Investment Spotlight: DFA Large Cap International Value Portfolios

Portfolio weight: varies from ~6-16% of typical client portfolios

Annualized Total Return as of 3/31/2007

Large companies based overseas have generated strong double digit returns over the past 5 years. A robust global economy, low inflation rates, greater liquidity in capital markets generally and increased transparency in overseas markets underpin this stellar performance. While the idea of investing in companies headquartered overseas may still seem novel to some US investors, the distinction between companies headquartered in the US and those headquartered overseas has never been smaller: some non-US companies like Toyota are leaders in the US market place while a number of household names in the US like McDonald’s earn most of their revenue overseas. In fact, as globalization continues to foster cross-border trading and investing, it is nearly impossible to find large public companies that are not deeply involved in global events. Some of the best companies in the world are headquartered overseas and investments in international large cap equity allow our clients to gain access to the fundamental returns generated by these world class firms, in addition to the currency effects as well as some diversification benefit of participating in non-US markets.

As markets become more interdependent, events in individual countries tend to have an impact on the global economy and cause rippling effects throughout the equity markets. Thus, it is not surprising that correlations between the overseas and US equity markets have crept up over the past ten years. So, while the return contributions can be very attractive, diversification is a smaller part of the benefit.

Nevertheless, a less obvious though important source of diversification from overseas investments is through unhedged currency exposure. Currency is a major influence on international equity returns and currency’s low correlation to equity and bond markets makes it a powerful diversifier. Our view that the dollar will continue to weaken further supports our conviction in investments in overseas equity.

To gain exposure to large companies in developed markets overseas, we currently use the DFA Tax-Managed International Value Portfolio (DTMIX) and International Value Portfolio (DFIVX) from Dimensional Fund Advisors. DTMIX has $2.5 billion and DFIVX has $8.2 billion invested in the large companies in Canada, Europe, Japan, Asia Pacific, and the United Kingdom. As of February 28, 2007, the approximate regional allocation for DTMIX was chiefly in continental Europe and the UK, as indicated in the graph below:

Employing its strategy of passive exposure to a very broad array of specific company opportunities, DTMIX invests in a total of 672 companies with an average market cap of $44 billion. Reflecting this very large company make-up, more than one fifth of its total value was accounted for by its 10 largest holdings.

Selected Investments

The following investments are representative of holdings in DTMIX:

ING Groep, based in Netherlands, provides banking, insurance, and asset-management services throughout the world. Based on market capitalization, ING is one of the top 15 global financial institutions. They serve more than 60 million customers in Europe, the United State, Canada, Latin America, Asia and Australia. Its key insurance products include life insurance, pensions, retirement services, and non-life insurance. Its banking operations include wholesale and retail banking and mortgage lending in Europe. In 2006, ING Groep Group managed to raise its net profits by 6.7% to generate a net profit of €7.7 Billion on sales of €73.6 billion.

Daimler Chrysler AG, based in Germany, was formed in 1998 after Chrysler was acquired by Germany’s Daimler-Benz for $37 billion. The company sells about 4.4 million vehicles a year and has approximately a 15% ownership in EADS, the European aerospace and defense consortium. Chrysler’s brands include Dodge, Jeep, Mercedes, Maybach, and Chrysler. Daimler Chrysler’s Freighliner unit is America’s number one heavy-truck maker, and through such brands as Fuso, Mercedes-Benz, and Sprinter, DaimlerChrysler is the world’s leading manufacturer of commercial vehicles. In 2006, Daimler Chrysler generated net income of £2.2 billion on sales of £102.2 billion.

Credit Suisse Grp, based in Switzerland, is the number two financial services firm in the country, after UBS. The firm merged with its Credit Suisse First Boston subsidiary in 2005 and is currently divided into three segments: investment banking, private banking, and asset management. Its investment banking operations, formerly Credit Suisse First Boston (CSFB), operates from nearly 70 locations in more than 30 countries. Its asset management offices conduct business in 18 countries. The company also offers retail banking in Switzerland through about 215 branches. In 2006, Credit Suisse Group generated net income of $4.4 billion on revenue of $68.4 billion.