News

(Bloomberg) -- As the equity selloff hit Wall Street late last month, Vance Howard’s quant program flashed sell signals across his portfolio teeming with high-priced tech companies, fueling a $1.8 billion liquidation and a now-40% cash position.

The algo, which signaled bearish alarms during the onset of the Covid outbreak, did its job – helping the 61-year-old investor stem further losses as growth equities sink anew this week in the grip of the brewing trade war.

Now, Howard is waiting for the all-clear from his systematic model – mindful that entering back into the market early is as vital for long-term investment performance as bypassing declines. The good news? The trading program suggests the equity market is getting into oversold territory. The bad: the negative momentum of late, notwithstanding Friday’s bounce, suggests the S&P 500 could hit 5,400, or 3.5% lower from Thursday’s closing level.

Yet for all that, the founder of Howard Capital Management expects a fresh rebound soon enough on the belief that the White House will step back from its disruptive tariff plans. Howard reckons the recent selloff is showering bargains, with the market likely to hit records again before the year is out.

His Georgia-based firm has around $6.5 billion in assets under management, with amped-up stock funds that have largely kept up with the S&P 500 over the past five years by maximizing the Big Tech trade.

“When you’re sitting with almost 40% of your funding cash, you want it to go really, really low so you can buy back in cheap,” Howard said in an interview. “If we can catch the turn correctly, then we can apply a little bit of leverage. We’re putting together our buy list and we’re pretty excited about it.”

Howard is the rarity in the typically conservative mutual-fund industry, because he dabbles in leveraged-up exchange-traded funds – speculative products beloved day traders that may have saddled ill-timed investors with losses north of 30% just this week. His firm uses its own math-driven process to time the market based on price trends and other inputs.

Out of 3,074 actively-run US equity mutual funds tracked by Bloomberg Intelligence’s David Cohne, only 10 fund families held leveraged ETFs as of the latest reporting period. And only Howard’s firm held ProShares UltraPro QQQ (ticker TQQQ) and ProShares Ultra S&P 500 (SSO), a triple-leveraged Nasdaq 100 ETF and a double-leveraged S&P 500 one, respectively.

Amid the recent tumult though, he divested nearly $2 billion in total in double- and triple- levered ETFs riding the major indexes. While both lag their stock benchmarks this year, his $1.6 billion HCM Tactical Growth Fund have outperformed the S&P 500 in the past five years on total-return basis, no mean feat given the performance challenges across the active-management industry. Amid the recent equity reversal, his $1.6 billion HCM Dividend Sector Plus Fund is now slightly under water over the timeframe.

Leveraged ETFs have been embraced by retail traders who have flocked to the season’s hottest trades thanks to their ability to amplify returns on the way up. But just as easily as they augment gains, so, too, do they pile on losses when markets decline.

Industry critics have long worried that many investors might not read the fine print and risk losing money in the process. Such products are often meant for speculative investors who want to bet on and against an asset’s performance for no more than a single day, as these funds can veer off course when tracking shares over a longer period. For Howard, they’re worth using, precisely because they offer to amp up the volatility — a boon when good times return.

“This is why you actively manage leveraged products. These are the times when you can really make some hay when the sun shines,” he said. In the event, “you’re looking at where to buy back in at an appropriate point, your odds of doing very well increase exponentially,” he said.

Count David Cleary, chief investment officer at Fortis Capital Advisors, among the limited cohort of institutional pros who use such products. Cleary, who manages around $1.3 billion, sold his amped up, tech-heavy ETF holdings in January. But he remains a supporter of the product to ride short-term gyrations.

“When using a levered ETF, we typically use it as a trading tool or a hedging tool, understanding its limitations and inefficiencies,” he said.

As for Howard, a former Texas city council member, his enduring bullishness is in part down to Trump’s ostensibly pro-business posture in his first term, citing support for deregulation, tax cuts and manufacturing.

“It was pretty disruptive the first three to six months that he was in office and then it started to calm down,” he said. “The second that news comes out that they’ve negotiated new trade agreements, I think you’re going see the market just shoot straight up.”