“Factors” for the current financial regime change.
“Factors” for the current financial regime change.
Join SmartBe Investments Chief Investment Officer Mr. Gavin Graham for a high level conversation about quantitative factor investing with Meb Faber, CIO, Cambria Investment Management. Regarded for his disciplined, rules-base investing, Meb discusses the financial regime change that began in 2020, the historic outperformance of the value factor during inflationary times, and the opportunity for a momentum/trend overlay in uncertain markets. All this and more in this segment of the Gavin Graham Show.
About the Speakers
About the Speakers
Mr. Faber is a co-founder and the Chief Investment Officer of Cambria Investment Management. Faber is the manager of Cambria’s ETFs and separate accounts. Mr. Faber is the host of The Meb Faber Show podcast and has authored numerous white papers and leather-bound books. He is a frequent speaker and writer on investment strategies and has been featured in Barron’s, The New York Times, and The New Yorker. Mr. Faber graduated from the University of Virginia with a double major in Engineering Science and Biology.
Mr. Graham joins SmartBe with over 30 years of experience in Canadian and international markets. A graduate of Magdalen College at the University of Oxford, Mr. Graham has directed investment strategy at numerous institutions, such as the Guardian Group of Funds in the UK and BMO Asset Management in Canada. In addition to his position at SmartBe, he serves as a contributing editor to The Income Investor, a respected online Canadian investment journal. The Gavin Graham Show is a platform for Gavin to share his wealth of knowledge with the SmartBe community, as well as engage in stimulating conversations with peers and thought leaders.
[00:00:00] Gavin: Welcome to The Gavin Graham Show, sponsored by
SmartBe Investments. And for this episode, we're delighted to have Meb Faber
of Cambria to talk about virtually anything that might be of interest as far as
investment and or, indeed, life, the universe, and everything as The Hitchhiker's
Guide to the Galaxy so wonderfully put it. Meb, could you just briefly tell the
listeners a little bit about yourself and how you got to your present position of
[00:00:28] Meb: My current is in Los Angeles. It's a beautiful Fall day here.
But before that, I was born in Colorado. I grew up a Denver Broncos fan and a
skier. I also grew up partially in North Carolina. Went to college studying
engineering in biomedical. Fully assumed I was gonna be grad school in that
topic, and I did do some grad school. But I was also seduced by the great
investment bubble of our time. Well, so far. At least in the US. Which was the
late 90s internet bubble, which was also a biotech bubble, and so I was fully
caught up in that seduction.
[00:01:09] And so I started out, was supposed to be a sabbatical, a break to
work as a biotech equity analyst while going to grad school before going back
to grad school full time. That wedge kept getting wider and never happened.
And my career, and my interests, and hobby kind of switched places after the
destruction of the internet and biotech bubble. I said, you know, this game is
little more interesting and complicated than I assumed. It's not just as easy as it
was from '96 to 2000, which was when I was in university and watching my
professors trade. And then kept on the quantitative path out here in California,
in San Francisco, and Lake Tahoe. And then started Cambria, which is our asset
management company, in 2006. Started to manage money in 2007. Here we are,
a dozen funds later, over a decade later. Over 15 years later! Geez.
[00:02:04] Gavin: Yes, I know. Doesn't time fly when you're having fun?
[00:02:07] Meb: It's funny because all the media still calls us an emerging
manager and I'm, like, at what point is it? Is it either the age vintage or the size
that we're no longer emerging? Like, I'm ready to have emerged and at least be,
like, a medium size manager.
[00:02:19] Gavin: Indeed. Well, the great thing is you're not submerging, which
would not be good.
[00:02:24] Meb: Yet. That's my favorite quote. As I say, the biggest compliment
you can give someone in the investing business is that you survived. You didn't
get taken out of the game. So we're still here. We're happy to still be here.
[00:02:34] Gavin: And how much do you have in the way of assets under
[00:02:36] Meb: Right around 1.6 billion. And we have, this is a cool stat to
me, over 125,000 investors. We take that with a lot of gravity and seriousness.
We often don't sound too serious when we're talking about things on the podcast
and elsewhere, but it is a serious blessing.
[00:02:55] Gavin: No, it's a big responsibility. You are looking after people's
life savings and you want to try and do the best job you can for them. Would
you say you have a specialization in a particular area? Is there something that
you are really, you feel, excellent at? Or are you excellent at everything?
[00:03:08] Meb: What's interesting is that in a world of 10,000 plus funds out
there, why do we need any more? The beautiful part about, and we often say
there's never been a better time to be an investor. And so here we are in 2022,
and you can buy the global market portfolio for roughly free. That's the benefit
of the Vanguard Complex.
[00:03:28] Gavin: BlackRock, whatever. Yep.
[00:03:29] Meb: Yeah. Or the Death Star, depending on your perspective. But
it's amazing time to be an investor. So what in the world do we need any more
funds for? Well we look around often and scratch our heads and say, "Hey,
there's an interesting idea. Why doesn't this exist?" There tends to be a lot of
group think in our world, right? And so you'll see one funder idea, and then
every single fund complex will copy it. I'm looking at my whiteboard and we
have another dozen ideas.
[00:03:54] There's four criteria when we're launching a fund. The first is either
it has to not exist, or it has to be, what we say, quote: "much better or much
cheaper." You would think those would be rare, but all of our funds are cheaper
than the category average, and we actually have a couple that are the cheapest in
the entire category. But we like to be, what we like to call: concentrated, weird,
[00:04:13] The second is it has to be based on some sort of academic or
practitioner research. Usually we do it. So we publish books and white papers
around the topic before the strategy goes live so people can get comfortable
with what it's doing.
[00:04:25] Third, it has to be something we wanna put our own money into. I
put all my public assets into our funds. The average fund manager in the US
actually has nothing invested in their own fund. Which is a weird state of
[00:04:37] And lastly, is it something people want?
[00:04:38] Gavin: What's been the most successful amongst those of your 1.6
or whatever? Where is the largest amount of assets?
[00:04:44] Meb: Our oldest is the largest. It's done a great job. One critic once
called me the King of Back Tests. And I think he meant that in a derogatory
way, but I actually took it as a compliment because, you know, as a quant you
can come up with any sort of historical view of the world and any beautiful
back test that makes it look like this is the best strategy on the planet. But really
until you start running it in real time, does it really matter?
[00:05:09] The big challenge with any strategy, and we tell people this all the
time, is that it doesn't matter if it's something like stocks versus bond, US versus
foreign, some sort of active strategy versus passive. Trying to come up with any
sort of conclusion from looking at one month, one year, three years performance
is total folly. And I think that's even true with five to 10 year.
[00:05:32] So the good news is, is that our oldest fund, which is called a
shareholder yield ETF, it's a traditional sort of value quality type of strategy. But
there's really nothing like it in the US. It's a 10 year track this spring. And I
think, I don't wanna jinx it, but it's currently the number one ranked fund in the
entire category of hundreds of plus funds since inception.
[00:05:53] Gavin: You got stuff that's done really well and that's worked really
well. Would you say that the macro background with the return of inflation is
making the world a somewhat different place? Cause I mean, you mentioned
that '96 to 2000 internet bubble bull market, and that was, I don't know about
you, but there were lots of echoes in this last five years with the FANG stocks
and the rest of it. And then you had a complete reversal. And what was last was
first, first was last. Does your experience lead you to think that maybe there's
been a major change?
[00:06:20] Meb: Something happened in, I think we pin it to really 2020. You
could mark it as the election. Most likely it's interest rate bottom or the sort of
the Covid low. But there's a very real regime change that happened in 2020.
2021 you had some exhaust from some of the investments still moving. So
there's a lot of shifting waters.
[00:06:42] But 2020 to 2021 very clearly to us was an inflection point. An
inflection point on the big one. Interest rates and inflation. 2022, which is where
we are today, that trend is starting to accelerate. So currently, we said this on
Twitter yesterday, through Q3 we have what would be the worst, it's rare we get
to say this, the worst year for this traditional 60/40 performance in the last 100
years. This is after inflation. On a nominal basis, it's still in the top three. I think
there's an entire generation of investors that have really only been investing or
managing money in one type of environment, which is declining interest rates
for the last 40 years, and that's no longer the case. And that has a ton of impact,
a ton of effects on the portfolios.
[00:07:35] Gavin: It's been a falling interest rate environment. We've gone from
15% to less than 1% on the 10 year US Treasury because inflation was falling.
And now they've let the genie out of the bottle. Oddly enough, it wasn't
transitory. One has to say that, as you said, the worst performance for a 60/40
portfolio. Because of course bonds have absolutely cratered. Do you have any
fixed income exposure? Or do you just look at it in terms of changing the macro
environment for what you're doing in equities?
[00:07:59] Meb: If you look at our allocation strategies, there's sort of a barbell,
and we'll start with the first side. So on the buy and hold side, meaning we
wanna reflect what we call is the global market portfolio, which is roughly
about half stocks and half bonds, about half US and half ex-US. Now we
implement that with not market cap weights, so we move to factors like
Momentum and Value, which we think is important, but also there's a very
sizable real asset component to this portfolio. So commodities, reads and tips. I
always laugh when I'm talking to my Canadian and Australian friends because
they understand this. But the vast majority of Americans, and many people
throughout the world, don't invest in real assets other than say their house. And
so if you look at something like this year, real assets (some of them) are helping
or at least outperforming.
[00:08:51] So that's on the buy and hold side. And traditionally that's a great
portfolio. It does well over time. The problem with buy and hold is it's really
hard to sit through the drawdowns. Drawdowns are a part of life that's a part of
being an investor. We like to say that to be a good investor, you have to be a
good loser. Meaning you spend most of your time in a drawdown.
[00:09:10] There's only two possible binary outcomes or status for an investor.
It's either you're at an all time high or you're in some form of drawdown. Now,
it may not be much, maybe a percent or 5 or 10 or maybe 50 or 80 or 90. You
don't do anything. And a lot of people struggle with not doing anything.
[00:09:25] So on the flip side, you have what we call our Momentum and Trend
Strategy. Which is highly tactical and can move all the way from a hundred
percent cash and bonds to 100% invested in various global assets. And, not
surprisingly, that fund is almost entirely in cash and bonds. Currently with a
smattering of natural resources, which will probably be exiting soon as they've
been also declining. And so the goal on that fund, traditionally it does well
during market downturns, that strategy. But it's also not simple to follow
because it often looks worse in the romping stomping period. So you know, the
entire decade of the 2010s. People struggle with trend following because you're
often looking wrong. They want to pick the tops and bottoms, but that's not
really what it's about. It's about participating in the meat of the move, but also
avoiding the big losses.
[00:10:15] So we've come up with a philosophy where you kind of combine the
two. It's about half buying hold and half Momentum and Trend. We call it Buy
and Trend or the Trinity Strategy. And to us that's a really nice balance between
the two philosophies. The biggest thing is I think it keeps you out of trouble.
[00:10:31] Gavin: Years like this one you can lose an enormous amount. It
takes you a heck of a long time to get back there. I'm not sure whether Nasdaq
was 5,000 in January 2000 and it didn't get back there till what, 2015? You say
you're almost totally cash with a little bit of natural resources. Do you see any
likelihood of changing that in the near future? What would make Cambria say,
"Actually interest rates have probably peaked because the authorities have
recognized they're going to break something and we ought to actually, if not
pivot, at least stop raising them." Or do you think it's gonna continue for a while
[00:10:59] Meb: So the nice thing about being a quant is it doesn't matter what I
think. I could sit here all day with you over happy hour, or coffee, and tell you
all day long what I think. And then the good news is it doesn't make it into our
models. And so one of the benefits of designing these ahead of time, and I think
this is a struggle for a lot of my bearish friends, they sold everything in 2008,
2009. Like they just couldn't take it anymore. They sold all their investments
and then speaking to them in 2012, '14, '16, '18, they never got back in. They
never found that moment where they just could get back invested. And so the
beauty of being a quant is you have strict rules and criteria for how you
approach your investments. And I think this all goes back to having an
investment plan in the first place, which most investors don't. Or a written
investing plan. It's like having a diet, you know, if you're not gonna codify it,
then you wake up in the middle of the night and you go open the fridge and
there's a cheesecake or piece of pizza. What are you gonna do? You're gonna eat
[00:11:52] The nice thing about the Momentum and Trend is it's about as
bearish as you can get. Which is rare. Like usually something is going up, but
it's really not the case. If you were specifically looking at US stocks, so we have
another tactical fund that's called Value and Momentum, and that one combines
half in value and half in trend. I think a lot of people struggle with one concept,
which is, hey, we're down a lot. It can't get any worse. But so the 60/40
portfolio, for example, let's call it we're down 20. The max drought on that is
over 50. And so imagine things getting twice as bad for that. It's hard to
imagine. But the thing is, particularly with US stocks, the rest of the world is
different, but US stocks if you're looking the long term valuation in PE ratios
the highest when I graduated college, so December '99 was at a long term PE
ratio, ten year chiller cape ratio of 45. This cycle peaked at 40. So the good
news is we're down to about 27. It's come down significantly.
[00:12:47] The bad news is the long term average. If we go back to an inflation
of sort of that 2% to 3% is around 22. So that's still lower than we are. The
really bad news is if we sit around here hanging out at 8% inflation, but even
call it 4% or 6%, the average multiple people have been willing to pay
historically in the low teens. That's like 50% from here.
[00:13:08] I'm not trying to be like a huge doomer about this, but it's just more
like, hey, this is what you have to at least be prepared for. And my guess is
come mid-October when we have the next CPI print, it's gonna be high again.
And people are gonna look at that and say: OMG! WTF! Whatever the acronym
they want to use is, and say, "This is not going away yet." That's my personal
[00:13:32] Gavin: It probably therefore would indicate regardless of what your
or my opinion might be, but probably that if those models continue to have the
validity that they've had in the past. We are going to see more downside.
[00:13:43] Meb: But there's some places you can hide. So if you look at the
1970s, 1940s, periods that had high inflation in the US, what was one of the
best places you could hide out? Value stocks or factor base exposures did great.
Particularly on a relative basis. We see what we consider to be one of the largest
value spreads ever. Still. Which is crazy because its had a significant
outperformance in the last couple years, but...
[00:14:06] Gavin: Sorry there Meb. You're saying that value stocks are as cheap
as they've ever been in relation to growth stocks? Even though...
[00:14:12] Meb: Expensive stocks.
[00:14:13] Gavin: Yeah, expensive stocks. I'm sorry.
[00:14:14] Meb: The expensive stuff. And so that's true in the US. It's also true
globally. Just moving away from that market cap index to something else,
preferably value tilt or a multifactor tilt, is one of the smartest things you can do
around the world.
[00:14:29] Gavin: And even though you've had a big relative outperformance
so far this year, it still is pretty enormous. So is that simply muscle memory
from investors? Simply because you've done so well for so long, you find it
enormously difficult to buy stuff that's cheap?
[00:14:43] Meb: Look, it's a story as old as time and markets. People get
excited about something and it gets into favour and something else is totally out
of favor and eventually it goes too far in the reverse.
[00:14:52] I mean, a good example of this, of two sectors that everyone's
familiar with is technology and energy. And you can see these as a percentage
of the S&P. Energy bottomed, I think, at like 2% or 3% of the S&P when once it
was a third. And then same thing with tech. You know, it has its moments when
it becomes the biggest component and then it gets pummelled and goes down
70% or something. And then everyone hates it, and that's usually a good time to
buy it. So you see these oscillations, the greed, the fear, the envy that play out.
We have a Twitter thread from really the peak February of 2021 of just the crazy
behaviour. And there's like 50 charts that you just look at and you're like, what
were people thinking? What was going on?
[00:15:31] Gavin: And the answer is that this has worked and continued to
work and the Central Bank's asleep at the switch and not actually starting to
raise rates once you saw those inflationary pressures coming through. Again, I
think energy, was it 1980 that it was at its peak? Perhaps a reflection of the
underlying inflation situation?
[00:15:47] Meb: There's obviously a lot of places. If you have a balanced
portfolio all these ideas are good right now, but they're good all the time. I have
a balanced portfolio of stocks, bonds, real assets, global focus, tilt away from
market cap waiting. And then have that set on autopilot. That's the way to go for
me, man. I don't wanna have to worry about this all night long, all day, when
things are going crazy as they always do when it comes to markets.
[00:16:10] Gavin: Do you automatically rebalance? Do it on a quarter basis?
[00:16:13] Meb: It varies by fund and strategy. Some are as fast as weekly and
some are as slow as yearly. But in general, they always are quantitative and
rules based. Discretionary is my nightmare. Can you imagine? Oh my gosh. I
don't wanna think about it.
[00:16:27] Gavin: As you say, quantitative and rules based. And have you
found that those rules have changed at all over the 20 years you've been doing
it? The 15 years that you've been doing it for the public? Have there been some
refinements and tweaks or something that maybe you didn't think about before?
[00:16:40] Meb: You know, we like to say the philosophy and theory that
underlies it is usually pretty consistent. But don't wanna be fools. And if there's
a structural change in markets, in particular, we want to be aware of that and
cognizant, and make changes. Now what we're not doing is trying to change the
strategy based on what's working and not working. Which is a huge trap that
everyone falls into. I can't tell you how many professional investors call me and
start talking about three year performance. And I say, "I assume the reason
you're asking me is because you wanna do the opposite?" And they kind of get
caught off guard and they're like, "What are you talking about?" I say, "Well, the
research shows over thousands of hiring and firing decisions that people love to
chase short term performance usually to their detriment." That applies to asset
classes and active strategies on and on. But we want this to be a very slow and
thoughtful process that we design ahead of time.
[00:17:30] And this goes back to studying history too. If you study history of
markets, you understand they're super weird and crazy stuff happens all the
time. That's the base case, but it's always gonna be weirder in the future. But if
you don't study history and you don't know that say 60/40 has had a 50% draw
down before and then you get into it. That's when the emotional fractures
happen and people start to go crazy because their expectations don't meet
[00:17:55] Gavin: It's managing people's expectations. Do the 120,000,
125,000 unit holders you have, shareholders you have, do you have a good
feeling for what they're looking for? Obviously if they're buying a particular
fund, presumably they're looking for quality and yield or a value bias or
whatever. Do you get any steer on on where they're coming from.
[00:18:13] Meb: Yeah, it varies by fund. Like an emerging markets deep value
fund or tail risk fund are gonna be very different with very different intents by
the users. So like the tail risk funds people use in different ways. Some people
use it tactical, some people use it as a hedge. Some people use it as a bond
replacement. Things like our largest fund, the long only shareholder yield, I
mean that's a much more traditional sort of style box lego. People say, "Okay,
I'm gonna not do S&P 500. I'm gonna do this instead." And it's a very clean
discussion. But others, they tend to have a varied usage set and also varies by
institution, advisor, and individual. Each end user tends to have a different
reasoning for why and what they're doing.
[00:18:57] Gavin: Do you have any feel for what percentage of your assets are
institutional and what are individual?
[00:19:02] Meb: I would probably say the majority is institutional or advisor.
But we got a lot of individuals as well. It's a pretty nice diverse mix.
[00:19:11] Gavin: That's good to have, because obviously one of the difficulties
with institutional or advisor is that policy changes and it's we decide we don't
like this. Maybe after those three years. I suppose again, that comes back to
managing people's expectations. If they have a clear idea of what they want
when they're coming in, then they're less likely to be surprised, disappointed if
you've got that lag in performance as happened during the decade of the 2010s,
[00:19:31] Meb: We never know what the future's going to look like. Of course,
if you look at some of the current stock market returns in countries all around
the world, there's a lot of countries that have had zero stock market returns for
10, 20 plus years.
[00:19:44] Gavin: The UK is one of them. Yeah.
[00:19:46] Meb: Yeah. We are shareholders now. It's in pretty, it's all value
territory. Last I checked, it was low teens PE ratios. We'll see at the end of this
quarter, you might might be getting in a cheaper. You know, again, like the US
once traded at a 5 PE ratio. So these things have a way. For the last 10 years the
biggest struggle and culminating really in the last year, the concept of global
investing was met with downright scorn from people. And I say, "Look, it's
good you put all your money in US stocks, but why wouldn't you put all your
money in Brazilian stocks?" And they say, "Well, that's crazy." I say, "Okay,
well what about Japanese stocks?" "That's crazy!" "Australian stocks?"
"Crazy!" I say, "Well, you know what? Everyone in those countries does the
same thing. They invest the majority of their assets in their own country. And it
sounds rational to them. And they would say you're crazy for putting all your
money in US stocks."
[00:20:34] Gavin: The percentage of the MSCI World Index represented by
different countries, I can remember, you can tell from my hairstyle I've been
around for a little while. Late 80s and Japan was actually 35 and the US was
less than 30%. Where are we now? If you don't know the history, if you're not
aware of long term trends.
[00:20:48] Meb: What's amazing about that example is Japan's the granddad of
all the bubbles for us at least. Where it hit this long term PE ratio of almost a
hundred. So the US example of 45, Japan was double that. And just to to scale
how enormous that bubble was, you know, it's taken three decades for that thing
to work off. And so you talk to Japanese investors and buy and hold's not even a
concept. They're like, "What are you talking about? Buy and hold? What do you
mean stocks are the long run?"
[00:21:15] Gavin: But now it's solidly in the value box and there's lots of really
cheap Japanese companies selling for less than cash on the balance sheet and
nobody will buy them because you've had that three decade experience. It's been
a really neat chance to chat. Really have appreciated it. And thank you very
much indeed. I hope we can do this again in the not too distant future.
[00:21:31] Meb: It was a lot of fun. Thanks for having me.
[00:21:35] Gavin: Thank you very much for listening to The Gavin Graham
Show sponsored by SmartBe Investments. If you would like to learn more about
the subjects discussed today, please go to our website, at
smartbinvestments.com or @smartbeinvestments on any social media platform.
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