Investing in emerging-market small-cap stocks paid off in a big way for Dimensional Fund Advisors LP this year.

Dimensional’s $4.7 billion Emerging Markets Small Cap Portfolio produced the highest risk-adjusted return of 197 similar funds in the first half, according to the Bloomberg riskless Return Ranking, by spreading cash across more than 3,000 stocks of small businesses in 17 countries from India to Brazil, while skirting Russia.

The fund, managed by Karen Umland and Joseph Chi, gained 1.2 percent when adjusting for price swings, double the return of the MSCI Emerging Markets Index.

Umland and Chi shun stock picking and invest based on research from Dimensional board members Kenneth French and Nobel laureate Eugene Fama, 75, whose model argues that small-cap stocks, often defined as companies with a market value of $250 million to $2 billion, beat broader markets on a regular basis.

The fund, which has 11 percent of assets allocated to Indian stocks, was bolstered by the 56 percent rally in that country’s small caps leading up to Prime Minister Narendra Modi’s May electoral win.

“The past six months has been a good period for small-cap stocks in emerging markets,” Umland said by phone from Santa Monica, Calif. “Small caps in India, for example, have had a very strong period and we have a slight overweight in India compared to most benchmarks based on our methodology.”

Risk Control

Her fund produced a total return of 11 percent in the first six months, seventh-best in the ranking, and had the seventh- lowest volatility, at 8.8. Bloomberg’s risk-adjusted return is calculated by dividing total return by volatility, or the degree of daily price-swing variation, giving a measure of income per unit of risk. The returns aren’t annualized.

In second place was the Franklin Templeton Emerging Markets Smaller Companies Fund, which returned 1.16 percent after accounting for price swings and 9.8 percent before. The ranking included funds with at least $250 million in assets and excluded those that focus on specific regions.

The two funds were among the 10 least volatile in the ranking. Price swings in Dimensional’s fund were below those of the MSCI Emerging Markets Index, which had a volatility of 11 in the six months.

“The fact that no single company makes up a big percentage of the portfolio is probably one of the main elements of risk control,” Umland said. “If something unforeseen happens to one of the companies we invest in on the negative side, it won’t have a big impact.”

Taiwan, Turkey

Dimensional, based in Austin, Texas, limits the fund’s exposure to any one country at 15 percent at the time of investment. Small caps Taiwan accounted for 15 percent of the fund’s holdings as of March 31, the largest allocation, and South Korea and China made up more than 14 percent each. Brazil equaled 9.2 percent. Other countries in which the fund invests include Malaysia, South Africa, Turkey and Poland.

The Dimensional fund beat 93 percent of peers over the past five years, before accounting for price swings, according to data compiled by Bloomberg. So far in 2014, it did better than 96 percent of similar funds.

Limited variation in country and industry weightings can hold back the fund, which in 2013 “significantly underperformed” some of the peers that it’s surpassed this year, Patricia Oey, a senior analyst at investment data provider Morningstar Inc. in Chicago, said by e-mail.

Transparent Markets

“An actively managed fund might see more variation in country and sector weightings,” Oey said. “As a result, the DFA fund may outperform its peers at times, and underperform at other times, depending on the DFA fund’s relative country and sector weights.”

Umland and Chi’s investment strategy reflects a philosophy, stretching across Dimensional’s equity funds, of avoiding stock picking, thereby reducing the research costs that accompany it. Founded in 1981, Dimensional had more than $375 billion in assets under management globally by June 30, making it the eighth-largest U.S. mutual fund company, according to Morningstar.

Seventeen percent of the cash was invested in emerging- market equities as of March 31, data on the company’s website show.

“At the core of the philosophy is the idea that we think that in liquid, transparent markets, prices do a good job of reflecting available information,” Umland said. If sufficiently transparent and liquid, the market, rather than individuals, is best placed to determine the value of stocks.