Today we will look at Meb Faber’s Global Asset Allocation portfolio from his book of the same name. The Global Asset Allocation portfolio is a passive investment strategy that aims to provide investors with a diversified exposure to global asset classes. In this article, we will explore the portfolio’s key features, performance, and assess whether it’s an effective investment strategy.

Prior to 2000, the portfolio did a decent job of closely following stock returns while experiencing fewer drawdowns. Nonetheless, the portfolio’s performance has decreased somewhat since the turn of the century.

Meb Faber’s book was published in 2013 and in this article, we backtest the performance since then.

What is Meb Faber’s Global Asset Allocation portfolio?

Meb Faber is a well-known author, podcaster, and co-founders of Cambria Investment Management, who wrote a book called “Global Asset Allocation” where he reviews over 10 famous portfolios and makes the claim that as long as you have a diversified portfolio, it doesn’t really matter what the mix or weighting is… they all end up returning about the same. He also believes many investors suffer from “home country bias” and don’t invest outside their home country enough. He also reviews his own portfolio which he calls the “Global Asset Allocation portfolio” that is a globally diverse mix of stocks, bonds, and real assets.

The Global Asset Allocation (GAA) portfolio is a simple yet effective investment strategy that aims to provide investors with a diversified exposure to global asset classes. The portfolio consists of a mix of stocks, bonds, real estate, and commodities. The strategy’s key idea is that by investing in a diversified set of asset classes, investors can capture the returns of the global market while minimizing the impact of individual asset class risk.

What investments are included in Meb Faber’s Global Asset Allocation portfolio?

The Global Asset Allocation portfolio consists of a mix of different asset classes, including stocks, government bonds, corporate bonds, commodities, and real estate. The specific allocation of these asset classes is based on the global market capitalization of each asset class. In other words, the portfolio invests more heavily in asset classes that have a larger market capitalization. Since it is hard to calculate the market capitalization of gold and commodities, Meb Faber ballparked a 5% allocation to each of those.

To implement this strategy, Faber recommends using a combination of low-cost index funds that provide exposure to the various asset classes. Specifically, he recommends investing in the following funds and allocations:

Asset class	Fund name	Symbol	Allocation
US large cap stocks	Vanguard Large-Cap	VV	18%
Foreign developed stocks	Vanguard FTSE Developed Markets	VEA	13.5%
Foreign emerging market stocks	iShares MSCI Emerging Markets	EEM	4.5%
US corporate bonds	iShares Investment Grade Corporate Bond	LQD	19.8%
US long term bonds	iShares 20+ Year Treasury Bond	TLT	13.5%
Foreign bonds	Vanguard Total International Bond	BNDX	14.4%
TIPS	iShares TIPS Bond	TIP	1.8%
REITs	Vanguard Real Estate	VNQ	4.5%
Gold	SPDR Gold Trust	GLD	5%
Commodities	iShares S&P GSCI Commodity Indexed Trust	GSG	5%

How does Meb Faber’s Global Asset Allocation portfolio work?

The Global Asset Allocation portfolio’s key idea is to provide investors with a diversified exposure to global asset classes, allowing them to capture the returns of the market while minimizing individual asset class risk.  The portfolio is then rebalanced monthly, quarterly, or annually to maintain the weightings. In this way,  investors get exposure to global financial markets without having to make individual security or market timing decisions.

What are the risks associated with Meb Faber’s Global Asset Allocation portfolio?

All investments come with risks and Meb Faber’s Global Asset Allocation portfolio is no exception. What’s interesting is that the investment choices are intended to provide performance even when one asset class is in crisis similar to risk parity portfolios like the permanent portfolio and the all-weather portfolio. Nevertheless, each investment in the portfolio is subject to some risk and the biggest risks to this portfolio are:

• Commodity Investing Risk: Investing in commodity-related companies may subject the portfolio to greater volatility than investments in traditional securities. The commodities markets have experienced periods of extreme volatility. 
• Currency Risk: Currency exchange rates may fluctuate significantly over short periods of time and can be unpredictably affected by political developments or government intervention. Changes in currency exchange rates may affect the U.S. Dollar value of the portfolio’s investments.
• Foreign Investment Risk. Returns on investments in foreign securities could be more volatile than returns on investments in U.S. securities. Exposures to foreign securities entail other risks, mostly around different rules in different countries. 
• Emerging Markets Risk: Emerging market investments are subject to the same risks as foreign investments and to additional risks due to greater political and economic uncertainties.
• Equity Investing Risk. An investment in the portfolio involves risks similar to those of investing in any fund holding equity securities, such as market fluctuations, changes in interest rates and perceived trends in stock prices. 
• Fixed Income Risk. A decline in an issuer’s credit rating and/or financial condition may cause such issuer’s fixed income securities to decrease in value while experiencing increased volatility and investment risk. The market value of a fixed income security generally changes in response to changes in interest rates and may change quickly and without warning in response to issuer defaults and changes in issuer credit ratings.
• Interest Rate Risk. The market value of fixed income securities generally changes in response to changes in interest rates. As interest rates rise, the value of certain fixed income securities is likely to decrease. Risks associated with rising interest rates are heightened given the Federal Reserve’s recent increases in interest rates. To the extent that rates increase substantially and/or rapidly, the portfolio may be subject to significant losses.
• Real Estate Investments Risk. The portfolio is subject to the risks related to investments in real estate, including declines in the real estate market, decreases in property revenues, increases in interest rates, increases in property taxes and operating expenses, legal and regulatory changes, a lack of credit or capital, defaults by borrowers or tenants, environmental problems and natural disasters.

Performance of Meb Faber’s Global Asset Allocation portfolio – backtest

According to Faber’s research in his book “Global Asset Allocation”, the Global Asset Allocation portfolio has generated an average annual return of 9.90% from 1973 to 2013 with a max drawdown of -26.72%.

The returns are comparable to the returns of stock index returns but with half the drawdown. (Stock indexes had an average annual return of 10.21% with a max drawdown of -50.95% from 1973 to 2013).

We backtested this portfolio from 2000 to 2023 and observed somewhat different results. The annual returns were 5.92% and the max drawdown was -30.63%. We believe the difference is attributable to the huge bull run in bonds in the 80s and 90s, which are periods not covered by this backtest. 

Meb Faber’s Global Asset Allocation portfolio – Does it work?

The performance history of the Global Asset Allocation portfolio indicates that it is a successful investment strategy. When compared to a standard stock-bond portfolio, its worldwide diversification across asset classes has traditionally offered investors comparable returns with lower risk.

Also, many investors find it to be an appealing alternative because of its low cost and simplicity of implementation.

However, it’s important to note that past performance does not guarantee future performance.