Q:  What is the history of Cambria Investment Management? A : Cambria Investment Management, Inc. was founded in 2006 by Mebane Faber, Chief Investment Officer, and Eric Richardson, Chief Executive Officer. Since then the asset base of the company has grown to $185 million. Initially, we started managing clients’ assets through separately managed accounts. The Cambria Global Tactical ETF (GTAA) was launched in October 2010 with Faber and Richardson serving as co-portfolio managers. The Cambria Global Tactical 2X Fund, which was launched in 2009, is essentially a leveraged version of our core strategy. Q:  What are the core principles of your investment philosophy? A : We believe there are a number of historical patterns that not only inform how securities markets have traded historically but also offer good predictive value for how markets will trade in the future. We have a fundamental belief that human beings are not great stock pickers. Rather than relying on individual stock picking, we believe that there are various trends and patterns in the market that are predictive of future moves. One of the patterns is the ability of momentum to predict futures gains and losses in markets. We do believe that as markets are trending higher, they tend to continue to trend higher and as they trend lower, they continue to trend lower. That is one of the core principles that form our investment philosophy. Q:  What is your investment strategy? A : Being a quantitative investment manager, we employ strategies that are primarily based on quantitative models rather than fundamental or bottom-up investment analysis. At present, most of our clients’ assets are invested in a strategy that we refer to as Global Tactical Asset Allocation. The first tenet of our strategy is our belief in the importance of being globally diverse in different asset classes throughout the entire world. We believe that various asset classes do not typically correlate but trade independently of each other. Thus, rather than just adopting a traditional portfolio allocation of 60% stocks and 40% bonds, we believe a more robust portfolio would reflect the approach taken by many of the endowments at various universities throughout the United States. We start with the premise that a good diversified portfolio will have a rough allocation of 20% to each of the five asset classes – U.S. stocks, foreign stocks, bonds, real estate and commodities. The second precept of our approach is that we believe in momentum and trend following. In our view, if any of those five given markets is trending up, we like to be in that asset class and benefit from the gains in that appreciation. Conversely, should any of those markets start trending down, we think it will be wise to exit the asset class and seek the safety of cash instead. Since the portfolio has the ability to trade these asset classes independent of one another, we feel that it is prudent to have an all-weather portfolio that can take advantage of differing market and economic conditions, political and global macro events. Such a portfolio will also allow us to trade in and out of markets and provide the ability to rebalance with a certain frequency between risky asset classes. Essentially, our approach offers equity-like returns with reduced risk and volatility. Q:  What are the main steps in your security selection process? A : We use ETFs as the major vehicle to trade across asset classes in all of our portfolios, including the Cambria Global Tactical ETF (GTAA), our separate accounts and private hedge funds. As part of our process, we look for ETFs that are issued by reputable and established firms and are highly liquid so that we have the ability to trade in and out of them with relative ease. Additionally, we want to invest in ETFs with very low expense ratios. The Cambria Global Tactical ETF (GTAA) can hold upwards of 80 underlying ETFs. Starting with the five basic underlying asset classes, we try to continue that breakdown into increasingly granular subsets. For example, commodities could be expressed as agricultural commodities, energy-related commodities, base metal commodities and precious metal commodities. In the same way, we could get extremely granular with foreign stocks and go beyond just saying developed countries and trade individual ETFs that focus on UK stocks, Japanese stocks, German stocks, French stocks and others. We carry out robust backtesting and historical research to see if these different approaches are viable and to demonstrate the accuracy of our hypothesis. In addition to our internal research we also contract outside firms to gain different perspectives. Our security selection process is a combination of having strong in-house research staff and spending the resources to acquire the data that we need. We supplement that with market data, analytical tools and company research. Q:  What will determine allocation between the five different asset classes that you described? A : The asset allocation is based on the price movement of the underlying ETFs set against the backdrop of a couple of different moving average parameters with different timeframes. We typically have a preset rebalancing period. We generally use a medium and longer-term horizon, and based on the price of the underlying ETFs, we can either be fully invested, partially invested, or not invested in that category, which means all of that allocation would be invested in cash. As we are trend followers, we do not try to predict any global events or the overall direction of the markets. In our opinion, it is difficult to precisely determine a portfolio based on forecasting and guesswork. Instead, we look what the markets are doing in real-time and how they have performed before making our adjustments to the portfolios based on those price movements and moving averages. One of the refinements we recently made in the ETF product was the addition of a small allocation to currencies based on our research on currency trends. Q:  Are there any other metrics that you focus on apart from standard research? A : Our goal is to generate absolute return and to outpace the market as a whole. We constantly try to enhance and refine the existing portfolios by making slight adjustments as we go forward. And again, we do that using the various research methodologies described earlier and with the help of backtesting. For example, we look at return characteristics based on the use of different government securities. That allows us to ask ourselves whether we should be focused on the 10-year bond or short term Treasuries in the bond space. We also evaluate how high yield bonds are performing or how emerging markets debt is faring. One of the moves we have made in the past six months is that we hired a very talented research analyst, Prabhat Dalmia. He brings robust modeling and software design capabilities to assist with the research and the testing that we perform. Q:  How do you build your portfolio? A : Our investment decisions are guided by rule-based system driven by a technical set of parameters with very little subjectivity in the process. We see global diversification as an important parameter in managing the portfolio and we think that momentum and trend following fundamentally works. Also, we believe that value investing is a sound underlying approach. We start with a hypothesis and then backtest that hypothesis as far back as we can using the most robust data that we can get our hands on. If our hypothesis is borne out by the historical backtesting, then we think that it is a viable portfolio approach going forward. Q:  What risks do you focus on and how do you manage them? A : The global tactical asset allocation approach that we use is inherently a risk management and capital preservation approach to managing money. For us, it is important to be diversified amongst the various asset classes. From a global standpoint, we believe that both U.S. stocks and foreign stocks have an important place in the portfolio. Nations are interconnected and commerce has become increasingly global, so we think that investing only in U.S. stocks or assets is myopic and can lead to missing out on global opportunities. Our strategy will never sell at the very top nor buy at the very bottom.