Coming Full Circle By Marilyn Kun GSB Chicago March 1995

Ask yourself the following questions. Is it unusual for two alumni to team up to start a corporation that relies heavily on research done at the GSB, more specifically at the Center for Research in Security Prices (CRSP)? Perhaps your answer is no. But, what if their company is so successful and innovative that Harvard uses it as a case study for its MBA students? What if the same alumni provide grants for GSB faculty and doctoral research? And what if these alumni were to collaborate with the GSB on projects that apply theories developed at the school to a real-world scenario? Now, the odds of finding two such alumni may seem akin to finding the proverbial needle in a haystack.

Meet alumni David G. Booth, '71, co-chair and chief executive officer of Dimensional Fund Advisors, Inc., and his partner, Rex A. Sinquefield, '72, co-chair and chief investment officer.

Since their days as MBA and Ph.D. students, they have not only formed a friendship that has spanned three decades but have also developed and maintained long-term ties with the GSB and its faculty. In the end everyone has come out on top.

For Sinquefield, CRSP was a major factor in the decision to come to the GSB. "Basically, financial economics would still be in its nascent stages if it weren't for a database like CRSP," he says. "Academics simply wouldn't have been able to do the research that has been done over the years, and it [CRSP] had a big impact on us as students." Booth, too, had used CRSP files while at the GSB as research assistant to Eugene F. Fama, Robert R. McCormick Distinguished Service Professor of Finance.

Both Booth and Sinquefield would continue to rely on the center for accurate data as they began their investment careers. Sinquefield accepted a position with American National Bank in Chicago, where he would become the head of the trust department. Booth headed west as an analyst at Wells Fargo Bank, San Francisco, and later returned to Chicago as vice president of Becker Securities, Inc.

Nine years later in 1981, their friendship took a new route. They opted to leave their successful careers to form Dimensional Fund Advisors (DFA), a firm devoted to managing index funds of small companies.

"When David and I got together and started Dimensional, our first product was a small company fund, sort of a passive small company portfolio," Sinquefield says. He and Booth relied heavily on academic research. In fact, according to Booth, dissertations by two GSB alumni, Rolf W. Banz, Ph.D. '75, and Marc R. Reinganum, '77, Ph.D. '79, on the impact of small stocks, proved helpful to the company. Reinganum had done an empirical investigation of earnings/price ratios, unexpected earning forecasts, and models of capital market equilibrium.

Banz had studied 54 years of New York Stock Exchange (NYSE) data and concluded that small companies outperformed large ones by 3 percent annually. "What Rolf found was that it looked like over long periods of time the rates of return on small stocks, risk adjusted, were higher than the rates of return on other stocks," explains Robert S. Hamada, dean and Edward Eagle Brown Distinguished Service Professor of Finance. "That caused a major uproar on Wall Street."

Although some skeptics had a difficult time proving "the small stock effect," Booth and Sinquefield used the empirical evidence to form buy-and-hold portfolios tilted toward small stocks. "The field was certainly ready for another innovative, passive-type product," Sinquefield says. "It wasn't like we had to convince the world that they should be passive as well. We had to convince them that they had to be passive in the small company arena."

DFA's principals had a major obstacle standing in their way. "In the course of running a small company fund, one of the things you like to have is historical data: an historical time series. And back in the early '80s, the only thing that existed was the New York and AMEX [American Stock Exchange] tapes," Sinquefield says.

When Booth and Sinquefield asked themselves where they could turn for such valuable and necessary information about small stocks, the answer was simple. They looked no further than to where NYSE and AMEX tapes originated: the GSB.

"Since we both went to the business school and we kept a close tie with the University of Chicago, and CRSP did such a great job on New York and AMEX, it was only natural we would go to CRSP," Booth says.

He and his partner decided to co-fund the NASDAQ database, both to help CRSP and to get the database their company needed. In 1984, with gifts of $180,000 each from DFA and the National Association of Securities Dealers (NASD), the road was paved for CRSP's newest database to be developed. The NASDAQ file contains daily information for more than 11,000 common stocks traded on the NASDAQ Stock Market since December 14, 1972.

To Hamada, then director of CRSP, the gift seemed perfect-and still does. "We at CRSP already had the reputation of producing deliverables such as databases, so it was a natural marriage," he says. "The NASDAQ tapes are very important to the GSB in terms of our reputation and allowing our faculty and students to do research. So you can see the joint benefits to everybody."

Since the founding of DFA, Booth and Sinquefield have added about 15 different passive or structured portfolios to their product line. Today, the firm has more than $11 billion under management and maintains offices in Santa Monica, Sacramento, New York, Chicago, Sydney, and London. And CRSP feeds data to more than 2,000 educational, corporate, and government subscribers.

DFA's long-standing relationship with the GSB isn't limited to CRSP. Since 1988, the firm has made an investment in new financial research done at the GSB by providing funds for 12 doctoral stipends. Two of the stipend recipients are current Ph.D. candidates. Among the remaining, seven are now assistant professors of either management or finance at universities across the country and three have taken positions in the private sector. In addition, grants from DFA have funded faculty research in financial markets. From 1987 to 1992, the firm gave a total of $250,000 to the capital campaign fund.

All told, DFA's financial gifts to the GSB surpass the half-million-dollar mark, not including individual gifts from both Rex and Jeanne Sinquefield, '79, DFA's executive vice-president and portfolio manager, and Booth.

Some people reach the pinnacle of success without ever looking back along the way. That is not the case with alumni Booth and Sinquefield. The duo set out to build a successful and innovative company of their own and succeeded; they have also been quick to credit the GSB for the impact it has had on their lives.

"Basically people ask, 'How do you do it?'" says Sinquefield. "I say, 'Very simple. I was lucky enough to be at the right place at the right time,' which was the University of Chicago in the early 1970s. Every time one of my professors talked about efficient markets. I thought I was looking at Moses coming down from the mountain, and I took it that seriously. Almost from the first time I heard these notions, I said, 'I think the only thing I am interested in is applying these ideas.'"

March 1995