Here’s an unorthodox investing strategy that’s super tax-efficient and could boost returns by nearly 50%: Avoid dividend stocks to improve “dividend investing.” Really.
Research scientist-cum-money manager Meb Faber – the witty, popular blogger with an independent and systematic approach to investing – in early March emerged with the idea as a way to increase returns – and reduce taxes. With it, he is questioning one of the most hallowed strategies of investing.
But sure enough, Faber’s research found that, by removing the dividend and using a value approach instead, investors can add another 50 to 100 basis points to after-tax returns, he told ThinkAdvisor in an interview.
The quant blogged his unconventional replacement strategy half-expecting to draw heckling emails and prickly comments from the financial blogosphere. After all, what he suggested was to replace a sacred cow – investing in dividend stocks – with his “better mousetrap” “non-dividend” strategy in order to reap similar returns.
Well, Faber reports no such bashing and trashing to date. That’s probably because the co-founder, chief investment officer and portfolio manager of Cambria Investment Management, 38, has already demonstrated a panoply of proven good ideas. It’s not for nothing that his own publishing imprint is called “Idea Farm.”
Newest of Faber’s five books is “Global Asset Allocation: A Survey of the World’s Top Investment Strategies,” released in March. It is available for free on the blog.
With about $320 million in assets under management, Cambria’s main goal is to provide low-cost alternatives to traditional buy-and-hold portfolios. The El Segundo, California-based firm’s quantitative research process is global, tactical, trend-following and multi-asset in approach. What chiefly impacts the global focus are price trends and valuations.
Faber, who started in the industry as a biotech stock analyst, saw early signs of the global financial crisis: in January 2008, his tactical computer models exited U.S. stocks; likewise, foreign equities the following month.
The models “won’t be long in bear markets,” Faber noted in a 2009 interview with this reporter. Cambria’s Global Tactical Moderate composite was even up slightly, 0.11%, in 2008.
The following year, Faber and co-author Eric Richardson, Cambria co-founder and chair-CEO, published “The Ivy Portfolio: How To Invest Like The Top Endowments and Avoid Bear Markets” (John Wiley).
This year, while on a February skiing trip in Japan, Faber blogged a white paper, “Finding Yield in a 2% World.” It laid out what he calls a better strategy for investing in global bonds. With today’s low, or even negative yields, he wrote, “a value approach could add a source of income to a diversified portfolio … Much like investing in stocks, one can apply a value methodology to global bonds.”
The Cambria ETF Trust and Cambria Investment Management are behind the first – and still only, according to Faber – U.S. market ETF that charges a 0% management fee. Launched two years ago, the passive Cambria Global Asset Allocation ETF (GAA) seeks to replicate a true global market portfolio, investing in a basket of U.S. and foreign equities, bonds, real estate, commodities and currencies. The portfolio tilts toward value and momentum factors.
All of Cambria’s seven funds – most of which are active and tactical – have been available for less than three years.
ThinkAdvisor recently spoke with the cerebral Faber, a Denver-born aerospace engineer’s son, who graduated from the University of Virginia with a double major in engineering science and biology.
With no traditional background in financial services, he has found that his objective view of market data is a major plus: “I don’t just believe what’s fed to you,” he says. Here are highlights from our conversation:
THINKADVISOR: What are your thoughts on buy-and-hold investing?
MEB FABER: It’s fine, but there are certainly many approaches that can be better: income strategies, global income strategies, global value strategies. Where do you see most of the opportunity in the market right now?
Foreign equity markets. We’re more positive on a basket of cheap ones than anything else, particularly the really cheap markets and emerging markets, which are a much better opportunity than the U.S.
That’s going against the grain.
Yes. [Those markets] have done very poorly since the global financial crisis, but it’s one of the reasons they’re set up for great returns going forward.
What’s the level of risk there?