MW How this money manager's one-of-a-kind fund beats the market without Nvidia and other tech stocks
By Philip van Doorn
Cambria Investment's Meb Faber tells MarketWatch how he makes shareholders money by owning high-quality, dividend-paying stocks that most investors overlook.
A money manager might bash competitors or lament the state of the financial-services industry when promoting their own business, but Meb Faber, CEO and co-founder of Cambria Investment Management, had something to say during recent interview with MarketWatch that might surprise you.
"This is the best time ever to be an investor," he said, because of how easy it can be to set up a diversified portfolio without spending a lot of money on management and other fees.
Still, if you're looking for expert help managing your investments, Cambria's flagship fund, the Cambria Shareholder Yield ETF SYLD, has been among the best. The exchange-traded fund is one of the top-performing actively managed U.S. ETFs over the past five years, according to FactSet.
Faber uses a value-oriented approach to stocks that focuses on high-quality companies - corporate-management teams whose actions create tangible value that can move a stock higher. Faber wants to own shares of companies that are showing improved financial performance and a combination of debt reduction and dividend payments, as well as a reduction in the share count to increase shareholders' participation in companies' success.
Faber's success at finding these companies has led his ETF to a five-star rating - the highest - within investment researcher Morningstar's U.S. Fund Mid-Cap Value category.
For this specialized, consistent investment discipline and success, Faber has earned a spot on this year's MarketWatch 50 list of the most influential people in markets.
Bitten by the bug
Faber is a high-profile figure among fund managers - authoring books and white papers covering various investment topics, speaking at conferences and making numerous media appearances. But he did not set out to be a professional investor.
He earned a bachelor's degree with a double major in engineering and biology at the University of Virginia and wound up working for a biotech mutual fund. The fund didn't perform well - "If you remember anything about 2000 [to] 2003, it was probably not a good time to own biotech stocks," Faber said - and he moved on.
But Faber was, as he puts it, "bitten by the investment bug." He moved to San Francisco and joined a commodity-trading adviser and futures-trading shop. There, he said, "[I] began to get my toes wet with quantitative research, analysis and ideas."
Using his scientific and engineering skills, Faber developed an investment approach to stocks centering on portfolio diversification and a unique criteria he calls "shareholder yield."
Shareholder yield
Faber co-founded Cambria in 2006 with Eric Richardson, who was serving as the firm's CEO when he died in 2018. At that time, Faber stepped up from his role as chief investment officer to become CEO. The firm has about $2.5 billion in assets under management, with 15 people on its investment team.
The Cambria Shareholder Yield ETF was established in 2013 and now has about $1 billion in assets. The ETF's five-year total return through Oct. 11 was 112%, compared with returns of 110% for the Vanguard S&P 500 ETF VOO and 111% for the SPDR S&P 500 ETF Trust SPY.
The Cambria Shareholder Yield ETF holds a portfolio of 100 U.S.-listed stocks of companies of various sizes. The stocks are weighted equally when the fund is rebalanced each quarter. Stocks added to the fund are typically those of companies with shareholder yields of 10% or higher.
Faber defines shareholder yield as a company's cash dividends paid, plus net share repurchases, plus debt reduction, divided by the value of a company's stock.
The idea is that a company that is producing plenty of cash and spending it wisely gives investors an attractive value proposition. For stock buybacks, the focus is on net repurchases. This is because some stock buybacks are done to "mop up compensation," which is Faber's term for mitigating the dilution caused by the shoveling of new shares to executives.
Net repurchases represent actual reductions in the share count that support higher earnings per share and, hopefully, higher share prices over time.
After screening thousands of stocks for high shareholder yield, Faber then considers additional metrics to come up with a portfolio of companies that trade at "a valuation discount versus S&P 500 Index and Morningstar Mid-Cap Value category average," according to Cambria's description of the fund. These valuation metrics include ratios of price to book value, sales, earnings and cash flow, as well as enterprise value to earnings before interest, taxes, depreciation and amortization.
Many of these attractive stocks are hardly household names. For example, as of Oct. 14, the top five holdings in the Shareholder Yield ETF were, in order: CNX Resources $(CNX)$, REV Group $(REVG)$, Jefferies Financial Group $(JEF)$, Prog Holdings $(PRG)$ and Adtalem Global Education $(ATGE)$. No Apple $(AAPL)$. No Meta Platforms $(META)$. No Nvidia $(NVDA)$.
Faber's value-focused, shareholder yield approach gives his fund's portfolio more downside protection and less volatility. During 2022, for example, when the S&P 500 fell 18.1%, the Cambria Shareholder Yield ETF fell 6.2%. Meanwhile, the ETF's five-year outperformance has been remarkable, not only for beating the S&P 500, but for doing so using a value-oriented strategy.
(All investment returns in this article are after annual expenses, which are 0.03% of assets for the Vanguard S&P 500 ETF, 0.0945% for the SPDR S&P 500 ETF Trust and 0.59% for the Cambria Shareholder Yield ETF, which is actively managed, as are all the Cambria ETFs.)
'The best time ...'
Getting back to his statement that this is the best time to be an investor, Faber said that the "biggest base" for successful investing for a typical investor is "the decision to save and invest in the first place."
He added: "The starting point is the global market portfolio. If you just bought every public asset in the world, it would get you to about half stocks and bonds, about half U.S. and half foreign," he said.
"You can get that for [very low] cost with extreme tax efficiency - a do-nothing portfolio. Buy two Vanguard ETFs and get 90% there for 3 basis points," he said.
Vanguard is well known as a pioneer in the realm of index funds. An index fund is passively managed to track a broad index, such as the S&P 500 SPX, or a more narrowly focused index that might be custom-designed for a particular mutual fund or exchange-traded fund. One reason active money managers have difficulty outperforming indexes is that they have to charge management fees. An index itself has no fee. And when Faber refers to a fee of "3 basis points," he means an annual fee of 0.03% of assets under management.
Faber didn't comment on specific Vanguard funds - rather, he was using the company as an example. For investors who are curious, Vanguard makes it easy to filter ETF offerings on its website by asset class, geography and other factors. For U.S. Investors, the Vanguard S&P 500 ETF VOO and the Vanguard Total Stock Market ETF VTI have expense ratios of 0.03%, while the Vanguard FTSE All-World ex-US ETF VEU has an expense ratio of 0.07%.
Faber also said that U.S. stocks have been "on a heater" for 15 years. For example, the S&P 500's average annualized return over the 15 years through Oct. 11 was 14.1%, compared with an average of 7.7% for the preceding 15 years, according to FactSet.
"Historically speaking, when you have amazing returns, often it sets the stage for the opposite," Faber said.
One reason the S&P 500's excellent run might lead to a period of weaker performance is that the technology stocks that have been a big driver of the returns "are expensive and they issue a lot of shares," Faber said. An increase in a company's share count means dilution of investors' ownership - at least for investors other than the executives who are handed newly issued shares as part of their compensation. The rising share count means lower earnings per share, which can weigh on the stock price.
The largest ETFs track stock indexes that are weighted by market capitalization. For example, the current top three positions in the SPDR S&P 500 ETF Trust - Apple (AAPL), Nvidia (NVDA) and Microsoft $(MSFT)$ - made up 20.1% of the portfolio as of Oct. 11.
Faber suggested that investors who are content with their cap-weighted index funds add exposure to other strategies to diversify with less-concentrated weightings and among a larger pool of companies or geographies.
He also discussed attempts at timing the stock market, or actively moving money into and out of funds to try to boost performance. "The best way to add yield to your portfolio is to spend no time on it," he said. In other words, don't react to broad gains or declines in the stock market.
Faber emphasizes the need for patience with investments, regardless of strategy. "Most people," he said, "are better off not working on their portfolio or trying to improve their returns."
Morningstar data backs up this view. According to its 2024 Mind the Gap report, investors "lost out on about 15% of the return their funds generated" over 10 years through 2023 because of the timing of their movements between investments, including selling into a down market in 2020.
Regardless of what approach an investor takes, Faber added, "the more you invest, and earlier, the better."
-Philip van Doorn
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(END) Dow Jones Newswires
October 18, 2024 07:29 ET (11:29 GMT)
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