved the way for
DFA to launch its first growth funds, which target stocks with strong profitability.

Transaction-cost management is an essential tenet of DFA's value proposition. It avoids high-

turnover strategies and incorporates transaction costs into its portfolio construction framework.
Because its funds do not track an index, DFA's managers are not forced to trade when doing so
would not be cost-effective. For example, if a security is near the cusp of a fund's targeted style
zone but trading it would significantly move prices against the fund, the fund may defer or avoid
trading it. The firm's traders are rarely required to trade any specific stock. They can substitute
one stock for another that would be cheaper to trade as long as it has the desired
characteristics for the strategy.

DFA often leverages this flexibility to provide liquidity--responding to sell orders with purchase
orders or selling stocks to satisfy investor demand. This flexibility distinguishes the firm and
should help reduce transaction costs. To further reduce costs and retain full control of its
orders, DFA has adopted an automated direct-market-access trading model, which it now uses
to place nearly all of its stock trades. As of March 2015, DFA employed 23 traders with an
average of 14 years of experience.

An investment committee meets twice a month to provide oversight for the strategies and
approve implementation changes. The committee includes the firm's senior executives and
portfolio managers. DFA also has a separate investment policy committee that meets to
recommend new strategies and enhancements to its existing strategies. Professors Fama and
French sit on that committee, in a consultancy role, along with many of the firm's senior
executives.

While it has a large lineup of funds, DFA is only targeting a handful of drivers of expected return.
There is substantial overlap among its portfolios, which gives investors the option to choose
from funds with moderate to more-exaggerated style tilts, but it also creates some redundancy
in the lineup. This overlap is a result of the firms willingness to adapt its strategies to meet
client demand. For example, it introduced a series of core equity funds in response to client
demand for a broad-market portfolio with systematic small-cap and value tilts. It also offers
some socially responsible versions of its funds.

However, client whims dont sway DFA from its methodical approach to launching new
strategies. It requires a heavy burden of supporting empirical evidence before it will consider
adopting a new strategy. Even when the evidence is solid, the strategy must be consistent with
the firm's low-turnover philosophy. For instance, despite the strong empirical evidence that
shows the near-term persistence of stock-price momentum, DFA does not attempt to trade on
it, though it may use momentum as a reason to delay a trade. Although it has launched 22
funds over the past five years, most of these target the same sources of expected return as its
longer-standing funds.

2015 Morningstar. All rights reserved. The information, data, analyses, and opinions contained herein (1) are proprietary to Morningstar, Inc. and its affiliates (collectively, Morningstar), (2)
may not be copied or redistributed, (3) do not constitute investment advice offered by Morningstar (4) are provided solely for informational purposes and therefore are not an offer to buy or sell
a security, and (5) are not warranted to be accurate, complete, or timely. Certain information may be self-reported by the investment vehicle and not subject to independent verification.
Morningstar shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, this information, data, analyses or opinions or their use. Past performance
is no guarantee of future results.
Dimensional Fund Advisors Morningstar Stewardship Grade for Fund Firms 8 June 2015 3

Dimensional usually doesn't chase trendy investment themes. Rather, it takes its cues from the
academic community. For example, the firm didn't abandon its stoic value framework during the
tech boom in the 1990s. Similarly, it hasnt rushed to offer a low-volatility strategy because it
believes investors can achieve the same results more efficiently by allocating a greater portion
of their portfolios to fixed income and value equity funds. As a result of its deliberate approach
to its fund lineup, DFA rarely liquidates or merges funds. In the United States, DFA has merged
or liquidated just three funds, according to Morningstar data. As of March 2015, equity funds
represented about 74% of the firms assets, while fixed-income funds account for most of the
remainder.

DFA has grown substantively during the past decade, now ranking among the top 10 mutual
fund companies with more than 6 times the assets it had 10 years ago. It was able to
accomplish that feat without traditional advertising. Rather, it devotes considerable resources
to investor education, which is a major area of focus for the marketing team.

Unlike most mutual fund shops, Dimensional does not make its funds available directly to
individual investors. Instead, the funds are only available through an intermediary, such as a
401(k) platform, or a financial advisor that DFA has approved. Before qualifying advisors to use
its funds, Dimensional educates candidates on its investment approach and attempts to filter
out those who are likely to hold the funds for the short term, a practice that could harm the
strategies long-term investors. The firm does not compensate or receive compensation from
advisors who use its funds. Investments from financial advisors represent about 55% of
Dimensionals assets, while the remaining 45% comes from institutional clients.

DFAs client-education effort appears to be effective. In 2008, when investors were leaving
equity funds in droves, DFA bucked the trend and enjoyed net inflows to its equity funds. But
even this responsible approach to selling has its limits. Like many fund families', DFA's dollar-
weighted investor returns, which approximate how average investors have done in individual
funds, are generally subpar to its time-weighted total returns over the past five and 10 years
through April 2015.

Because DFA's funds are so process-driven and its approach is team-oriented, it may seem that
portfolio-manager retention would be less important than at other firms, where a star
managers departure would have a meaningful, detrimental impact. But manager retention is
still important because it is indicative of the firms ability to attract and retain talent.
Dimensional hires many of its portfolio managers straight out of MBA programs. But the team
has no shortage of seasoned professionals. As of March 2015, the 45 members of the portfolio
management team had an average of 14 years of experience.

Over the past five years, Dimensional has retained close to 92% of its managers, which is
strong compared with large mutual fund companies. However, this figure is only based on the
senior portfolio managers that Dimensional lists in its regulatory filings with the Securities and
Exchange Commission. Dimensional has provided additional information to Morningstar that
indicates the retention rate for the broader portfolio management team was above 90% in each
year since 2009. This suggests that its managers are well-suited to the firms distinctive
investment approach. The firm's private ownership structure may also contribute to its low
turnover. Current and former employees own most of the firm.

Fund Board Quality -- A

A mutual fund board's sole purpose is to act as an advocate for fundholders, helping to ensure
they are treated fairly and honorably. Only mutual fund directors have a seat at the negotiating
table when it comes to hiring mutual fund advisors and setting fees, for example. Most boards

2015 Morningstar. All rights reserved. The information, data, analyses, and opinions contained herein (1) are proprietary to Morningstar, Inc. and its affiliates (collectively, Morningstar), (2)
may not be copied or redistributed, (3) do not constitute investment advice offered by Morningstar (4) are provided solely for informational purposes and therefore are not an offer to buy or sell
a security, and (5) are not warranted to be accurate, complete, or timely. Certain information may be self-reported by the investment vehicle and not subject to independent verification.
Morningstar shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, this information, data, analyses or opinions or their use. Past performance
is no guarantee of future results.
Dimensional Fund Advisors Morningstar Stewardship Grade for Fund Firms 8 June 2015 4

of directors take their responsibility seriously, but those that stand out have established a track
record of independence and shareholder-friendly practices.

DFA's mutual fund board is unique in its makeup. All six of its independent board members have
served as professors in finance, economics, or accounting at the University of Chicago, Yale, or
Stanford. The lead independent board member, Myron Scholes, is a Nobel laureate. Their
experience allows them to effectively understand and monitor the firm's quantitative strategies,
which were derived from academic research. While these board members don't necessarily
share one view, there is a risk that the limited diversity of experience on the board could limit
its perspective. That said, considering DFA's straightforward approach to investment
management and distribution, the firm may not encounter as wide a set of challenges as other
fund companies.

Co-CEOs Eduardo Repetto and David Booth, who is also the firm's chairman and co-founder, are
the only DFA insiders on the mutual fund board.

Independent directors fully comprise the Audit Committee and Nominating Committee, which
nominates new board members. The Investment Strategy Committee includes three
independent directors and Repetto. This committee is responsible for reviewing potential new
funds, reviewing performance, and recommending and evaluating proposed enhancements to
the funds' investment strategies--the latter of which is an uncommon exercise for mutual fund
board members. The full board meets in person at least once a quarter. At each of these
meetings, the independent directors also meet separately.

For the year ended October 2014, each disinterested director earned $250,000 for services
provided, with the exception of Roger Ibbotson and Myron Scholes, who earned $260,000 and
$300,000, respectively. (Ibbotson founded Ibbotson Associates, which is now part of
Morningstar.) Disinterested directors have the option to defer all or a portion of their
compensation. This deferral is then placed into a simulated fund, which behaves as though an
equal dollar amount had been invested a cross-section of DFA's funds. These simulated funds
give the directors exposure to a broad swath of DFA's offerings and thus may align the
directors' interest with a greater percentage of the fund family's fundholders. All the
disinterested board members have more than $100,000 invested in the simulated funds.
Among those disinterested directors, only Roger Ibbotson and Myron Scholes have direct
investments in DFA funds, in addition to their simulated fund investments.

Each board member has strong credentials well suited to effectively monitor Dimensionals
strategies, and the board members are invested alongside fundholders, so the firm receives an
A for Board Quality.

Fund Manager Incentives -- C

The firm meets the industry standard for manager investment in fund shares, thus earning a C
for the Manager Incentives portion of the Stewardship Grade.

Portfolio managers who invest alongside their fundholders not only show a conviction in their
investment approach and portfolios but also are better able to share in a true fundholder
experience as they endure the same tax and cost consequences as their shareholders.
Morningstar's research has found that portfolio managers who invest significantly in their funds
tend to perform better on average, particularly on a risk-adjusted basis. For these reasons,
Morningstar's Manager Incentives grade is determined primarily by how heavily and
predominantly a fund family's managers own the funds they oversee. Specifically, Morningstar

2015 Morningstar. All rights reserved. The information, data, analyses, and opinions contained herein (1) are proprietary to Morningstar, Inc. and its affiliates (collectively, Morningstar), (2)
may not be copied or redistributed, (3) do not constitute investment advice offered by Morningstar (4) are provided solely for informational purposes and therefore are not an offer to buy or sell
a security, and (5) are not warranted to be accurate, complete, or timely. Certain information may be self-reported by the investment vehicle and not subject to independent verification.
Morningstar shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, this information, data, analyses or opinions or their use. Past performance
is no guarantee of future results.
Dimensional Fund Advisors Morningstar Stewardship Grade for Fund Firms 8 June 2015 5

considers what percentage of assets are in funds in which at least one portfolio manager has at
least $1 million invested (the highest ownership range reported to the SEC).

By this gold standard, manager investment in DFA funds is relatively modest. In fact, according
to the Statement of Additional Information filings, none of DFA's funds boasts a portfolio
manager investment greater than $1 million.

There are mitigating factors. At DFA, each manager is listed on dozens of funds, many of which
pursue similar strategies. Some are listed on as many as 50 or more funds, and it would not be
reasonable to expect them to make substantial investments in each one, particularly those that
are narrowly focused. Dimensionals managers are also generally paid less than traditional
stock- and bond-picking managers. That said, it's encouraging to see that DFA's seven listed
portfolio managers invest in multiple funds they oversee, rather than just one or two.
Additionally, based on the upper limit of the SAI ownership disclosures, four of the managers
may have more than $1 million invested across the full lineup of U.S.-listed DFA funds.
Combined, they help manage close to 80% of the firm's U.S. mutual fund assets. This
demonstrates some alignments of incentives between management and fundholders.

Managers receive a base salary plus a discretionary cash bonus. The size of the bonus is based
on an assessment of how well the managers kept their portfolios within their guidelines and
minimized cash balances and trading costs. Overall contributions to the team and client service
factor into the bonus as well. However, there is no direct link between the performance of the
funds and the managers' compensation. This is because performance is primarily driven by the
guidelines the funds follow rather than manager discretion.

Senior managers also participate in DFA's long-term incentive plan. Managers that qualify for
this plan receive phantom shares that replicate the performance of DFA's equity. These shares
vest over a rolling three-year period. The size of these awards is partially dependent on seniority
and tenure. They help align managers' incentives with the success of the firm. Between 200
and 250 employees are eligible to participate in this plan.

Fees -- A
Morningstar calculates a fund family's Fees grade based on the average Morningstar Fee Level
percentile for all the family's funds. These percentiles compare each fund share class with
similar share classes of funds in the same fee-level group, ranging from 1 (for the cheapest
funds in each group) to 100 (for the most expensive). To find a family's overall fee-level
percentile, Morningstar takes the straight average of the fee-level percentiles for all the funds in
the family, counting each share class separately.

Morningstar's research indicates that a fund's price tag is among the best predictors of its
future relative performance. Funds with below-average price tags are likely to outperform
typical rivals; those with above-average expense ratios are more likely to underperform.

Consistent with the cost efficiency its quantitative approach affords, Dimensional prices its
funds below those of peers engaged in security selection but above index alternatives from
rivals such as low-cost leader Vanguard. Compared with all the funds in relevant categories,
DFA's fee levels are low across the board. Slightly more than 96% of the firm's share classes
have low fee levels relative to their categories, while the rest carry fees that are still below
average. On average, the firm's share classes are priced in the cheapest decile of their
respective categories, according to Morningstar's Fee Level calculations. Therefore, it earns an
A for Fees.

2015 Morningstar. All rights reserved. The information, data, analyses, and opinions contained herein (1) are proprietary to Morningstar, Inc. and its affiliates (collectively, Morningstar), (2)
may not be copied or redistributed, (3) do not constitute investment advice offered by Morningstar (4) are provided solely for informational purposes and therefore are not an offer to buy or sell
a security, and (5) are not warranted to be accurate, complete, or timely. Certain information may be self-reported by the investment vehicle and not subject to independent verification.
Morningstar shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, this information, data, analyses or opinions or their use. Past performance
is no guarantee of future results.
Dimensional Fund Advisors Morningstar Stewardship Grade for Fund Firms 8 June 2015 6

Unlike many mutual fund companies, Dimensional launches its funds with expense ratios that it
believes will be sustainable when they become large, so it passes along economies of scale to
fundholders before the firm realizes such savings. However, this also means that fee cuts are
uncommon.

Regulatory History -- Neutral

Because investors should expect fund companies to comply with laws and regulations, the
highest Regulatory History rating a firm can receive is Neutral.

Dimensional has not had any material regulatory infractions in the recent past, so it gets full
credit for Regulatory History, expressed as a rating of Neutral.

2015 Morningstar. All rights reserved. The information, data, analyses, and opinions contained herein (1) are proprietary to Morningstar, Inc. and its affiliates (collectively, Morningstar), (2)
may not be copied or redistributed, (3) do not constitute investment advice offered by Morningstar (4) are provided solely for informational purposes and therefore are not an offer to buy or sell
a security, and (5) are not warranted to be accurate, complete, or timely. Certain information may be self-reported by the investment vehicle and not subject to independent verification.
Morningstar shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, this information, data, analyses or opinions or their use. Past performance
is no guarantee of future results.