Shadow Manager

Cambria Funds: A Deeper Look at the Performance

Shadow Manager

The explosion in ETFs over the past decade has been substantial. Marrying the ideas of fund management with the ability to trade throughout the day, ETFs have become one of the most popular vehicles utilized by investors. In fact, according to the 2017 Fact Book from the Investment Company Institute (ICI), the number of ETFs available for investors as of the end of 2016 was 1,716, which is more than double the number of ETFs available at the end of 2009. Assets in ETFs have grown from $777 billion at the end of 2009 to $2.52 Trillion as of the end of 2016.  

A fund company that has emerged during this rapid period of growth was Cambria Funds based out of El Segundo, CA. Combining older investment ideas such as value investing with newer ideas such as momentum and tail risk, Cambria takes an active, quantitative approach to investing. As of the end of 2016, their firm managed close to $500 million in assets.

As most of our readers are already aware, we are not proponents of active investing. This is not an attack on the level of intelligence that can be found in the active investment community; rest assured there are a lot of brilliant people in our industry. It is more about understanding how competition in our industry has removed almost all ability to find and reliably capture risk-free value in equity markets. In other words, actively trying to beat the market is likely to be a losing proposition. This conclusion has been reinforced for decades. 

Mark Hebner recently debated two active managers at a UCLA Investing Conference. One of the active managers was Meb Faber, who is Cambria’s Chief Investment Officer. Here is the video of the debate:  

 

 

Mr. Faber published a white paper and made a prediction in 2013 that the U.S. market was going to have sub-average returns in the near future based on the 10-Year Cyclically Adjusted Price-to-Earnings (CAPE) metric made most popular by Nobel Laureate, Robert Shiller. He concluded that investors should look to diversify outside the U.S. If we were to examine the performance of global markets over the last 3 to 5 years, we know that some of his predictions have not come to fruition. U.S. equities have trounced their international developed and emerging markets counterparts. For the 3-year period ending March 31, 2017, the S&P 500 delivered an annualized return of 10.37% versus the MSCI World ex US Index, which delivered a 0.84% annualized return over the same period. The MSCI Emerging Markets Index delivered a 1.18% annualized return.

As late as last November, Mr. Faber was on CNBC talking about the good buying opportunities in the particularly low-valued markets like those of Brazil and Russia, with low cyclically adjusted price-earnings ratios"So you're starting to see some of the momentum and trends change, and we think there's a lot of room to run, because these valuations in the cheap bucket are about as half as the expensive bucket," Faber added during his interview. This all sounds very sophisticated and heavily researched by Mr. Faber. Now that he has ETFs that he manages, we can actually track his abilities to exploit these opportunities. 

This isn’t to say that Mr. Faber couldn’t eventually get it right, but you are likely to get it right sooner or later just based on sheer luck. This is the crux of the problem. There are many brilliant people making many predictions. Which genius do we trust? How do we decipher the merits of one professional’s opinion versus another? And how accurate do these forecasts need to be to beat a non-forecasting investment strategy? Nobel Laureate Bill Sharpe concluded that the accuracy needs to be at a 74% level.  When CXO Advisory looked at market gurus with 100 or more documented forecasts, none of them reached the 74% accuracy. 

One potential way is to examine the past performance of the strategies they oversee. We have taken a deep dive into other fund company’s returns before to shed light on how difficult it is to find an active strategy that has reliably delivered superior risk-adjusted returns and have come to one universal conclusion: they have failed to deliver on the value proposition they profess, which is to reliably outperform a risk comparable benchmark. You can review by clicking any of the links below:

Fees & Expenses

Our analysis begins with an examination of the costs associated with the strategies. It should go without saying that if investors are paying a premium for investment “expertise,” then they should be receiving above average results consistently over time. The alternative would be to simply accept a market's return, less a significantly lower fee, via an index fund.

The costs we examine include expense ratios, front end (A), level (B) and deferred (C) loads, and 12b-1 fees. These are considered the “hard” costs that investors incur. Prospectuses, however, do not reflect the trading costs associated with mutual funds. Commissions and market impact costs are real costs associated with implementing a particular investment strategy and can vary depending on the frequency and size of the trades taken by portfolio managers. We can estimate the amount of cost associated with an investment strategy by looking at its annual turnover ratio. For example, a turnover ratio of 100% means that the portfolio manager turns over the entire portfolio in 1 year. This is considered an active approach and investors holding these funds in taxable accounts will likely incur a higher exposure to tax liabilities from short term and long term capital gains distributions relative to those incurred by passively managed funds.

The table below details the hard costs as well as the turnover ratio for all 8 active ETFs offered by Cambria. You can search this page for a symbol or name by using Control F in Windows or Command F on a Mac. Then click the link to see the Alpha Chart. Also remember that this is what is considered an in-sample test, the next level of analysis is to do an out-of-sample test (for more information see here).


Name Ticker Turnover Ratio % Prospectus Net Expense Ratio 12b-1 Fee Global Category
Cambria Global Asset Allocation ETF GAA 8.00 0.25 0.00 Multialternative
Cambria Emerging Shareholder Yield ETF EYLD  -- 0.69 0.00 Emerging Markets Equity
Cambria Shareholder Yield ETF SYLD 43.00 0.59 0.00 US Equity Mid Cap
Cambria Foreign Shareholder Yield ETF FYLD 53.00 0.59 0.00 Global Equity Mid/Small Cap
Cambria Global Value ETF GVAL 15.00 0.69 0.00 Global Equity Mid/Small Cap
Cambria Value and Momentum ETF VAMO 48.00 0.59 0.00 US Equity Large Cap Value
Cambria Global Momentum ETF GMOM 316.00 0.80 0.00 Allocation
Cambria Sovereign Bond ETF SOVB  -- 0.60 0.00 Emerging Markets Fixed Income

 

On average, an investor who utilized an equity strategy from Cambria experienced a 0.60% expense ratio. Similarly, an investor who utilized a bond strategy from Cambria experienced a 0.60% expense ratio. This can have a substantial impact on an investor’s overall accumulated wealth if it is not backed by superior performance.

Performance Analysis

The next question we address is whether investors can expect superior performance in exchange for the higher costs associated with Cambria’s “expertise.” We compare each of the 8 strategies performance since inception against its current Morningstar assigned benchmark to see just how well each has delivered on their perceived value proposition. We have included alpha charts for each strategy at the bottom of this article. Here is what we found:

  • 75% (6 funds) have underperformed their respective benchmarks since inception, having delivered a NEGATIVE alpha
  • 25% (2 funds) have outperformed their respective benchmarks since inception, having delivered a POSTIVE alpha
  • 0% (0 funds) have outperformed their respective benchmarks consistently enough since inception to provide 95% confidence that such outperformance will persist as opposed to being based on random outcomes

It is safe to say that the majority of funds offered by Cambria have not outperformed their Morningstar assigned benchmark. Of the strategies that do have a positive alpha, 0 had enough consistency to yield a statistically significant result. The inclusion of statistical significance is key to this exercise as it indicates which outcome is the most likely vs. random-chance outcomes.

Conclusion

There is no reliable evidence that Cambria can provide risk-adjusted outperformance for their investors. This is not to say that their leadership is not extremely intelligent and competent. They obviously are. While it is hard to make a statistical case on performance given the small sample size, it would be imprudent to suggest that these strategies are in the best interest of investors.

Similar to the fate of other investment firms, the market as a whole is more informed than any single individual. Competition in the industry has removed almost all opportunity to find risk-free value that can be reliably captured. A better solution is to align yourself with the market instead of against it and buy, hold, and rebalance a globally diversified portfolio of index funds.