Few investment companies have enjoyed the degree of success marketing their mutual funds through independent financial advisors that Dimensional Fund Advisors (DFA) has. Then again, few mutual fund companies are as out of the mainstream as DFA.

It is, in essence, a company that prides itself on being a maverick. You barely hear anything from this company because it spends next to nothing on marketing and does not sell directly to individual investors.

At its Santa Monica, Calif., headquarters, investment research and trading are not the stuff of smoke-filled rooms and harried equity analysts.

They are instead research and theory emanating from the subdued halls of academia. Two Nobel laureate economists have been affiliated with the company, and one of them, former Long Term Capital Management partner Myron Scholes, sits on the company's mutual fund board.

DFA also has strong ties to economists at the University of Chicago, where its two co-chairmen attended graduate school. It relies heavily on the work of Eugene F. Fama, whose research argues value and small caps always beat growth and large caps over the long run. In the late 1990s, that strategy proved costly to DFA and advisors who relied not only on their funds but also on their appproach to doing business.

Many of DFA's leading disciples in the advisor community have embraced the asset-allocation concept advanced by the firm, Fama and his colleague and fellow researcher Ken French. Research conducted by French concluded the optimal allocation between U.S. and international equities was 50%-50%. Some advisors who work with DFA followed this recommendation and, in the late 1990s, were faced with significant client defections, prompting rival advisors to wonder if the DFA disciples hadn't been brainwashed by too much academic research.

DFA maintains its investment philosophy is based on academic research that relies on the premise of an efficient stock market. In its view, stock picking and market timing are exercises in futility.

The company's co-chairman calls the media talk about stock picking and market timing "investment pornography." Company officials routinely scoff at the notion that anyone walking the earth has the talent to consistently beat the market.

In the age-old debate between passive and active investors, DFA officials are standard-bearers for the passive side and staunchly defend their views. Often brash and outspoken, they take a contemptuous view of active investing: It's a waste of time.

The Warren Buffetts of the world, they say, are merely lucky. If you have a universe of 10,000 money managers, a handful will defy the odds. And most of those who do have a run of several good years, they assert, usually revert to the mean, or lower, in five years or so.

Rex A. Sinquefield, the DFA co-chairman who garnered many laughs with his "pornography" remark, maintains individual stock picking is "irrelevant" because, at any given point, stock market prices are at efficient levels. "Just because there are some investors smarter than others, that advantage will not show up," he declares. "The market is too vast and too informationally efficient."

DFA, along with other small-cap and value-oriented companies, suffered a black eye from the performance of its funds in the late 1990s. But DFA officials say they were somewhat heartened by the way growth and large caps fell in 2000. "Every few years, you get a great story like this, which drives the message home," says Dan Wheeler, director of DFA's Financial Advisor Services. "I think active management, 10 years from now, is not going to be the powerhouse it is today. You can only fail for so long before people figure it out."

DFA wins praise from many for the way it has targeted the advisor community since the late 1980s. "From the start, they treated us like professionals, not like sales people," says Harold Evensky, chairman of the Evensky Group in Coral Gables, Fla. Other fund companies would retain motivational sales consultants to speak at meetings, but DFA typically turned to top-flight academics to enlighten advisors.

DFA pushes its message so hard, in fact, that even some financial advisors who use the company's products are sometimes turned off by it. Some advisors-all of whom must be approved by DFA before they can offer the company's funds-say the company's view of other investment approaches is outright arrogant.

"It's like a religious cult," says Abner Oldham, an investment advisor at Capital Perspectives in Chattanooga, Tenn., who has been using DFA funds in his portfolios for five years. "Their attitude is, 'We're the best and offer the best funds, and we expect you to do the same.'"

Yet Oldham and other financial advisors who raise eyebrows at the company's arrogance do appear to agree on one thing: The company delivers results that are consistent with the market returns it sets out to replicate. "I do think, as a group of funds, they do offer a lot of good choices," Oldham says.

Not all advisors buy into DFA's investment philosophy or the marketing tactics of "Saint Rex," the company's outspoken co-chairman. "I had a problem with a company whose business model relies on constantly mocking their competitors," notes Richard Wagner, head of WorthLiving LLC in Denver.

Once when Wagner wanted to put several clients into a DFA fund, the company asked to see his business plan first. Put off, Wagner declined. The cavalier attitude with which DFA dismisses the quest for investment performance also left him puzzled. In particular, the boast of DFA officials that in any given year 33% of their funds finish in the top 40% of all funds left him underwhelmed.

Nonetheless, DFA's growth is evidence of increased interest among advisors, particularly those seeking a conservative family of offerings. Founded in 1981, DFA's family of funds includes about $34 billion in assets. About $10.5 billion is advisor assets, and most of the rest represents institutional clients, Wheeler says.

Overall growth in the company's advisor business in 2000 was 8%, or $800 million, which was about the same as its growth in 1999, he says. Both years were down from 1998, when the advisor business grew by 15%.

"Anything that had to do with small and value was getting killed," Wheeler says of the late 1990s. "We spent a lot more time and energy in keeping clients disciplined than we did telling our story."

While he acknowledged some clients and advisors bailed on DFA, Wheeler said the defections were minor. "We did lose some advisors. But we didn't lose any significant ones," he says.

The advisor side of the business was started in 1989 and since then has accounted for 65% of the company's overall growth, he says. About 350 companies have been approved by DFA and have access to the company's funds. That includes everyone from individual advisors to businesses with staffs of hundreds of advisors, Wheeler says.

Wheeler, who started DFA's financial advisor services unit, was led to the company as a financial advisor searching for passive-investing solutions for his clients. "The only option back then for passive investing was the Vanguard 500," he says.

He soon found other advisors who were looking for similar alternatives, as well as those who found active investing unrewarding. "The first five years we saw people come out who were frustrated with active investing," he says.

But there was also another niche in which DFA seemed to have particular appeal: CPAs. Stuart Zimmerman was among a group of CPAs who decided to rely on DFA when they founded Buckingham Asset Management in St. Louis in 1994. The firm has $330 million under management, most of it in DFA funds, Zimmerman says.

Three years later, the company started BAM Advisor Services-a firm that provides back-office and marketing services to CPAs who are transitioning to financial advisor businesses. BAM Advisor Services provides services for 83 CPAs, comprising $535 million in managed assets. Most of the money is in DFA funds, Zimmerman says.

DFA appeals to CPAs because it provides a "sensible, documented long-term strategy," Zimmerman says. "CPAs certainly understand risk and reward."

The recognition and classification of stock market risk are key ingredients to the DFA investment philosophy, which puts a bit of a twist on pure passive investing. Like other passive-investment funds, DFA mainly uses index funds.

But it does so with a family of more than 30 funds that each center on a singular "dimension" of risk, based on DFA's own indexes rather than third-party indexes such as the Russell 1000 or S&P 500.

DFA may be passive in nature, but the firm's management makes active decisions based on academic research. Evensky notes that, unlike most value index funds, most of DFA's value vehicles don't hold any utility stocks. That strategy hurt its relative performance in 2000 and helped it in early 2001. "You may disagree with them, but they have sound reasons for these decisions," Evensky adds.

The company also diverges from pure passive investing by advocating extra weighting on small-cap, value (based on book-to-market ratio) and international equities. The weightings are based on research by Fama, who is DFA's director of research, and other scholars who hold positions with the company or are affiliated with it. They include Scholes, a winner of the 1997 Nobel Prize in economics, and the late Merton Miller, who won the same prize in 1990.

Scholes sadly went on to achieve notoriety and to prove that some forms of active investing could be even more dangerous than Sinquefield's apocalyptic visions portrayed them in 1998. That year, as a partner at Long Term Capital Management, Scholes spent his summer at ground zero as a participant in what became the biggest financial disaster since the 1987 stock crash. The hedge fund was bailed out and ultimately liquidated in orderly fashion by a consortium of investment banks to prevent the disaster from taking the rest of the global financial system along with it.

A psychic benefit of being a DFA disciple was attending meetings in which one could participate in spirited intellectual jousting between Scholes and Miller over active versus passive investing. "I'd refer to them as an applied think tank from the University of Chicago that takes some of the best ideas and is actually building investment tools with them," says John Bowen, a consultant who has worked closely with the company and is the founding CEO of Creating Equity Group LLC in San Martin, Calif.

DFA touts its funds as building blocks for structuring diversified portfolios that can be counted on to grow at the same pace as the market. "None of the funds are meant to be stand-alone investment products," says David Booth, DFA's other co-chairman.

At the same time, the company places a heavy emphasis on minimizing trading costs. This, Sinquefield says, is crucial because the fund deals heavily in small-cap and value equities, whose limited liquidity could lead to high trading costs. DFA gets around that essentially by acting as Wall Street's version of Wal-Mart: extracting discounts on bulk purchases of stock.

The savings on trading costs alone, Zimmerman says, give DFA the edge over its active-investing competitors. "All things being equal, passive and active will both underperform the market by the amount of their expenses," he says. "We figure active managers have a 5% hurdle to get over, and it can't be done."

Booth cites the cost savings when explaining the ability of the company's small-cap funds to consistently beat the Russell 2000 Value Index. DFA's U.S. 9-10 small-cap fund, which invests in the smallest 20% of companies listed on the New York Stock Exchange, has produced average annualized gains of 14.58% since it was started in 1982. That beats a 13.1% average for the Russell 2000 Value benchmark during the same period.

The U.S. 6-10 value fund, composed of the 50% of smallest domestic stocks whose book-to-market ratio is also in the highest 30%, has had an average annual return of 14.68% since its inception in 1993, compared with 12.01% for the Russell 2000 Value Index.

DFA's large-cap funds, which don't benefit from the trading discounts, have mostly underperformed the Russell 1000 Value index.

Still, in recent years, DFA funds have underperformed many actively managed funds in the growth and large-cap sectors. While poor performance in the international sector continues to hobble DFA clients, the partial comeback of value and small caps in 2000 has been encouraging, says Gene Dongieux, chief investment officer with Mercer Global Advisors in Santa Barbara, Calif., and an advisor relying on DFA since 1991.

"I'm experiencing a turnaround," he says. "Potential clients are calling us who are discontent with their other strategies. They're calling us cold."

Mercer Global, he says, remains committed to DFA because of the academic foundation of its investing philosophy. The firm has about 85% of its assets in DFA funds, he says. "We really like the fact that they are the product solution for the academic findings coming out of the University of Chicago and other places," Dongieux says. "We have a lot of respect for them."

Steven E. Evanson, owner of Evanson Asset Management in Monterey, Calif., says when he was looking for indexing alternatives seven years ago, he found DFA, Vanguard and a few Schwab funds that met his needs. "They are the only player (besides Vanguard)," he says. "It's conservative and low-cost. And because of the diversification, it's low-stress and low-worry investing. I hear this from my clients all the time."

His clients' portfolios were flat to slightly up in 2000, but he says, "Compared to some of their friends who were twisting and turning in the wind, my clients were sleeping fine and happy."

Some advisors, however, feel DFA is sometimes weighed down by its own philosophy. William Muhs, owner of MontVest LLS investment advisors in Bozeman, Mont., has been using DFA funds for four years, and regularly includes about nine of the company's funds in clients' portfolios. "The main attraction of Dimensional Funds is that their managed portfolios are well-targeted, well-positioned, well-managed and low-cost," he says.

But Muhs says he also regularly uses actively managed funds to capture areas not targeted by DFA, such as natural resources, convertible bonds and health sciences. The mix of active and passive funds enabled larger accounts to see gains of 15% to 30% in 2000, he says. "I think generally (DFA's) philosophy is correct," Muhs says. "However, I don't think one needs to be terribly dogmatic or zealous about the issue. They're pretty unwilling to listen to any other issues or sides."

As a former partner in Reinhardt Werba Bowen Advisory Services Inc. in San Jose, Calif., Bowen trained hundreds of advisors who went on to use DFA products starting in about 1989. Some advisors, he says, do chasten at DFA's hard-line stance on passive investing.

"You could call it arrogance or you could call it passion. DFA is doing what they believe is right," he says. "They can be very passionate about (passive) investing, and I think in some cases, some advisors have been uncomfortable with that stance."

Greg Curry, president of Pillar Financial Advisors of Louisville, Ky., would have reason to be unhappy. He started using DFA three years ago when he started his independent advisory business. That was about the same time value and small caps were dismally underperforming growth and large caps. "I couldn't have picked a worse time," he says. "Clients were questioning me, asking why their neighbors did 30% and you did 6%."

Curry, however, stuck with DFA because he feels it offers a well-balanced selection of funds and is in tune with his own buy-and-hold investing philosophy. By using mainly DFA funds, as well as the Vanguard S&P 500 and Hennessee Cornerstone Growth funds, Curry was able to outperform the market with break-even results last year.

"Their goal is to provide good well-balanced building blocks. It's our responsibility to figure out how to use them," he says.

DFA, of course, didn't invent passive investing, and the debate of passive vs. active was going on years before the firm's inception and isn't expected to end anytime soon. It's also been typical for academia to lean on the side of passive and market players to lean on the side of active.

But in some ways, DFA is guilty of falling into the same traps that active investors do. While the firm argues that you can't beat the market, it also maintains that investors can enhance their returns by tilting portfolios to overweight certain asset classes. Citing Fama-French research, DFA executives told their disciples that value beat growth, that small-cap stocks outperformed their large-cap counterparts and that international investing reduced risk. All three strategies boomeranged for an extended period in the late 1990s, and DFA's Booth acknowledges several disciples defected.

Some skeptics question the value of excessive reliance on academic research. Ron Muhlenkamp, who heads his own value-oriented mutual fund company based in Pittsburgh, questions a lot of recent academic research on stock market trends. One reason is that the historical time period they attach most weight to is the 1965-98 era, a 33-year period neatly divided into a long bear market followed by a long bull market. "A lot of what happened in the economy during those years was knocked out of whack by inflation and interest rates," Muhlenkamp says.

While some believe that Fama, French and other academics favor value as a superior asset class because it performed relatively well in the 1970s and 1980s, Muhlenkamp believes value is more reliable but doesn't necessarily generate higher returns. As for the academic research, he maintains that "by the time something has worked long enough that you can prove it, it no longer works."

Fama, however, says his research covered a 70-year span, and recent history has not altered his conclusions. "The data for the last 10 years is about where it was historically," he says.

Peter Di Teresa, senior editorial analyst at Morningstar, says both methods have their pros and cons. Although DFA often argues that consistent market beaters are virtually impossible to find, Di Teresa says it's a stretch to attribute Bill Miller's string of market-beating years at Legg Mason to luck. "We do see active managers who have been able to beat the market over extended periods of time," he says.

At the same time, index funds have proven themselves more resilient, while Miller's performance has floundered n the last year. "The index funds in a given category do typically beat the average fund when we look at them over a period of time ... Over a three- to five-year period or longer, they tend to be at least in the upper half of their category and often in the upper third or better."

The concept of "buying the market" has also been growing in popularity, as illustrated by the growth of index funds. Since 1990, the number of domestic index funds has gone from 12 to 177. Index funds now comprise about 3% of all funds on the market, Di Teresa says.

Much of the growth, he says, has been tied to the successes of the S&P 500 index in the 1990s. Sixty of the 177 index funds are based on the S&P 500, he says. Statistics and annualized returns aside, however, index funds and passive investing suffer from one major problem: the boredom factor.

In other words, index funds have never made for interesting talk at cocktail parties, says Meir Statman, professor of behavioral finance at the University of California at Santa Clara. "People treat the mutual funds the same way we all treat automobiles, wine and other similar types of products: Not as generics, but as status goods," Statman says.

The irony of it is, he says, many people may delve into growth investing and be happy-even if their equities aren't performing as well as they would with an index fund.

Given the conservative nature of index funds, he says, this isn't surprising. "I think that an index fund is one that's always mediocre," he says. "It's like a Volvo-it will kind of get you there safely and has no flash ... One thing you know with an index fund is that you will never win."

DFA isn't oblivious to the fun factor. "I think it's part of our culture to want to win," says DFA's Wheeler. "Everyone wants to believe, in spite of all the data, that there is a Michael Jordan of money management, and somehow they're going to find him and make a lot of money doing it."