Meb Faber, of Cambria Investments, champions shareholder yield, a winning investment approach that focuses on dividends, buybacks, and debt reduction. By Ian Salisbury
Meb Faber has one of the toughest jobs in investing. He's a value-oriented money manager in a market that has gone gaga for growth stocks. But he thinks there are plenty of winning stocks beyond highfliers like the Magnificent Seven.
And, he has the record to prove it. Faber's $1.2 billion Cambria Shareholder Yield exchange-traded fund, which targets companies that pay dividends and repurchase shares, returned 12% a year on average over the past decade, handily beating the 9.8% return delivered by its mid-cap benchmark.
In addition to running Cambria, where he oversees more than a dozen ETFs that follow stock and asset-allocation strategies, Faber has made a name for himself as an author and economic commentator, penning a blizzard of white papers, blog posts, and more. He also hosts a podcast, the Meb Faber Show, that has welcomed a host of investment luminaries.
Barron's recently spoke with Faber about what to make of the market's tech rally, where to find value today, and his most contrarian investing idea. An edited version of the conversation follows.
Barron's: These haven't been easy times for investment managers who focus on dividend stocks -- or, really, anything but tech. How much longer can the large-cap-growth rally last?
Meb Faber: Since 2009, the S&P 500 index has returned 15% a year -- astonishing. It has been a 10-bagger. A lot of people don't realize that it hasn't been a double or a triple. It has been a "decuple." I had to Google that.
U.S. stocks have smoked everything else. There have been only four periods in history when this has happened, and they all have names: The Roaring '20s, the Nifty Fifty, the Internet Bubble, and whatever this is.
If you look at how a standard asset-allocation portfolio has performed -- endowment-style, a 60/40 portfolio, a permanent portfolio -- they all did well. They all returned around 8% a year, but the S&P 500 did 15%. If you own the SPDR S&P 500 ETF, pat yourself on the back. It has been amazing, but historically, this sort of performance doesn't last forever.
The irony, of course, is that I wrote that in a paper in February, and the market is up another 25% this year. The market gods always laugh at you.
So, where should investors put their money now?
Everyone who thinks about valuation sees that valuations are high. You might think that means the market has to crash. It doesn't mean any of that. My favorite way to think about this is to create a "quad box." Is the stock market cheap on a historical basis, or is it expensive? Is it in an uptrend, maybe based on the 200-day moving average, or is it in a downtrend?
The best quad box, not surprisingly, is a cheap uptrend. But the second-best is an expensive uptrend, which is where we are right now. The market is expensive but going up. It isn't flashing a red light.
The opportunity set is twofold. One, in the U.S., is to move away from market-cap indexes. So, move away from the S&P 500 into anything else -- value, equal-weight index funds. We like shareholder yield, which we define as dividends and net stock buybacks and net debt reduction, divided by market cap.
Second, look at foreign and emerging market stocks. In those markets, the broad indexes are much cheaper [than the U.S. stock indexes]. They have underperformed seemingly forever relative to the S&P 500.
What do you like about emerging markets?
The U.S. share of the world's market cap is around 60% today. The U.S. hasn't always had the biggest market cap. Japan was bigger in the 1980s. But the U.S. is currently 10 times bigger than any other country.
A lot of the growth since 2009 has come from earnings growth, but a lot has been [price/earnings] multiple expansion. In 2009, U.S., foreign, and emerging markets were all screamingly cheap, with low-double digit price/earnings ratios. The CAPE ratios [price divided by 10-year inflation-adjusted earnings] were all around 11 or 12. The difference is, the U.S. has gone from 12 to 38, and the other markets haven't. They have kind of muddled along in the high-midteens area.
My troll-inducing tweet of the year was about emerging markets, and it wasn't even an opinion. It was just an observation that emerging markets are 85% of the global population and 60% of global gross domestic product, but only 10% of market capitalization. And the average allocation in U.S. portfolios is something like 2%.
You're known for popularizing the shareholder yield concept. How does it work?
It is a better approach to dividend investing. Investors love dividends more than almost anything on the planet -- that sweet, sweet, passive income. They fantasize about sitting on the beach drinking piña coladas and letting those sweet checks roll in.
But the reality of markets is that if something changes structurally, you have to account for it. And ever since the 1980s, but increasingly in the late 1990s, companies have shifted their cash-earnings payout away from dividends toward stock buybacks.
Now, buybacks have a terrible reputation and brand. If you could go back in time and rename them "tax efficient" or "flexible" dividends, people would see them differently. Essentially, they're the same tool -- just better, and CEOs are no dummies. And so, since the 1990s, companies have paid out more in buybacks than they have in dividends. It's simply a way to return cash to shareholders.
If a company pays a 10% dividend, that's fine. If a company pays no dividend but buys back 10% of its stock, that's also fine. We look at the aggregate. Apple is the greatest use case. The Cambria Shareholder Yield ETF owned it from 2013 to 2020 because Apple did both -- paid a dividend and bought back stock.
The fund -- Cambria's biggest -- uses screens to pick stocks. What do you screen for, and what are some of its biggest bets today?
Basically, shareholder yield is the first filter. Then it goes to valuation, because you don't want companies with expensive stocks buying them back on and on. You want to buy $1 for 80 cents.
Then we look at quality, making sure companies aren't super-leveraged and buying a bunch of stock with debt. And lastly, we apply a momentum sort of screen, to try to avoid the value traps that are just going straight down.
The fund updates once a quarter. It holds 100 stocks. It is size-agnostic, but we cap the countries and sectors at a third of the portfolio, so it isn't all-in on one country.
Not surprisingly, for the U.S., energy, financials, and consumer discretionary are the top three sectors. When it comes to foreign and emerging market stocks, energy and financials are also high on the list. They are big positions across the board.
What are some of the individual stocks in the ETF?
CNX Resources, an energy company, is an interesting one. It has a P/E ratio of 11, and its enterprise value to earnings before interest, taxes, depreciation, and amortization, or Ebitda, is less than six. Those are pretty cheap in this market. And, it has been buying back shares. CNX reduced its float by a third in the past few years.
PayPal Holdings is another interesting holding, with an enterprise value to Ebitda of about 10. Its shares outstanding are down about 15% in the past couple of years.
What ties these companies together?
A shareholder yield focus gives you a lot of co-inherited traits. When you screen for a company that is paying out 10% of its market capitalization in cash, that means you have to either A) have the cash right, or B), like Apple, be generating so much cash that you can't do anything with it, and so you often end up with high-quality companies.
Also, what are you screening out? You're screening out the companies that are just wasting cash on a new mining project, or putting their names on stadiums, or making huge employee stock grants. Returning cash to shareholders requires capital discipline. It drives me crazy when the politicians criticize buybacks, because they get it totally 100% wrong.
The big commonality in our screen is P/E ratios, price-to-book, price-to-sales, all of that -- it's a mile wide compared with the S&P. The P/E ratio on the Cambria Shareholder Yield ETF is almost a third of the S&P 500's. It's just so much cheaper.
It is fascinating that the idea of shareholder yield came out of a structural change in the market. What investing shibboleth is due to be re-examined next?
Look, a buy-and-hold portfolio is fantastic. We manage one -- Cambria Global Asset Allocation ETF. But probably my No. 1 nonconsensus view is that the best compliment to that traditional portfolio is a trend-following approach. Some would call it managed futures; some would call it something else.
The correct allocation -- when you combine a buy-and-hold portfolio with trend following -- is that trend following can be up to half an investment portfolio. I don't think anyone else on the planet believes that, other than Meb F. Even if you like trend following, most people think it should be, like, 5%.
Explain what you mean by trend following.
Basically, you are trying to invest in something as it goes up, and you are out, or selling it short, when it goes down. The goal is to trade as many markets as possible -- the yen, gold, oil, and more, and go long and short.
Asset-allocation players do great over time. But the Achilles' heel of buy-and-hold is bear markets, such as the 2008-09 period. You just have to hold on to your hat. You take it and do nothing. Historically, that works, but it is painful. The bigger problem is that a bear market correlates with your human capital: Lehman Brothers is going under [the firm failed during the 2008-09 financial crisis], your friends are getting fired, everything bad is happening, and your portfolio is going down.
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November 08, 2024 21:30 ET (02:30 GMT)
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