Meb Faber is a well-known investment professional who has gained popularity for his contrarian and trend-following investment strategies. He runs Cambria Investments and has authored several books explaining his quantitative investing approach. In this article, we will provide an in-depth Faber investments review, looking at the merits and potential drawbacks of applying Meb Faber’s strategies to an investment portfolio. We will examine some of his most famous strategies like the dual momentum approach as well as other lesser known Faber techniques. Our goal is to provide investors with a balanced perspective on Faber investments so they can determine if his strategies are a good fit for their needs.
Faber’s dual momentum blends momentum with risk management
One of Meb Faber’s most well-known strategies is the dual momentum approach outlined in his book Dual Momentum Investing. The strategy combines momentum effects with risk management by investing in the asset class with the strongest 12-month return trend across several asset classes like stocks, bonds, commodities, and real estate. However, it applies a safety mechanism by moving entirely to cash if the overall market drops more than a predefined threshold. This blend of momentum and risk control produced strong historical results in backtests. However, like all momentum strategies, dual momentum can underperform during sudden market shifts when trends rapidly reverse.
Faber’s trend-following model struggles during range-bound markets
In addition to dual momentum, Faber has written about using 10-month moving averages to follow asset class price trends. This approach invests in an asset class ETF like emerging market stocks if the price rises above its 10-month moving average and sells when the price crosses back below this trendline. The simplicity of this system is appealing but it can whipsaw during range-bound sideways markets with no clear trend. Faber’s trend-following strategies work well when strong multi-year trends emerge but they carry the risk of underperforming buy-and-hold investors over shorter periods.
Faber’s preference for active management has costs
While passive index funds dominate Faber’s model portfolios, he does advocate for active managers in less efficient asset classes like emerging market stocks. The higher fees charged by active emerging market funds can eat into net returns over time. Faber also favors commodity trading advisors in trend-following managed futures funds, which adds another layer of complexity and costs versus simpler systematic trend-following rules.
Transaction costs can accumulate from Faber’s rebalancing
While trading costs have fallen with the rise of low-cost brokerages and ETFs, Faber’s models can still generate excessive rebalancing activity during volatile market environments. For example, his dual momentum and moving average strategies rotate across 7-8 different asset classes which amplifies transaction fees and taxable events for taxable accounts. Faber’s models work well applied to large institutional portfolios but smaller individual investors need to be aware of these incremental frictional costs over time.
Meb Faber’s quantitative investment strategies offer some intelligent ideas on combining momentum and trend-following with risk management guardrails. However, the transaction costs, potential whipsaws, and hit to performance during trendless markets are all factors an investor must weigh carefully before implementing Faber’s models. His approach is best suited for large institutional investors who can absorb the trading costs.