Managing other people’s money is a lucrative gig, but Cambria Investment Management in El Segundo is offering to do it for free.
In December, the firm launched an exchange-traded fund, or ETF, that charges no management fee. The firm claims the fund is the first of its kind in the country. It’s a novel move in the investment management world, but there’s an old name for this kind of new product: a loss leader.
Just as a grocer might sell milk at a discount to draw in customers who will also buy higher-margin goods, Meb Faber, Cambria’s co-founder and chief investment officer, hopes the free ETF will introduce investors to Cambria’s other products, which do charge typical management fees.
“We think of the brand as a whole,” he said. “This fund can drive flows to our other funds.”
Called the Cambria Global Asset Allocation, the new ETF owns stakes in 29 other ETFs, mostly from large investment firms such as Vanguard Group in Malvern, Pa., and BlackRock Inc. in New York – but also three other Cambria funds. It’s designed to be a core investment portfolio with a predetermined allocation in domestic and foreign stocks, bonds and commodities and has raised about $18 million so far.
Investors pay an annual fee of 0.29 percent – or $29 on a $10,000 investment. Other ETFs charge ongoing management fees on top of that, and that’s where Cambria is different.
Holding positions in other funds is part of the reason Cambria can afford to offer the product for free, Faber said. He’s basically buying other ETFs and walking away.
“Because it’s buy and hold, this isn’t me adding a ton of value,” he said.
Cambrian explosion
Faber and Eric Richardson formed Cambria in 2006 and launched their first ETF, Cambria Shareholder Yield, in May 2013. It now has $216 million under management.
Exchange-traded funds are securities that track an index or basket of stocks, bonds or commodities and trade on public markets. They are similar to mutual funds, but while ETFs can be bought and sold throughout the day, just like stocks, mutual funds can only change hands at the end of each trading day. ETFs also tend to charge lower fees.
Today, Cambria has five funds and manages about $420 million in assets across all of its strategies. Faber – who says he has essentially his entire net worth in Cambria funds – expects to introduce more ETFs this year. Cambria ETFs usually charge management fees of about 0.6 percent.
Although Cambria has just four employees and no marketing budget, Faber, 37, plans to promote the new ETF through his appearances at finance events; a new e-book, his fourth; and on Twitter, where he has more than 18,000 followers. He said the new fund has already attracted a broader spectrum of investors than the firm’s other offerings, from individuals buying a handful of shares for their personal accounts to investment advisers and small endowments.
“I’d be surprised if it’s not our largest fund in the next year,” Faber said.
Mutual distrust
Cambria’s new fund comes during something of a golden age for ETFs, with more than 8,000 hitting the market since the first one debuted in 1989. A recent PricewaterhouseCoopers report estimated that ETFs will hit $5 trillion in assets by 2020, nearly doubling from $2.6 trillion today.
Duncan Rolph, a partner at Miracle Mile Advisors in West Los Angeles, said he thinks ETFs will eventually replace mutual funds.
“ETFs are gaining inflows by the hundreds of billions and mutual funds are losing flows by the hundreds of billions,” he said. “By the next five to 10 years, I would expect mutual funds to pretty much disappear.”
That could play into Faber’s hand: If he’s successful in spreading Cambria’s name through the fee-free product, he might be able to funnel some of those mutual fund outflows into Cambria ETFs.
But Ranjit Sufi, a managing director at West L.A. money manager Aristotle Capital Management, which has two mutual funds and serves as an adviser on several others, doesn’t think it’s a zero-sum game between mutual funds and ETFs.
“I think there’s a space for both vehicles in the marketplace,” Sufi said. “I think long-term skilled investors such as ourselves will persevere because we’re buying good businesses.”
Still, he acknowledges that the average mutual fund manager won’t outperform a simple index fund once fees are taken out. To differentiate Aristotle, Sufi has to convince prospective investors that his team’s stock-picking skills are worth paying a 0.9 percent annual management fee. That’s a tough sell when there are so many low-cost ETFs on the market.
Locked in
While Rolph is bullish on ETFs generally, he does have some concerns about Cambria’s new fund. For one, he thinks its one-size-fits-all portfolio isn’t appropriate for investors who have personalized needs.
“It locks you into a fairly rigid asset allocation that is probably not the right one for most people,” he said. “There’s not an ability to move the dials. If you literally just invested in two or three of these instead of one, you’d have much greater control.”
He also said he thinks Cambria’s fund has too much exposure to foreign markets. International stocks can come with geopolitical consequences – just ask shareholders in Swiss companies who took a bath recently when that country’s central bank suddenly unpegged the franc from the euro.
But Faber said the fund mirrors the world economy as a whole, which has always grown over time. And as for the one-size-fits all approach, he said that’s a feature not a bug.
“The vast majority of the research shows that investors are their own worst enemy,” he said. “Having too much flexibility is a bad thing for most.”
Faber’s competitors might be hoping investors in his new fund get what they pay for, but he’s betting on future performance. If the new ETF outpaces most mutual funds, the value proposition becomes clear.
“Why would you hire an adviser that pays an investment team millions of dollars when you can buy this for 29 basis points?” he asked.
