Client Letters

When it comes to your finances, the company you keep is important. As if hard-learned lessons from company scandals were not sufficient, this wisdom became even more apparent when you read about Fannie Mae, the nation’s behemoth government sponsored home loan agency. The Federal Housing Enterprise Oversight board issued a blistering 211-page report last week accusing Fannie Mae of using “cookie-jar” reserves and other accounting shenanigans to manipulate its earnings, to artificially pump up its regulatory capital and to line the pockets of its executives. The Barron’s article (9/27/2004) goes on to report that Fannie Mae was ridden with “dysfunctional” accounting policies, and weak or non-existent internal controls that raise concerns over “the overall safety and soundness of the Enterprise”.

To make matters worse, Fannie Mae’s stock has lost 14% of its value. The Justice Department has launched a criminal investigation into the company’s accounting practices. To secure it’s financing huge amounts of Treasury securities may have to be purchased, thereby pushing down interest rates while the Federal Reserve tries to increase interest rates to contain inflation, reports the New York Times (10/3/2004).

Protection against such upheavals is neither guaranteed, nor the main reason we use Dimensional Fund Advisors (DFA) as a key resource for building your portfolios. However, we think recent events illustrate why such protection is an inherent added value within the company we hope that you keep. We strongly believe that the management at DFA and its Fund directors have investor interests as their primary concern. That concern begins with a commitment to create the very best passive asset class funds. DFA’s commitment to investors also can be seen in its concern for minimizing investor costs, addressing tax issues, and accepting investors only through qualified advisors who understand the importance of using DFA funds for long-term investing rather than for speculative or short-term activities. Finally, DFA has demonstrated vigilance in trying to stop any attempts at “market timing” with DFA funds, as well as in strict enforcement of market deadlines to prohibit illegal late trading. All of these factors add up to protection of your interests in a risky and sometimes greed-driven investment climate.

s The

markets have tended to move sideways during both of the past two quarters. For example, from February through September 30, the DJIA has gone from around 10,400 to 10,100, down about 2.9%. Although the economy is continuing to show signs of recovery, even in the face of continued high unemployment, the future is difficult to predict. Such changes in direction from month to month again illustrate the importance of remaining continuously diversified across multiple asset classes, whether the news is good, bad or mixed.

s International markets continue to benefit from globalization. Brian Garvey of State Street Global Markets reports that US Treasury data show US investors spending $78 billion to buy foreign securities in the past 12 months. Euro zone, emerging markets and Latin America seem to be the beneficiaries. International markets continue to add further to the benefits of diversification. Your advisor can discuss with you how this might affect your portfolio.

Following is a representative sample, as of September 30, 2004, of DFA funds in the asset classes covered by DFA and currently recommended for use in our client portfolios. This is not a complete list of all DFA funds, and your portfolio may or may not contain all of these funds.

Fund Name	3rd Quarter	Year-to-Date	One-Year	Three-Year	Five-Year
US Large Company	-1.88	1.45	13.69	3.89	-1.45
Tax-Managed US Equity	-2.27	1.57	13.96	4.67	N/A
US Large Cap Value	-0.29	5.44	22.90	10.54	7.53
Tax-Managed US Marketwide Value	-0.56	5.73	22.39	6.14	4.04
US Micro Cap	-4.31	2.29	19.12	19.90	15.30
Tax-Managed US Small Cap	-4.04	2.45	18.30	14.51	10.58
US Small Cap Value	-2.14	8.93	31.49	23.63	17.59
Tax-Managed US Small Cap Value	-2.17	6.02	26.24	18.75	13.97
Real Estate	8.03	14.53	24.64	19.02	18.58
International Value	0.62	9.84	30.21	16.48	5.85
Tax-Managed International Value	-0.51	8.46	27.10	15.19	4.78
International Small	-0.48	13.00	26.52	23.12	9.26
International Small Value	0.31	14.13	28.80	26.97	12.44
Emerging Markets Large	8.43	9.61	28.67	24.96	6.44
Emerging Markets Value	12.76	15.38	41.51	35.28	10.03
Two-Year Global Fixed	0.95	0.69	0.75	2.88	4.27

Notes: Returns for more than one year are annualized. “N/A” appears where returns data did not exist for the entire period. We hope you will find the above information of interest, and that you will use it in the spirit it is provided. While not meant to serve as a basis for your portfolio assessment, results from one year or less are useful as a tool to better understand how frequently such short-term market fluctuations occur, and yet how unpredictable they are. Likewise, three- and five-year returns demonstrate that different asset classes can be in or out of favor for longer periods, but again without a reliable basis for prediction. This in turn provides further evidence that clients should build entire portfolios and focus on their portfolio’s total return rather than on individual asset classes.

Third Quarter 2004 Client Letter

3rd Quarter

Tax-Managed US Equity

US Large Cap Value

Tax-Managed US Marketwide Value