Mutual funds often have the reputation of being suitable for the average investor but not really appropriate for the sophisticated individual or institutional investor.  What is interesting about this reputation is that it is absolutely false with respect to some of the most truly sophisticated investors out there:  those who make use of the growing body of academic research into so-called "market anomalies."  Two of the anomalies that have received the most attention are the "small company effect" and the "value effect" which refer, respectively, to the tendency of smaller companies and companies trading at low price-to-book ratios to exhibit higher returns than the market as a whole

A careful reading of the research supporting these phenomena will show that the only conclusions one can reasonably draw from the studies are statistical in nature. That is, they tell us something about how certain large groups of stocks have behaved in the past but nothing at all about individual members of those groups. We know, for example, that if you rank all stocks by their price-to-book ratios, the bottom third of the market will typically achieve higher returns over the following five years than either the market as a whole or any other price-to-book grouping. The research supporting this conclusion, however, has not so far been able to tell us how to further refine our selection to individual stocks within this bottom third.

The only investment strategy supported by these findings, then, is one that involves buying the entire bottom strata.  Since this involves several hundred stocks, an institutional mutual fund designed to capture this segment can actually operate more efficiently, with greater economies of scale, than any but the very largest of investors. One example of just such a fund is the DFA US Large Cap Value which has annual operating expenses of just 0.35% versus an average for all equity funds of 1.60%.

It's also interesting to note that CALPERS (the California public employees pension plan), one of the largest institutional investors in the nation, has engaged Dimensional Fund Advisors to handle its passive investments in the small cap part of the market.