There has been a growing belief in the advisor and asset management communities that buy-and-hold as an investment strategy is not always the best mindset to deploy. Conventional wisdom on passive investment strategies as well has been challenged due to its inability to adjust to the volatile nature of the markets and capture emerging investment opportunities. In contrast, the strategic deployment of a more tactical mindset allows investors to participate in upside growth while working to mitigate downside risks across macro events and market cycles.
Mathematics - in the form of proprietary software and analytics - is the key component driving this proactive, tactical, and quantitative approach that is geared to navigate markets intelligently. Increasingly, this risk management approach is being characterized as Modern, if not Post-Modern, Portfolio Management so as not to be confused with 70-year-old Modern Portfolio Theory.
To better understand this tactical mindset, we were invited to interview Vance Howard, CEO of Howard Capital Management, Inc. (HCM) – a Roswell, Georgia investment advisory firm which offers a suite of separately managed accounts, mutual funds and ETFs, retirement tools, and self-directed brokerage accounts to clients and financial advisors, as well as specialized resources for retirement plan advisors and plan sponsors. Their HCM Mutual Funds and ETFs are a diverse array of actively managed strategies built to perform across market environments through their tactical, risk management tool called the HCM-BuyLine® which has been applied across their entire investment line-up. Their proprietary investment tool is designed to monitor and defend against changing market conditions and quantitatively identify imbalances to tactically shift assets. This approach, per Vance Howard, also helps redefine investors’ mutual fund and ETF experience by increasing investor confidence and lessening emotional decision-making.
Hortz: What were your motivations and goals for your investment firm and in developing your tactical approach?
Howard: From an early age I had wanted to learn to trade the markets. That was my passion. I started to manage money when I was 27 years old after being bought out of a small waste management firm we had back in 1991.
My first step was that I went to all the great traders that I had read about at that point in time, back in the late eighties, early nineties, everybody from Mark Cook to Linda Raschke to Ed Seykota. What I started learning about how they traded money was that they were not in the guessing game, they were in the odds game. In other words, they had built a system that was edged to win and they stuck to that system. And so that is what led me to begin building and developing my own system back in the nineties, and that effort evolved to become our HCM-BuyLine® risk management overlay system and our HCM Pivot Points indicators.
What we do is trade off of math and what the market is actually doing, not what we think is going to happen. I have found that people lose if they let their emotions get in the way. We believe investors need a system that has a mechanical edge. This is because people often can think their way out of a great trade or think their way into taking too much money out of the market due to the fear of loss. Since it can work both ways, that is one reason mechanical systems have been the backbone of everything we have done at Howard Capital. We have learned that it can completely change investors’ experiences with the markets.
Hortz: What did you see as technology’s role in addressing investment management challenges?
Howard: That is an interesting question because when I was developing the HCM-BuyLine®, I met a gentleman, Wayne Rainwater, who had a very good mechanical system based upon new highs and new lows in New York Stock Exchange that indicated whether he wanted to be in the market or out of the market. We ran that system together on a Big Chief Tablet with a fat pencil and every day would mathematically calculate where the market was and where the line was going as far as positive or negative.
Over time, as computers became more programmable and you could work with one without being a full-time programmer, that was when we started to go more into quantitative systems to try to really gain the market. That is when we started to use computer algorithms to tell us what the most effective way is to use the HCM-BuyLine® as a trend following tool. Now we have seven programmers working full-time on making it into a robust, mathematical trend system.
Hortz: For a firm your size, why do you have seven programmers? What exactly do they do for your firm and what have they been working on?
Howard: Every day, we are always trying to “sharpen the saw.” We are always trying to make the systems that we have better. We are also looking for systems that may outperform the ones that we have, which by the way are very challenging to do. We will come up with different concepts and test them to see if they work over a period of time. You have to really go back and fine tune these things and put in some sort of margin of error because even if you back test it, that does not mean it is going to work going forward.
Mathematically, we are trying to find the best investment for the amount of time that we are going to be in the market, getting the right risk to reward ratio that we are looking for, but also factoring for position size. So, we have our programmers doing mathematical equations of what is the most productive position size for the risk we want to take for the account we are trading. If we are trading a billion-dollar account, is a $75 million trade too much or too little? We want to see what the position size is that makes the most impact. And if the trade does not work, we want to make sure the position sizing is not so large that it does a lot of damage to the portfolio. The reality is we are going to be wrong from time to time.
You need to figure out these questions and decisions over time as these markets have become increasingly complex as quantitative traders are dominating the markets now. We have had to speed things up on our research and development. That is how we are constantly trying to sharpen our saw with our programmers and provide a better experience for our investors.
Hortz: What is the HCM-BuyLine® specifically designed to do and how does it get deployed with your investment products?
Howard: The HCM-BuyLine® is an intermediate term trend system. Once the trend is up, the system is positive. That means we want to trade to the long side as the market is trending upwards. We want to stay in tune with which direction the market is going. If the system is breached to the negative, we start to scale out to cash and wait for a positive trend to come back. Like the old saying goes, and I know it is worn out, but the “trend really is your friend.”
We deploy our risk management system across all our investment products - our mutual funds, ETFs, our SMAs and we even apply our system for bonds that tells you when you need to pull money off of the bond market and put your money in one-month treasuries or cash. It is applied as an overlay to the stock and bond markets indicating when you want to be trading in that environment, aiming to take the guesswork and emotion out of the equation.
Hortz: Can you tell us a little more about your range of funds and ETF offerings? Any particular differentiating aspects and applications you would like to mention?
Howard: We offer four proprietary mutual funds and two ETFs. Our product line-up is a diverse mix of investments built to perform across varying market cycles. And I designed our funds to seek upside potential in all market sectors, as well as offer investors a variety of risk levels.
To further explain, when the HCM-BuyLine® is positive, our series of investment products are focused on different areas and approaches in the markets looking for the most productive asset classes or stocks/bonds that we can find to potentially generate the most gains in that investment environment on behalf of our clients.
Of particular interest may be that we have two different mathematical equations we use in that pursuit in these vehicles. One is a hybrid model, which is mainly Relevant Strength where we are aiming to pick out the strongest sectors or stocks/bonds at any given moment with specific risk characteristics, along with a stop and a walk behind stop on that trade.
Second, we have developed what we call the HCM Pivot Points that are designed to “force” us to go into a trade, rather, “the market” forces us into a trade, but also gives us a very identifiable exit point or two. So, again, we take the emotion out of the equation on when to buy and when to sell.
We are mathematically driven where fundamentals of individual companies are not going to have very much of an impact at all, as far as we are concerned. We are looking at things that are moving up and we are going to try to capture some of those up gains and avoid down trends. We are becoming more and more of a quant trader.
Hortz: How do your funds with the HCM-BuyLine® help position advisors to take advantage of the retirement plans market and build strong relationships with mid-to-large corporate plan sponsors? What tools and approaches do you support advisors with in working with retirement plan sponsors?
Howard: For the retirement plans marketplace, we developed the HCM 401(k) Optimizer® which offers portfolio allocations for 401(k), 457, 403(b) accounts. For example, let’s say you have twenty choices inside of your retirement plan. We take those 20 choices and recommend, based on your risk tolerance and goals, which investments you should consider holding. Every quarter, the client is then given a new recommendation on how to reallocate those three, four, or five holdings to maximize returns. It helps take the guesswork and anxiety out of a client's retirement plan options and make the selection process more mathematically driven on their behalf.
Our mathematical system is designed to help the advisor save time on individually allocating 401(k) plan options with their plan participant clients. In addition, when you look at the Department of Labor (DOL) and review the rules they have implemented, they support computerized models instead of having a plan sponsor or investment representative guessing or offering suggestions.
Most importantly, this is providing some competitive tools to retirement advisors in working with retirement plan sponsors versus walking in with a typical 401(k) plan and just an asset allocation questionnaire to help their plan participants to implement investing for their accounts. This kind of mathematical risk management system aims to change the experience of investing in mutual funds and may help increase active participation into the retirement plan.
Hortz: How do your investment products and risk management methodology fit into an advisor’s portfolio construction and client suitability process? Do they particularly address high-net-worth client needs?
Howard: When you look at our investments’ tactical approach, it is at root a risk management approach. What we have found with high-net-worth clients is they really want somebody to monitor their overall asset base and portfolios. They are concerned with preserving their wealth, as well as growth, and are looking for a risk management approach.
When geopolitical, economic, and other risks raise their ugly heads, it is exceedingly difficult at the height of the moment to analyze the nature and extent of the risks as they are happening, causing confusion, and triggering emotion in not knowing the best course of action. Having a mathematical risk management system in place can take defensive actions that usually give you enough time to make rational decisions when events roll over. We have designed our investment products and services to meet high-net-worth expectations and help redefine their risk tolerance while being presented with a clear course of action.
Hortz: What experience can advisors expect in working with Howard Capital?
Howard: We have built a much bigger value proposition for advisors working with our firm than just working with our investment products. We collaborate hands-on with advisors as strategic partners where we are on the same side of the table with them.
Often, advisors bring us business owners and high-net-worth clients because there are so many things you can do with a business owner from their portfolio management to their retirement plan and tax strategies. We are set up to help the advisor uncover other client needs like building a foundation, utilizing RD tax credits, or managing their estate. And another thing too, some of these business owners get bought out, and we can help the advisor assist on the buyout process on how to reduce the capital gains tax on the sale of their business.
There is a multi-front plan and resources that we can help provide to advisors with these business owners and high-net-worth individuals to help them get to where they want to go. We offer a multi-front plan, extensive resources, and an expanded opportunity set, to support advisor business development by collaborating with them on high-net-worth as well as business owners and retirement plans which are just second nature for us.
Related: Putting $10 Million To Work Is More Than an Investment Activity