Meb Faber, founder and head of investment at Cambria Investments, said the stock market could fall further. Stocks and bonds are both falling, and Faber said investors need more diversification. Cambria’s two ETFs have done well this year, and he explains how they work.
At times, the investing world seems to be divided into two distinct camps: those who play it safe and seek steady, reliable income, and those who take risks and seek dramatic, market-beating performance.
Meb Faber’s firm, Cambria Investment Management, which manages $1.4 billion, has created a formula that does both, even as the prices of riskier stocks and safer bonds experience a rare simultaneous dip.
In a recent interview with Insider, Faber said that most investors see little downside in a traditional portfolio of 60% stocks and 40% bonds, even in catastrophic times for the market. He doesn’t think that’s true — while periods of sustained and significant losses in equities and fixed income are rare, they do happen. In fact, he thinks such a period may come soon.
“Historically, with low inflation, the 10-year US CAPE ratio has been like 36,” he said. “With high inflation, that goes down to the teens. So if inflation stays high, we’re just talking about just a 50% haircut on the multiple.”
A prolific podcaster, Faber has been warning listeners that stocks are very expensive right now, but the trend is lower, which means investors need to tread carefully.
Despite the tough market backdrop, Cambria’s Shareholder Yield ETF has returned investors about 1% this year, and its Global Momentum ETF has returned 7%, according to Morningstar. Since the start of 2022, the S&P 500 is down 13.5% and the Barclays Aggregate Bond Index is down 9%.
The Global Momentum Fund is essentially buying other ETFs that are rising and are trading above their moving averages. Faber told Insider that the fund, in particular, employs strategies that some investors have been reluctant to use, which is working against them.
Investors often “own too much in the local market. In our case, U.S. stocks and bonds,” he said. Typically, they also “have no exposure to physical assets. So this year you think it’s a pretty big deal, which means commodities, TIPS, real estate. Usually investors don’t invest there, and I think that’s a mistake.”
Momentum funds are heavily exposed to commodities and real assets, with little or no exposure to U.S. stocks other than energy securities. Morningstar said its largest holdings include the Invesco DB Energy Fund and the iShares Global Energy ETF, both of which hold U.S. energy stocks.
If investors want to succeed from here, they should follow these paths, Faber said. Unsurprisingly, he prefers that they do this by buying Cambria’s ETFs, but that’s not the only way to invest. Income-focused shareholder yield ETFs skew toward value stocks, which are cheaper based on metrics like price-to-earnings ratios, Faber noted.
“In the United States, the spread of values is huge relative to history,” he said. “Value stocks are doing amazingly, but the spreads haven’t really narrowed.”
Buying high-dividend or low P/E stocks, or buying funds targeting high-yielding or value stocks, are simple strategies any investor can apply. Notable examples include the iShares MSCI USA Value Factor ETF or the Vanguard Russell 1000 Value Index Fund ETF.
Following trends is a slightly more complicated approach than putting money into ETFs, but Faber believes it’s a great way to diversify. Investors can apply this strategy by looking at indices tracking various asset classes such as commodities, stocks and bonds, and buying stocks that are rising or trading above their moving averages over a period of time such as 100 or 200 days.
The key, according to Faber, is to stick to this strategy for the long term, even though its returns in a positive market may not be encouraging.
“Trend following usually has very few small losers, but it understands that big winners make up for them,” he said. “It can be difficult for investors to actually follow trends, but admit it’s hard to buy and hold, too. .”