(Bloomberg) — Just outside Atlanta, a 60-year-old wealth adviser says he is I understood how to “take the emotion out of the investment process”. How? Filling his mutual funds with ETFs that use leverage to increase the daily returns of the Nasdaq 100 while using quantitative tactics to understand when to enter and exit the market.
Lately, this unconventional approach, in the long-resolved world of asset management, has just worked. Vance Howard's HCM Tactical Growth Fund has beaten 96% of its peers over the past five years with an annual return of 20%.
Established a decade ago, the $1.6 billion fund currently keeps a third of its money in two- and three-leverage exchange-traded funds — products often favored by day traders — and spreads the rest among companies different with megacap.
Finding ways to match the massive returns of stock indexes has become an obsession on Wall Street, as the relentless bull market leaves a host of active stock managers in the dust.
For Howard — founder of Howard Capital Management in Roswell, Georgia — it's been a road to expansion. Assets under management have grown from $350 million to $6 billion in the past decade, thanks to returns that have outpaced even the S&P 500 during its great run.
His high-octane approach stands out, reflecting a disdain for routine and a tolerance for loss. Of the 3,153 actively managed equity mutual funds tracked by David Cohne of Bloomberg Intelligence, Howard's shop is one of only two that lists Nasdaq triple ETFs among its holdings.
“I don't think these are high risk. My personal account is our biggest customer,” Howard said. “They don't hire us to be average. If you want average, go buy an index.”
Another Howard fund, launched in 2015, focuses on dividend growth. The $1.6 billion HCM Dividend Sector Plus fund has the same double-leveraged Nasdaq 100 ETF and a triple-leveraged S&P 500 product, which make up almost 40% of its total portfolio. It has beaten the S&P 500 total return index in the past five years as well.
However, the strategy is not without risks, says BI's Cohne.
“Indirect exposure to leveraged ETFs, particularly triple-leveraged ETFs, can expose retail mutual fund investors to potentially large losses,” he said. “To do so may be playing with fire.”
As Howard says, properties are kept honest in part thanks to computers that use a “mathematically driven process” to time the market based on price trends and other data. He cites the pandemic as an example, when his four funds were about two-thirds allocated to cash, unlike most Wall Street professionals, who typically have a mandate to stay fully invested.
“We don't have a specific time when we will rebalance,” he added. “We are very active. We can retreat in 10 minutes. We're out in 10 minutes and we'll be in cash.”
Howard's funds have slightly outperformed the S&P 500 since inception, despite deviations during sharp market moves. In 2022, his tactical growth fund fell nearly 40%, more than double the nearly 18% decline of the S&P 500 total return index. His dividend sector fund also fell about 22%.
Leveraged ETFs, which use derivatives to boost returns or even pay the opposite of the return of certain stocks or indexes, have grown in popularity over the past year, mostly among risk-addicted retail investors.
Commonly sold as vehicles for quick market flyers, inverse and leveraged ETFs have racked up more than $8.4 billion in inflows year-to-date, on track to surpass last year's $10.1 billion, according to compiled data. from Bloomberg Intelligence. Demand for such funds has increased as money managers look for new vehicles to bet on the market's biggest themes, such as Big Tech. But they come with added risks, given that they can generate losses as quickly as they can see profits.
“They are generally not designed for a long-term buy-and-hold strategy,” said Amrita Nandakumar, president at Vident Asset Management. “Where we see people run into trouble is when they don't understand the mechanism of fund leverage, and then they're surprised by unpredictable return patterns and rapidly mounting losses.”
For Howard, his funds' strong performance comes at a time when US markets are at all-time highs in wildlife spirits. The S&P 500 broke its record more than 30 times this year alone, driven by the strength of a handful of stocks fueled by the frenzy surrounding artificial intelligence.
In case stocks go south, Howard — a four-time Texas city council member and two-time mayor — isn't particularly concerned. He has trusted his models for almost three decades. Since founding his firm in 1999, Howard has expanded his business into separately managed accounts, four mutual funds and three ETFs, two of which Morningstar Inc. leads. order of the top performers among stock ETFs for the second quarter.
“I'm not trying to call the top or the bottom of the market,” he said. “I'm just trying to lose 80% of the bad and catch 80% of the good.”