Lead-Lag Live

Investing Like a Yale Endowment: Secrets Revealed with Meb Faber

• Michael A. Gayed, CFA

Share episode

Dive into the intriguing world of endowment investing as we explore the performance strategies of Yale University, one of the top-performing institutions. With unique insights from experts, we dissect why Yale's model has consistently outperformed traditional portfolio allocations and what lessons everyday investors can apply to their financial strategies.

In this episode, we take you through an analysis of Yale's innovative investment strategies, including their remarkable asset allocation, which noticeably differs from common practices. You’ll learn about the advantages of tax-exempt investing, and how these long-term strategies can serve as guiding principles for individual investors looking to optimize their own portfolios.

We also introduce the concept of the Endowment ETF, a new vehicle that aims to democratize access to sophisticated investment strategies previously reserved for elite investors. By providing an opportunity for diversification and efficiency, this ETF could reshape the current landscape, allowing more people to benefit from strategies that have stood the test of time.

Join us as we navigate critical market trends and discuss investor psychology throughout various political landscapes. This episode not only informs but also inspires listeners to reconsider their approaches to investing. Subscribe now to ensure you never miss a chance to enhance your financial literacy!

DISCLAIMER – PLEASE READ: This is a sponsored episode for which Lead-Lag Publishing, LLC has been paid a fee. Lead-Lag Publishing, LLC does not guarantee the accuracy or completeness of the information provided in the episode or make any representation as to its quality. All statements and expressions provided in this episode are the sole opinion of Cambria and Lead-Lag Publishing, LLC expressly disclaims any responsibility for action taken in connection with the information provided in the discussion. The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.

 Sign up to The Lead-Lag Report on Substack and get 30% off the annual subscription today by visiting http://theleadlag.report/leadlaglive.


Foodies unite…with HowUdish!

It’s social media with a secret sauce: FOOD! The world’s first network for food enthusiasts. HowUdish connects foodies across the world!

Share kitchen tips and recipe hacks. Discover hidden gem food joints and street food. Find foodies like you, connect, chat and organize meet-ups!

HowUdish makes it simple to connect through food anywhere in the world.

So, how do YOU dish? Download HowUdish on the Apple App Store today: Support the show

Speaker 1:

So these endowments, these institutions, have access to the best money managers in the world, they have the most resources, and CalPERS is the one that we often talk about here, but they can't outperform essentially a basic buy and hold allocation, which is why we often say, calpers, you should just fire everyone. I've offered to be the CIO multiple times for free. Fire everyone, buy some ETFs and be done with it. But they chase this elusive, you knowusive, carrot of trying to be like Yale, and so the question we ask in this paper is like is there something special in the water in New Haven, or can we replicate some of what Yale's doing?

Speaker 2:

My name is Michael Guyette, publisher of the Lead Lag Report. Joining me here is Mr Meb Faber of Cambria. This is a sponsored conversation. Cambria is a client of mine. Meb, I know a lot of people I've introduced you to are like oh yeah, I've followed your work and read your stuff for a while. But I want to touch on a recent paper you put out which is kind of an update to a book that you put out 15 or so years ago, and I remember this book on the investing like an endowment, investing like the Yale model, the Swenson sort of mindset, the liquidity you know, premiums and things like that. So I want you to talk about, first of all, that book from 15 years ago and what exactly this new paper is about.

Speaker 1:

Yeah Well, to be clear listeners, I didn't tell Guy that he had to take a red eye. I mean to me, unless you're going to europe or like asia or something, it's, it's a hard, no, uh so you know, I always say, I will not relent.

Speaker 1:

But this bookcase turns into a bed, by the way listeners. So, uh, anyway, um, it'll be good to see you. Um, yeah, you know, it feels like two years ago I was talking to somebody. I was like, yeah, we wrote this book, you know, a two years ago I was talking to somebody. I was like, yeah, we wrote this book, you know, a couple of years ago. And then I was like, wait, actually just kidding, it's like 15 years ago and it was kind of a spin out, longer version as my first book and it was a spin out of our first white paper, a quant approach, tactical ass allocation, which is going to hit, I think, a 20 year Anniversary next year, which is insane, and it's now dropped a number two all time on SSRN.

Speaker 1:

So we got to, we got to publish a 20 year anniversary so we can get it back up to number one, but anyway, ivy, what was the point of that book for those who read it? Um, it was like, hey, how do we take a look at these endowments which has been crushing it, particularly Swinson? But Harvard had a great track record, you know, up till that point, and they were pioneers, really in the 20th century too, of this endowment style of investing. We'll talk about what that means in a minute. But really said, you know, um, what are the benefits of this? And then what are some things that people can do to try to be like Yale? Can we be like Yale? Um, what are the downsides of the endowments? And we talked about a lot of fun tactical studies that Guyad would love in this book.

Speaker 1:

We did, we talked about and some of these are more just for fun but we talked about foreign listed hedge funds. If you guys remember, back in 2008, 2009, you know, third Point, greenlight, some, uh, pershing square today, you know these foreign listed hedge funds can trade like closed in funds here. So you could have bought Dan Lopes fund at like a 50% discount to NAV Pretty incredible. I mean, you can buy. I think you can still buy Ackman's at like a 25% discount in AV today. Um, there's some tax issues, but that was a fun part. We did a years in a row down, like what happens if you buy an asset class when it's down three, four or five years in a row. Uh, humorously, since then, we've had a few industries that have been down six years in a row coal stocks, uranium stocks over the past decade and this year for the first time, I think. I mean, it's a tiny sub industry, but cannabis stocks are down nine years in a row and we manage a cannabis fund, so we totally understand that.

Speaker 2:

And you're keeping it going. Man, I give you credit.

Speaker 1:

Yeah, well, we're going to be the only one left standing. Eventually. You know, everything goes down 99%, we'll be the only ones left, but we've been helped because we've got a lot of tobacco companies in there. So, anyway, and uh, we've been helped cause we get a lot of tobacco companies in there. Um, so anyway, and tobacco companies, oddly enough, have been ripping for the past year.

Speaker 1:

Um, most of what I'm talking about is not related to endowments, but so what was the original? What does it mean to be an endowment, endowment, investing? So, first of all, endowments are sort of like you and I and sort of different. The first thing, you know they're tax exempt. Maybe not for long it's new administration, who knows but we're currently tax exempt, so you can do other things. If you're tax exempt, you don't have to worry about pesky taxes. Second is their time horizon is literally kind of forever. So let's say, you're Harvard and Yale. I mean, you do have current students, you have current administration employees, but also you have future students and future ideas, and many of these endowments have grown to be $10, $20, $30, $40, $50 billion, and so the amount of returns and interest they spin off is non-trivial. We may see a scenario and this is a sign of the times, too, that Texas endowment is really competing to get close to being the largest in the world hopefully largest in the US, excuse me, soon, anyway.

Speaker 1:

So what have these endowments done historically? Well, they've historically been equity focused. And what does that mean? Because they have a long time horizon, their number one enemy is inflation and bonds. Historically, you don't get a whole lot of step up premium over inflation, right, you get a little bit extra returns Equities historically. The problem with equities, of course, is they're volatile. You can lose 50%, create depression, you lose 80%, things like that. They also diversify. If you look at the portfolios, it's not just US stocks, s&p, it's global stocks, it's global fixed income, global real assets. And then the biggest differentiator between you and I is usually the alts bucket, and historically that's meant a lot of different things.

Speaker 1:

Harvard, back in the day was early in September. Yale has been famous for its private equity venture capital allocations. If you look at the Yale annual report and you're like, oh my God, meb Gaiad, they got 2% in US stocks. Are they crazy? Well, and you're like, oh my God, meb Guy, like they got 2% in US stocks. Like, are they crazy? Well, you're like, well, they got like half in private equity, VC stocks in general. So you know those are still quote businesses and stocks. They're just privately traded.

Speaker 1:

So anyway, in this book we said you know, could we, um, could we come up with a public portfolio that tracks the endowments? And how does it do? What can we do to improve it? Now, the biggest, probably Achilles heel of the endowments that came out during the financial crisis was illiquidity. So if you're managing for a long-term time horizon but you have short-term cash needs and or a short-term part of the portfolio that's super liquid, that's a huge part of the portfolio, and all of a sudden you have capital calls et cetera, you can get in deep trouble quickly and a lot of them did. But once you burn your hand on that stove, you learn how to manage your cash flows and illiquidity better. Anyway, we decided to write a paper recently called Can we All Invest Like Yale?

Speaker 1:

It's on the camryinvestmentscom website. We'll kind of talk a little bit about it today. But, walking forward, you know the past 15 years since publication of this book. What's changed? What's the same. I mean, I think the biggest thing is arguably the greatest of all time of capital allocators in our lifetimes. David Swinson passed away, you know, and his, his helm during this time at Yale from 1985 to 2021, is is, you know, one of the best, best streaks in history. So we can get into parts of the parts of the paper how that applies to everything today. That's just kind of the general overview of the old book and what's going on.

Speaker 2:

Yeah, there's this concept out there that when a research paper comes out or when some book comes out documenting some investment strategy or strategies, that whatever alpha was discovered in the research behind that suddenly goes away. Right Now it's in the public domain. How have endowments in general performed, you know, following that book? Yeah, especially in the QE3 Zerp era to where we are today.

Speaker 1:

We got a bunch of links in the in the appendix of our paper to a bunch of other academic papers. A lot of people written about this. You know the period, sort of post-2000 decade, really golden era of endowments, but said differently, it was a golden era of anything that's not the S&P. So, financial advisor man, you did amazing during the mid-2000s because REITs did great, gold did great, bonds did great. Small cap did great Gold did great, bonds did great. Small cap did great Value did great, on and on and on. Private equity VC did great.

Speaker 1:

Everyone got hammered in 08, with exception of trend and managed futures. Anyway, since then, what's happened? We've talked about this on a previous stream. S&p has crushed everything. It has just been an absolute haymaker just 15% per year. And that doesn't mean that allocations have done poorly. And we look at different time periods in this paper.

Speaker 1:

And so one of the big takeaways, by the way, is everyone wants to look like Yale, right? So every endowment, every possible institution CalPERS, who I love to pick on everyone tries to gravitate towards this endowment model of investing. But if you look at Yale versus the average endowment back to 1985, and these, by the way, listeners, all these institutions, for some unknown reason, report their fiscal year ending June 30th. So if you look at some of the calendar year metrics they won't quite match up. But the average endowment did 8.8% per year. Solid. That's a great return. Did it with reasonable volatility 10% a year. Again, you're only looking once a year, so it kind of masked some of those entry year drawdowns. Sharp ratio 0.5. Worst year 20%, great allocation. But instead of 8.8, yale did over 13. That is a big fat difference, right, A little more volatility. Sharpe ratio up around 0.8. So solid Sharpe ratio, but worse year a little higher. And then 60-40 did 10%, s&p did 11.8. So S&P and 60-40 beat the average endowment, and let that sink in for a minute. So these endowments, these institutions, have access to the best money managers in the world, they have the most resources, and CalPERS is the one that we often talk about here. But they can't outperform essentially a basic buy and hold allocation, which is why we often say, calpers, you should just fire everyone. I've offered to be the CIO multiple times for free. Fire everyone, buy some ETFs and be done with it. But they chase this elusive carrot of trying to be like Yale. And so the question we ask in this paper is like is there something special in the water in New Haven, or can we replicate some of what Yale's doing?

Speaker 1:

Swenson himself in one of his two books. He wrote two fantastic books Pioneering Portfolio Management and Unconventional Success. I think it may have just murdered the titles, but in his books he says look, here's what individual investors should do. They should put 20% in us stocks, 20% in foreign stocks, 10% emerging markets. By the way, listeners just hear what he said. He said 30% in foreign and emerging, 20% in us. No one does that, by the way, right? Everyone's like all us S 20% REITs, 15% US bonds and 15% tips. Okay, solid allocation.

Speaker 1:

We tested this out in our global asset allocation book, which is free online. We also teased out the allocations in the Ivy portfolio book where we said let's take out the hedge fund component they call it absolute return because that can mean all sorts of different stuff and we'll just call private equity venture capital stocks and then we'll normalize the portfolio. And that ended up being 50% stocks, 15% fixed income, 35% real assets almost identical to Swenson's portfolio. So these portfolios and we called one in the book and the paper Ivy, which was just for you guys know me, I love simplicity and rounding, so I said 20% in each in US stocks, foreign stocks, bonds, reits, commodities, just trying to simplify. And anyway, the point of all this is, if you looked at these portfolios that we, that you know these kind of investable benchmarks that cost zero, and take it back to 1985, you end up so remember the average endowment 8.8, yale 13, you end up at 9.6. So better, better than the average endowment, better Sharpe ratio, and largely because the average endowment just pays more in fees.

Speaker 1:

Ennis, who writes a lot about the endowments, is very critical about their attempt to try to find this elusive alpha. He says, look, they pay like 3% for these private allocations and he calls it I love the phrase an impossible burden, anyway. So Swenson and the beta doesn't quite get there right. So it's good, look, 10% returns. Everyone like there's nothing wrong with that, but it's not quite Yale. Better than the average now, but not quite Yale.

Speaker 1:

So we said, look, can we try to attempt to do some things? And I get that this is hindsight bias. We understand fully that this we're looking back I mean Swenson and Harvard back in the day. Harvard's also a case study of kind of not what to do. By the way. The impossible task of all these different hands being in the cookie jar. All the alumni is like this is intolerable, we can't take this. They're underperforming, they're doing a terrible job and then if the endowment does great, they're like they get paid too much. It's really funny to watch and over the years, if you search my blog for Harvard, you can find all these articles. Anyway, but the biggest alpha is they made these decisions at the time, right.

Speaker 1:

So Swenson, the fact that he decided to do private equity and VC in the 80s and 90s right. That decision has a massive amount of alpha versus today. When everyone does it today On and on, it's like this transition from former alpha sources which you referred to, right. Like there's a trade right now that I love that I can't talk about because it's a direct arb where the more people in, the worse it gets, and longtime followers of me can probably guess what this is for 2025 because we've talked about it before. But I don't want to talk about it because every person I mentioned it to it makes the trade worse. But that's the same thing with you know kind of what they've done and what what Swinson has done.

Speaker 2:

Well, which, by the way, I mean it's just a classic argument of you know you need to. You get out for inefficient markets and the more accessibility and democratization there is of I had an old buddy, peter Mladina, who is a Northern Trust super smart guy.

Speaker 1:

He wrote an old paper. It's basically like can we replicate Yale, with the full knowledge that they kick ass at private equity in VC? It's massive alpha. And so, you know, can we replace all the equities with stuff like shareholder yield value? You guys know I love momentum factors, so we went through this in the paper and said we called it Swenson plus, you know, taking a factor approach. And so it adds like a percent a year, which is kind of what we expect.

Speaker 1:

If you replace your equities, take away market cap weight and you do something like value or factor base, but it does still doesn't quite get you to that magical 13%. But if you know anything about private investing is many of the funds are either implicitly or explicitly leveraged, right? If you do private equity, those deals are leveraged. By the way, if you just invest in stocks the S&P 500, those companies are leveraged, right, they have debt on their balance sheet. If you do derivative strategies, you do long short equity, you do all sorts of these various strategies. Many have embedded leverage. So we said, well, could we add some leverage to this portfolio? And where does that take us. So the good news is it can get you up to that 13% return. Good news is it can get you up to that 13% return right. So you leverage it about one and a half times. So 150% gross takes you up to almost 14%.

Speaker 1:

Now of course, the volatility comes up and a lot of people like to argument that, argue that a lot of the private investments tend to smooth the returns. Right, if you own a bunch of buildings downtown Manhattan, you own a bunch of private equity like you don't have to mark those every day. And Cliff Haslund and others talk about this volatility laundering. It's one thing. If you have a private equity fund and say it's, you know, hey, look, this is probably 20% vol. But if you're marketing and I see these like you guys don't send these to me, marketers, cause I will just call you out. But if you're like, hey, this has 5% volatility, I'm like no one believes that. You know it doesn't have 5% volatility. I know it doesn't have 5% volatility.

Speaker 1:

And here's a fun proof Pacer just launched a private equity venture capital replication ETF and to achieve the returns of private equity in VC, you know how much that thing is leveraged Two and a half times. So the leverage is not just not 15% or not seven, it's like 40. So, anyway, so you mask a little bit of the volatility. But in this paper we say, look, we replicate these return streams and the worst year characteristic for Yale was like minus 20, but entry year was down 50, right. So very similar to asset allocation portfolios 08, 09. So, anyway, we think you can get to that 13% alpha number with leverage.

Speaker 1:

The volatility I think it's tolerable, right, 18% sharp ratio is decent, it's not like one or two. And like we show in the paper, we're like look at this most recent period where you know US stocks from like. Look at this most recent period where you know U S stocks from, um, you know, uh, what is this? Uh, you know 2010 to 2024 of a sharp ratio above one. If you're a hedge fund, you're marketing that for the past 15 years you're a billionaire, right, so, um, but anyway, you know it's, it's, it's an aggressive allocation strategy. It's not something that I think you would expect to say, hey, look, this is never going to lose money, this is never going to go down, but you know it's, it's, uh, it's got a little spice, but it's globally diversified. And if you have a time horizon and you're honest about it. You're like no, look, my time horizon is 20, 50, a hundred years no-transcript portfolios over time.

Speaker 1:

They all do about the same and you know, it doesn't even matter how much this is. This was kind of the huge takeaway from our global allocation book. If you're just doing buy and hold now, you have to have all the main categories. If you totally leave out one of the main categories and I'm talking about global stocks, global fixed income and global real assets usually it's suboptimal. So you can't just leave out real assets, because the 70s would have just woodshedded you Right, um, but, but but. Then it doesn't matter exactly how much. Should you have 5% in gold or 10%, doesn't really matter um, on and on, so, um, over the full cycles in our and we're going to update this book and take it back to the 1920s as opposed to 1970s of our first book Um. However, the path is different and the reason that people sweat asset allocation so much and so often is that, despite the fact they all end up the same place, they all do like eight, 9% per year or, said differently, like 5% above inflation over time, but they wiggle a lot in the main term. So like that, if we looked at, like these 10 portfolios in the book, the spread between the worst performing and the best performing each year averaged like 20%, right. So some years like 2022, or 1970s, 2008, 2009,. You'll have some portfolio that crushes it and some that does terrible, which causes people to behave poorly, but over time it doesn't matter. But things like permanent portfolio did great, and permanent portfolio is interesting because at its core, if you just did 25% each in stocks, bonds, gold and cash I think was the original idea it's one of the few portfolios, I think, that had real positive returns in each decade, so it's incredibly stable. But because it has so much in fixed income and cash, it's lower vol. So really to get higher returns for that portfolio, you need to lever it up. Mark Faber no relation has a similar portfolio that's also done really well, but so they're all kind of similar.

Speaker 1:

To do things where you're going to be kind of different, you need to move further afield, and so we talk about value as a big one. But the big one for us is trend following right, and so in this endowment portfolio we show an additional chart. We say what if you lob trend following into this allocation? And, not surprisingly, it does what you think it would do, which is reduce volatility and draw down to the rest of the portfolio for, like, a traditional managed future style allocation, but all these portfolios are great. You know, that's the thing I was like. The takeaway from this paper is not everything sucks and everything's good. All these portfolios are good. Yale has just happened to be great, and so will they remain to be great.

Speaker 2:

But hold on. That's interesting, right? Take the name Yale out of it. In any data set you're going to have anomalies, right? I mean, is it just luck, is it just an anomaly in the data set, or is it Yale doing something legitimately different? According to the Nazi toolbar, even Yale has been.

Speaker 1:

There's no question Yale has been special. But then you look at, so one of the fun takeaways from our paper. We talk about this and I go and I'm going to just read it here. So, as investors review the tables in this paper, many will come to varied and possibly opposite conclusions. As the old wall street saying goes, that's what makes a market. I go, some paper, some, some investors will read this paper and conclude the best way to invest is just to buy us stocksS, stocks, call it a day.

Speaker 1:

So for the past 15 years, 60-40 has beaten everything. You look like a moron If you just went to sleep 2009,. You're like I'm just going to buy stocks. Dollar cost average in see y'all in 20 years. God bless you. You beat almost everybody, no-transcript.

Speaker 1:

And here's another quote from William Feather. He says one of the funny things about the stock market is every time one person buys, another sells and they both think they're astute. And so the same thing with allocation is everyone looks at this and they're like, oh okay, well, clearly you should just 60-40. So, yes, do I think Yale's been special? I do, but clearly you should just 60-40. So, yes, do I think Yale's been special? I do, but the million dollar question like will they be special going forward? Will they still be able to magically command amazing terms? Will they still be able to find incredible managers with much more competition?

Speaker 1:

Was it just David Swenson, you know? Can his team replicate what he did On and on? So in Harvard, you know, it's kind of shown that the structure and the people really matter, because they've been a basket case and a lot of the smaller endowments over the past 10 to 15 years have outperformed, largely because most of them just put it mostly in US stocks and market cap weight. So the cycles, as you know and I know, they can outlast you know our careers and they last much longer than we often expect. So my point is you can kind of get a lot of the way there with just smart allocation, spread it out, add a little leverage and then throw in some good ideas like value and trend as well.

Speaker 2:

Speed value and trend Value really hasn't had much of a trend. Yeah, Largely because of tech right being the main driver of the trend, and that's more growthy Well it's interesting.

Speaker 1:

There's some areas of the world where it's, you know, if you look at foreign and emerging and we posted a good chart to Twitter not too long ago from Goldman and it showed that European banks have outperformed the MAG-7 since 2022. Now it's obviously a cherry-picked time horizon, but it's interesting and Europe's doing great this year and a lot of the cheap global countries are up well into the double digits. So will that rotation last? Usually, the foreign rotation lasts about a month, so we're getting long in the tooth here for US stocks to just come back and start waxing everything. But you never know.

Speaker 1:

Um, the cool part about this whole day idea, you know, is um, I wanted to take out a huge billboard in front of CalPERS headquarters in Sacramento and said you know what? You guys forced my hand. I tried to help you. I applied for your CIO job three times. You wouldn't even, uh, recognize me with a turning me down. Uh, you know, you wouldn't even start. You wouldn't even recognize me with a turning me down. You wouldn't even have me for an interview. So you know what?

Speaker 1:

Let's make this a bet. I'm going to launch an ETF. Just a low-cost ETF publicly trades everything. See what's in it and let's find out. Can you beat me? We're going to find out. I might have to take it out and add in Barron's and say, look, let's find out. And so, anyway, we're launching Endowment ETF in April, so right around April 10th. We're putting this to work in the real world. So this is going to be a leveraged aggressive allocation with ETFs, no management fee and only the underlying fees of the ETFs in the component. And we'll see. Every June 30th. Maybe we'll hold a party and see if the institutions can keep up with this low-cost, investable benchmark. And my offer stands CalPERS, happy to come run it for you.

Speaker 2:

A lot of alpha comes from rebalancing, typically right. So talk to me about rebalancing on the endowment portfolio, Swenson's a big proponent of that.

Speaker 1:

You know we call it rebalancing alpha it. More than anything, I think it just keeps you on track of your process, and for someone who bought 6040, say, in 2009, you're not 6040 anymore. For someone who bought 60-40, say, in 2009, you're not 60-40 anymore. You're probably I don't even know what 80-20 at this point, and so rebalancing matters. As long as you do it sometime, I don't think you need to be super sophisticated about it. It's just that you need to do it if that's what your mandate is and that's what I think is important about this type of strategy. So the more components and the varied they are, probably the less you need to rebalance. But if you have things in there that are super volatile so like, look, you got a bunch of bitcoin in there um, you know, if you had a big bitcoin 60, 40 gold's, now creeping on 3000 are we there yet? I don't think so, getting close anyway, um, but yeah, I, I mean investments that that are volatile and then make these huge runs you have to rebalance or else you end up owning and that's the whole Achilles heel with market cap investing right Is you end up owning the most expensive things at the worst possible time to own them. So you put most of your money in Japanese stocks in the eighties. You put most of your money in expensive us stocks in the late 90s. If you can break that market cap link, I think it makes a lot of sense and it's thoughtful.

Speaker 1:

So, yeah, these will rebalance Again. I don't think you don't have to do it like once a week, once a month even. I think even for most people once a year probably gets you there. But the nice thing about buying a basket of ETFs is they rebalance for you. They do the work you know. So if you're investing in a shareholder yield ETF, it's going to rebalance quarterly. If you invest in somebody else's whatever equal weight ETF, it may be rebalanced once yearly. But they kind of like do all the work behind the scenes, the baking and cooking.

Speaker 2:

You must be itching to see a value cycle, right, I mean because I'm going to make the assumption that the majority of the funds under Cambria have that, that tilt.

Speaker 1:

So the older. When we first started launching funds in 2013, you know I would sweat what the market was doing. I would pull up my phone, I would count the basis points, right, we have 16 funds now, that kind of zig and zag, and I fully have the understanding that of those 16. I mean we have US, we have large cap, we have small cap, we have foreign, we have emerging, we have REITs, we have fixed income, we have tail risks, we have allocation, we even have a crazy cannabis fund on and on Right. So, uh, we have some, some hedged funds.

Speaker 1:

It's a pretty diverse lineup, and so that's good and it's bad. It's good that you know usually something is doing well. It's bad that usually something is sucking it up too. That all having been said, you know, the worst, probably on a relative basis market for us is S&P just creams everything. Now it's good in the sense our largest fund is the US stock fund. So if the US stocks double from here, good, that's fine for us. But on the trend side, we benefit from trends anywhere, and so the trend in US stocks has helped all the trend funds. No trends elsewhere has hurt them, and whipsaw and sideways markets have hurt those. So it varies.

Speaker 1:

But yes, I mean, look as a quant and someone who follows the value trade we definitely believe that value is in the top decile of attractiveness to history. That overlaps with some other things like small caps, mid caps versus large cap. Basically it's a it's a large cap, expensive, concentrated story. But everyone knows that, like I feel like that's well known and people are kind of just dancing around musical chairs waiting for the music to stop. And so part of me you know I'm student of bubbles I love uh market history. So we've now taken out on the cape ratio the um uh 2021 high of at least intraramont of the CAPE ratio. It was like 38 and change, I think, and so now we only have the final boss 1999, left to take out. So part of me wants to just take that out because I never thought I'd see it again in my lifetime Forget 20 years later, right, 25 years later. So part of me wants to see it go totally nutty. But the rest is waiting for a return to sanity.

Speaker 2:

Any chance at all that this time is actually different just because of the automated passive flows and smp large cap that's.

Speaker 1:

That's been well documented too, and yeah, hard to disagree with it yeah, um, the problem with that argument that I've always struggled with is that should be true everywhere, and and so, um, I get it and I think it's reflexive. I think it's true in sector funds, I think it's true in active funds. I mean, we saw it with Kathy wood. You know what helps you on the way up, it's going to hurt you on the way down when it comes to flows and uh and and same thing with sectors, on and on, I think it creates opportunities. I mean, that's, that's how countries get to single digit PE ratios and how countries get to 40, 60 PE ratios. Right, it's like these, these manias and booms and bus, Um, but eventually, you know there's gravity takes hold. It's just how far that rubber band gets stretched, and so, like, could this last for a long time? Sure, you know it's. It's just how far that rubber band gets stretched, and so could this last for a long time? Sure, it's happened.

Speaker 1:

If we look back in history I think you and I talked about this before there's been four periods where stocks have done 15% per year for over a decade. Now again, they're all in the history books, though they all have names, and eventually they end. Now, sometimes they end quickly, like the 1920s and 30s. Sometimes they end now. Sometimes they end quickly like the 1920s and 30s, sometimes they end in a different way. You know, the 1970s, the nifty 50, set the stage for really an inflationary, massive run-up in bond yields. Very different market. The 1970s, um, and then 1990s totally different too. I mean that lasted three kind of slow rolling years, um, so they're all different, I think. But you know, we've seen it in foreign markets a million times and it and it's um, it, uh. The bricks back in 2007, india and China were trading, p ratio is like 50. Like 50, so higher than the us was in 99 and and so, um, we're right, like 38, which is, it's high and I think it's really expensive and there's pockets of super concentrated. But to me it's not bubble. Bubble to me, I mean, I've come up with a very generic arbitrary line in the sand is a 40 pe, uh, but we're not, we're knocking on it. But. But the good news is, you know, salesmen and me, we have a solution for that. Just wait, there's more.

Speaker 1:

But so a lot of people have been, you know, invested in us stocks. A lot of people have highly appreciated us stock positions, but they're kind of stuck. You know they say I can't do anything with my video, I can't sell it, taxman's going to kill me. And so historically there's been very few choices for those type of investors how they can sort of move out of their highly appreciated investments. And we've finally come up with one and we talked about it, I think, on one of these before a 351 conversion. So for this endowment ETF, you can buy it after it launches, same as any other ETF. We're also allowing people to see the ETF with their own securities could be stocks, could be ETFs and get the ETF in return in a tax-free transaction, which is a pretty cool innovation that we're starting to see more and more of. So, listeners, if you're interested, you can always reach out to me. But that's a potential solution for a lot of people that are concentrated and don't know what to do. I mean my mom. Back in the day I would try to help her out with investments. We'd talk about it. She's like you know, I just own this GE, I can't sell it, tax money is going to kill me. I'm like mom, market's going to solve this for you if you don't sell it Right.

Speaker 1:

And it's like, eventually, the reception by some advisors, as you explained, with 351 Exchange. How intrigued, but it sounds like it's kind of a big operational undertaking. In reality it's really not that bad. Your client say, hey, explain this to them, they're okay, sign a docusign. And then you just got to get like an excel file with positions and tax slot basis, so basically a download, monthly portfolio statement. It's about it. Um, but again, like it's like going to the gym, you know, it's like every, every blockade you put in is like reduces compliance by like 90.

Speaker 1:

So if you tell an advisor, yeah, you're gonna do that for one person, cool. You tell an advisor, yeah, you're going to do that for one person, cool. If you tell an advisor, you got to do that for 100, you know, not so cool. So for highly concentrated positions, I think it's been a big unlock. You know, for people who have an advisor has a handful of accounts, I think it's a little harder for them if they say, look, we've been doing direct indexing and we're stuck in these frozen, calcified positions after five, 10 years of parametric and I have 500 clients and I really don't want to go do that work.

Speaker 1:

However, like it is a massive benefit to investors If you think about it if you've been invested in taxable accounts for the past 10 years and all of a sudden you're like all US stocks, like that's the way. If you look at the percent of U S investors net worth allocated to equities, it's the highest level ever and so historically that's like the number one indicator for next 10 years returns. In the opposite, you know it's got like a near perfect track record as predicting the future. So people were totally off sides and so that little bit of effort can really, can really help. You know there's two main criteria. You can't just give us 100% one stock. The biggest stock can't be larger than 25% of the portfolio, so it has to be somewhat diversified, is what they call it. So that's, that's a consideration to take into account. But ETFs are pass-through. So if you got 25 million NVIDIA and 75 million SPY, that probably works. So it's more that no one's heard of it.

Speaker 1:

So I gave a speech this week at the Elks Club in SoCal. It's actually the certified financial planner organization. I actually had two or 300 people there, but I said hey, how many of y'all know what a 1031 is? Every single hand went up, right, no one didn't know what a 1031 would go. How many of you guys have heard of a 351? Zero hands went up right. And these are CFPs Like their job is to be on top of taxes. Financial planning, um, and so I think it's.

Speaker 1:

I think it's a big opportunity and value add for planners and wealth advisors to take this to clients. It's also big prospecting. So if you're an advisor, I guarantee you you know someone who's got 50,. Look, you can charge on my normal portfolio, but you're not charging on this $100 million of Microsoft because I can't sell it and there's nothing you can do with it. So if you ever find a solution and can get me out of this, great. And so all of a sudden for financial advisors unlocking a huge portion of business and they never thought they would be able to touch.

Speaker 1:

And again, direct indexing is another one where they've kind of sold this solution, but then after a certain number of years they're like whoops, just kidding. Now there's nothing to do with this portfolio. Now there's a solution for that too. So we're excited. We have endowment's going to be in April, we have another one probably August, september. Then we're going to kind of see what people want from there. Everyone says they want US stock market beta right now and I tell them I said you wait about a month or two of the US going down and we'll see if you still want US stock market beta after that.

Speaker 2:

I made a point that the most contrarian trade now is that under a Trump presidency US stocks ended up being the biggest laggard.

Speaker 1:

It seems like so impossible under trump, but probably why it happens yeah, well, and that's the thing is, like everyone, like I think people what were, what were they talking about last trump president, that everyone just would have assumed energy would have been like an amazing sector and I think it like did terror, was it used to. Might have been you talking about this, but it's like. It's always like what you expect to happen may not happen.

Speaker 1:

My favorite part of this was when Trump got elected last time and the futures just started tanking that night and Carl Icahn put his martini down and went and bought 2 billion, and then you had something like 17 months in a row where the U S stock market was up the first year, first calendar year in history, where the market went up every month. So you never know what markets are going to deliver us, right? It's always surprising and that's part of the reason we got to be diversified and have a lot of these approaches and ideas baked in. But what's going to happen? You know the president's administrations. They don't control the valuation of stocks when they inherit them. That's beyond their control, right? And so you know Trump's inheriting one of the most expensive stock markets in history, which is a tall order, but I also think the president's irrelevant to stock market returns, but who knows?

Speaker 2:

It's also interesting I mean I've seen the studies that generally under Republican administrations the S&P tends to underperform relative to Democrats, which is counterintuitive given tax cuts.

Speaker 1:

But it's even funnier because half the time now the Republicans were Democrats. You know, it's like who knows what.

Speaker 2:

Yeah, even the categorizations don't even make sense at this point.

Speaker 1:

Yeah.

Speaker 2:

I think it's exactly right, matt, for those who want to learn more about the endowment portfolio when it's live, and then the 351 exchange. I know you're doing a few webinars, doing a few webinars, doing an webinar with me as well. Yeah, talk to me about sort of the different sources people can educate themselves on.

Speaker 1:

If you go to my Twitter account, you can see somewhere in the feed. Uh, we're doing a webinar Thursday where we're going deep on this. Um, you can always email me on Cambria funds or Cambria investments. There's a lot of information. Uh, there's three 51. There's 351 tabs that have FAQs, overview of the approach. It goes pretty deep. We got videos, podcasts, all sorts of information to educate people. That's much like you. That's our big calling card. We want to make sure everyone understands what they're investing in. My nightmare is having an investor that doesn't know what they're investing in, and so we spend an inordinate amount of time trying to educate through any medium at this day and age. Uh, go across any possible video text. Uh, you can email me. You can find us on LinkedIn. You can go buy the old Ivy portfolio book. You can download a zillion white papers for free. There's a million resources. If you just uh look hard enough, you can find a find all of them.

Speaker 2:

By the way, I give you a lot of credit. I mean, you know you've got a big firm, you've got a number of people working for you, but you're still the guy that's often out there communicating the most and doing one-on-one meetings.

Speaker 1:

As you know, guy, the life of an entrepreneur, it's all hustle. Someone asked the NVIDIA founder and CEO. I think it was no, was it NVIDIA?

Speaker 1:

CEO? I think it was. No, it was Nvidia. No, it was no. Sorry, it was um, it was a different profile of a Korean CEO, but it doesn't matter. But they said, um, you know how many hours do you work per week? And he answered all of them. You know, it's like. It's like the entrepreneur mindset the owner is not one that you just flip off on Friday night and turn back on Monday morning. You know it's an always-on mentality, but we love it, like it's a lot of fun too. I don't, you know, it's like Warren Buffett skipping to work, and so we always never a dull day in our world.

Speaker 2:

Yeah, ain't that the truth? Appreciate those that watch this. And, Meb, I will see you tomorrow.

Speaker 1:

Great See you bud.

Speaker 2:

Cheers.

People on this episode

Head Shot

Michael A. Gayed, CFA

Host