Cambria Fund Profile Series — Cambria Value and Momentum ETF (VAMO)

Episode Summary

Executive Summary: The episode argues that short-term underperformance is a normal feature of investing and that investors should judge strategies over full market cycles, not recent winners. Using Cambria’s VAMO fund as an example, the speaker explains how value, momentum, and hedging headwinds hurt returns, yet stresses that out-of-favor approaches can rebound when market regimes change.

Main Topics: Investor education and fund-profile format (Priority: 4/5): The episode opens by explaining Cambria’s broader effort to educate clients through blogs, papers, books, speeches, and social media, and frames the podcast as a way to provide more context than a fact sheet. Performance chasing versus disciplined investing (Priority: 5/5): The speaker warns against chasing whatever strategy is currently outperforming, arguing that investors should consider whether an out-of-favor approach may be closer to its next upswing. VAMO’s recent underperformance (Priority: 5/5): Cambria’s Value and Momentum ETF is presented as a case study in a strategy that has lagged for multiple time horizons, with poor rankings in Morningstar’s long-short category. Why the strategy struggled (Priority: 5/5): The fund’s value and momentum exposure, value hedge, trend hedge, and use of the S&P 500 as a hedge all acted as headwinds as growth, expensive markets, and fast rebounds dominated recent years. Market regimes and the inevitability of seasons (Priority: 5/5): The episode emphasizes that no strategy wins every year and that regime shifts are difficult to identify in real time, so patience is required when a favored style is out of favor. Historical examples of patience rewarded (Priority: 4/5): Buffett/Berkshire Hathaway is cited to show how long-term commitment to an unpopular style can eventually deliver extraordinary compounding despite painful drawdowns. Value’s potential rebound (Priority: 4/5): The speaker cites AQR research suggesting the value spread is historically extreme, arguing that value may be nearing a turn and could eventually boost VAMO performance.

Key Arguments: Performance is cyclical; no investment strategy dominates year after year, so investors should expect long stretches of underperformance. Chasing hot funds is often a mistake because current winners can become overcrowded and future returns may disappoint. VAMO’s weak results were not necessarily evidence the strategy was broken; they reflected unfavorable market conditions for value, momentum, and hedging. The fund’s structure was hurt by multiple simultaneous headwinds: value lagged growth, hedges detracted as markets rose, and the chosen S&P 500 hedge was costly. Closing a fund simply because it is underperforming would ignore the possibility that the strategy is temporarily out of favor rather than invalid. Long-term success in investing often requires enduring uncomfortable periods before a style or factor regains favor. Historical examples like Buffett show that great long-term returns can come from staying committed to a disciplined approach through severe drawdowns. Current valuation dispersion may signal that value investing has unusually attractive forward potential.

Data Points: Client/investor audience: Over 80,000 strong - The intro says Cambria has educated clients and investors now numbering more than 80,000. Mutual funds shut down or merged: Nearly half of all mutual funds from 10 years ago - Used to explain why many funds disappear and why underperforming strategies are often closed. VAMO one-year Morningstar percentile ranking: 80% out of 212 funds - Long-short category ranking based on total return as of 12/31/2020. VAMO three-year Morningstar percentile ranking: 96% out of 196 funds - Long-short category ranking based on total return as of 12/31/2020. VAMO five-year Morningstar percentile ranking: 97% out of 161 funds - Long-short category ranking based on total return as of 12/31/2020. Hedging level: Approximately 50% hedged - The speaker notes VAMO was about half hedged with S&P 500 futures at the time. Berkshire Hathaway $10,000 growth: About $200 million - Illustrates the long-term payoff from staying with Buffett’s value-oriented approach since 1965. Broad stock market $10,000 growth: About $2 million - Comparison against Berkshire’s long-term return. Value spread history: At or near the 100th percentile since 1967 - Citing Cliff Asness/AQR to argue value looked historically cheap relative to expensive stocks.

Pivotal Quotes: "no investment strategy dominates year in, year out. Instead, seasons come and go." — Meb Faber: Core thesis on why investors should expect cyclical performance rather than permanent outperformance. "Shouldn't we rather be focusing on sound assets and strategies that are out of favor?" — Meb Faber: Argument against performance chasing and in favor of contrarian discipline. "There hasn't been a better opportunity to own value stocks going back over 50 years." — Meb Faber: Used to support the idea that value may be poised for a rebound after a long weak period.

Implications: Listeners are encouraged to judge strategies over full cycles, tolerate uncomfortable drawdowns, and avoid chasing recent winners. The broader message is that out-of-favor factors like value may offer stronger future returns when market regimes shift.