A Word From The Advisor

Throughout our existence, our goal at Oakwood Capital Management LLC has been to provide our clients with cost effective portfolio diversification throughout all markets, and comprehensive allocation throughout all asset classes. We have searched for an ideal solution that would span across asset classes, from small-cap to large-cap, from value to growth, from emerging markets to international, to real estate.

We are pleased to announce that Oakwood Capital Management LLC has established an alliance with Dimensional Fund Advisors (DFA)(1), pioneers in the field of the science of investing, to bring the ideal solution to our clients. The philosophies of Oakwood and DFA are aligned: to deliver the performance of the capital markets and increase returns through state-of-the-art portfolio design and trading. We both see markets as an ally, not an adversary. Rather than trying to take advantage of the ways markets are wrong, we take advantage of the ways markets are right—the ways they compensate investors. We are fortunate to be able to offer these strategies to capture what the market offers in all its dimensions. These strategies are only available to clients of qualified and select registered investment advisors, such as Oakwood, and are not available to the general public.

The Oakwood/DFA portfolios are designed to provide substantial diversification ranging from small-cap to large-cap, from value to growth, from emerging markets to developed international markets, to real estate. Increased diversification will reduce investment concentration and the resulting increased risk caused by the volatility of individual companies, asset classes or indexes. Portfolios are monitored and rebalanced, taking into consideration risk exposure consistency, transaction costs, and tax ramifications to maintain target asset allocations established by Oakwood for each client's unique risk profile..

The investment strategy of Oakwood and DFA is based on the principles of Modern Portfolio Theory (MPT)(2) and the Fama and French Three Factor Model for Equities(3). An important part of MPT is the Efficient Market Hypothesis, which says that market prices are fair; that they fully reflect all available information. This does not mean that prices are perfect; some prices may be too high and some too low, but there is no reliable way to tell. In an efficient market, investors cannot expect to earn above-average profits without assuming above-average risks.

Fama and French’s Three-Factor Model is an extension of another important part of MPT, the Capital Asset Pricing Model (CAPM). Put simply, the CAPM says that an investor’s expected return is proportional to a single factor, the stock’s risk relative to the entire stock universe. The expansionary Three-Factor Model is based on the following:

• Market: Stocks have higher expected returns than bonds.
  
  
• Size: Small company stocks have higher expected returns than large company stocks.
  
  
• Price: Lower-priced “value” stocks have higher expected returns than higher-priced “growth” stocks.

Everything that has been learned about expected returns in the equity market can be summarized in three dimensions. First, stocks are riskier than bonds and have greater expected returns. And, relative performance among stocks is largely driven by the two other dimensions: small versus large, and value versus growth. Many economists believe small cap and value stocks outperform because the market rationally discounts their prices to reflect underlying risk. The lower prices give investors greater upside as compensation for bearing this risk.

Successful investing means capturing risks that generate expected return and reducing risks that do not. Financial science-based portfolio design identifies the risks that add value, and then minimizes the costs imposed by traditional approaches, such as “indexing”.

We look forward to discussing this new opportunity with you. Please call us at 800-586-0600 to discuss the benefits of an Oakwood Structured Portfolio.

(1) Dimensional Fund Advisors, headquartered in Santa Monica, California, inaugurated its strategies in 1981 with early research into the stronger performance of small cap stocks. Later, a comprehensive analysis of stock prices worldwide broadened the strategy repertoire and set a new standard for portfolio design options.

(2) MPT is generally accepted as the combination of the pioneering works of Markowitz, Sharpe and Miller who have all been awarded the Nobel Prize.

(3) Eugene Fama of the University of Chicago (father of the Efficient Market Hypothesis) and Ken French of Dartmouth College wrote the paper on the Three Factor Model for Equities which ‘expands’ our understanding of both MPT and the capital markets.