Yesterday 4/15/2015 (Yay! tax day!) Mebane Faber spoke at the CFA Society Pittsburgh. Love those Duquesne Club macaroons.
His presentation was about investing on a global scale and the use of value metrics. He also touched on cap weighting vs. pretty much any other weighting scheme. He mentioned Rob Arnott but not his monkeys.
Meb was very friendly and answered questions during the presentation and afterwards, thanks! Even my dumb one. I just don’t think like a stock picker (that is not intended as an insult in any way, to anyone).
One point he made was that home bias leads to over investment in US markets for US investors, and that this has been a winner in the past, but that value metrics suggest that this may not be true going forward. I think he is correct, but this emotional investing (which he also talked about with those excellent bull/bear graphs) is also what leads to the cap weighting bias. Well, that and cost.
One of the issues that has been huge for advisors during the time of US equity outperformance is that it’s really hard to sell clients on global investment when the rest of the world looks like crap compared to US. This is really career risk, and it’s a communication issue for the advisor.
In the same way, other-than-cap weighting, or what the industry typically calls “smart beta,” comes with some career risk. I think everyone acknowledges the fact that cap weighting causes you to hold too much of overvalued stocks, and not enough of undervalued stocks. Well, not everyone. There are still a few people who cling to EMH despite all the overwhelming evidence of its imperfections. Anyway, the problem is that the advisor has to select and then defend an alternative. In addition, this alternative costs more than the cap weighted funds (which are at .10% and below now! Wow!). I like Rob Arnott’s RAFI indexes (currently priced at .39%). They are not based on any kind of “tilt,” but are purely an attempt to weight equities by some size measure that does not include price. But the track record has to be looked at over the long term in order to see a benefit in performance. Which makes sense in a bull market – prices are going up for almost all stocks, and as they go up, the more winners you hold, the richer you get. Here’s data from the Invesco website:
as of 03/31/2015 YTD 1 Year 3 Year 5 Year 10 Year Fund Inception Index History (%) FTSE RAFI US 1000 Index 0.32 10.24 17.29 14.64 N/A 9.13 Russell 1000 Index 1.59 12.73 16.45 14.73 8.34 7.99
So you can see that some up and down is required for the smart beta to look very smart. This past 3 years have been really rough for the international smart beta advisor. 2011 had a small drawdown, which may explain the 5 year beat by RAFI.
Mr. Faber also showed a John Hussman chart. Love that guy, although THE SKY IS FALLING!!
Informative presentation, although, since I have already read most of his stuff, there wasn’t much new for me. It’s nice to meet one of your most admired investment thinkers in person.