Lead-Lag Live

Market Mastery Through Trend Following with Eric Nyquist

• Michael A. Gayed, CFA

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When financial stress tore Eric Nyquist's family apart during the mid-2000s, it sparked his lifelong mission to understand how to both grow and protect wealth. Now leading fund sales and distribution at Howard Capital Management, Eric shares how personal experience shaped his investment philosophy and why protecting capital during market downturns is just as crucial as capturing upside.

The cornerstone of Howard Capital's approach is their proprietary HCM Byline – a trend-following indicator that serves as a market barometer, signaling whether markets are healthy or deteriorating. Developed by founder Vance Howard in the mid-90s after experiencing the 1987 market crash firsthand, this systematic methodology removes emotional decision-making from investing, addressing what Eric identifies as the number one reason investors underperform: behavioral finance pitfalls.

Eric challenges conventional investment wisdom throughout our conversation, particularly questioning Modern Portfolio Theory's assumptions about rational investor behavior and its equation of volatility with risk. "Volatility works on a two-way street," he explains. "There's as much upside volatility as downside, and if you can't capture upside volatility, you're never going to make money in the market."

For advisors constructing portfolios, Eric suggests thinking in thirds – allocating to tactical growth strategies like Howard Capital's ETFs, actively managed fixed income, and passive strategies to keep costs down. Their ETFs (LGH and QQH) offer tactical versions of major indexes designed not to avoid every market hiccup, but to protect investors from the devastating 30-50% declines that can derail financial plans, especially for those nearing retirement.

Whether you're concerned about current market valuations, wondering about the persistence of large-cap dominance, or simply looking for ways to enhance your investment approach, this conversation offers valuable perspective on navigating market cycles with confidence. Visit howardcm.com to learn more about their systematic approach to staying tactical in today's rapidly evolving markets.


DISCLAIMER – PLEASE READ: This is a sponsored episode for which Lead-Lag Publishing, LLC has been paid a fee. Lead-Lag Publishing, LLC does not guarantee the accuracy or completeness of the information provided in the episode or make any representation as to its quality. All statements and expressions provided in this episode are the sole opinion of Howard Capital and Lead-Lag Publishing, LLC expressly disclaims any responsibility for action taken in connection with the information provided in the discussion. The content in this program is fo

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Speaker 1:

Let's talk about that byline approach a little more. Is it from an actual in-practice perspective or from a backdressing perspective? Does it tend to be a better approach for large cap names, mid caps names, small cap names, us international? I'm trying to get a sense of sort of where do you find, where is the historical success really been?

Speaker 2:

Well, this historical success really been um well, this historical success, the byline, can be overlaid on any investment class. It is our market barometer, michael. It uh is basically telling us if the market's healthy, if the market's getting sick or if the market has cancer and overall, you know, put very simply, it's a proprietary trend following indicator. It's looking at the overall breadth of the market and telling us to take appropriate action. If it's trending upwards, you know we want to maximize upside participation. If it starts trending downwards, you know we might take a little more defensive stance and protect some capital for our investors.

Speaker 1:

One of the big reasons I'm a big fan of Eric and Howard Capital Management is they have a thing for active, which is kind of my thing too, and they've done it actually quite well as a firm. We'll be getting into that. This is going to be an edited podcast under Lead Lag Live. This is a sponsored conversation by Howard Capital Management. We'll get into some of their strategies and products here and, with all that said, my name is Michael Guy, a publisher of the Lead Lag Report. Joining me here is Mr Eric Nyquist himself, who apparently was familiar with some of my work before we actually chatted. As I found out when we were first on a call, he had read some of my papers and didn't realize I was the guy behind some of these papers a while back. So, eric, I like this format because this is also an opportunity for me to get to know you on a more personal level. So introduce yourself to the audience, to me. Who are you? What's your background? Have you done throughout your career? What are you doing right now?

Speaker 2:

Sounds good, michael. Well, first and foremost, I appreciate you having me on, man. It's been great getting to know you in the short time that we've known each other and look forward to continued conversations. You know, michael, these markets, first of all these markets kind of make me feel like my golf game Every time I feel like I've got it figured out. It seems to humble me. So happy Friday to you, man, and thank goodness we're done with this February, hopefully on to a better month coming up.

Speaker 2:

But my name is Eric Nyquist. I lead the charge in the fund sales and distributions for here at Howard Capital Management. I've basically been in the money business and the people business since coming out of college, graduated Mercer University, but my reason for getting in this business kind of stemmed from earlier in the time. I know firsthand what happens when you know financial security can be lost. When financial security can be lost. My parents struggled financially in the mid-2000s and the financial stress tore their relationship apart. They divorced when I was a teenager. 2008 did not help either. So it wasn't until afterwards that I realized that money stress, money fights, money problems number one reason for divorce in America. So that made one thing very clear and evident to me that I did not want to go throughout my life not understanding money as well as how to grow and protect it. So that drive led me where I am today and kind of leading the charge on the fund distribution efforts.

Speaker 2:

I've always, I've always believed, you know, that drive, michael, kind of led me to where I am today, not only with this same. With you know, I played college ball at Mercer and then I had a short stand with the Blue Jays. I've always believed that, you know, success is not just about talent, it's about, you know, being proactive, putting in the extra work and preparing relentlessly so when a big moment comes, you're ready to execute without having to think about it. So that's what drives me to work hard every day and do the best I can to help investors navigate these markets with confidence. Man, and to me it's not just about chasing returns, it's about having a plan and a process in place when things go bad.

Speaker 2:

Obviously, markets go through cycles and downturns will occur, recessions will happen. It's inevitable. But you do not have to ride every single downturn to the bottom. I've seen firsthand what happens when there's no plan to protect against a severe downturn, and so that's why I believe in Howard Capital's approach. I believe having a strategy to mitigate loss and stay on the right side of the market is not only smart, it's necessary, because protecting what you have is just as important as growing it.

Speaker 1:

You talk about that 2008 experience and suffering through that, that being sort of a major driver of your own personal why in choosing this career and being in the industry, I talked to a lot of people that remember that period very well and it scarred them and made them also hesitant to take on risk. And one of the things that you and I have talked about before is this idea that you want to be cognizant of the big risks that are out there but at the same time, there's always a reason to sell. Yeah, no, let's combine those two concepts, because the appeal of active management is risk management, but on a long enough timeframe. Usually, equity markets go up, so how much should one consider risk management by timeframe, as opposed to sort of just closing your eyes and knowing that over time it probably will be fine?

Speaker 2:

Well, definitely no good question, Michael. I think risk management is very important to consider but at the same time, I me as well as Howard Capital don't necessarily believe that you should sacrifice one for the other and vice versa. You know traditional money management tends to lean towards. You know that you should sacrifice one for the other and vice versa. You know traditional money management tends to lean towards, you know you, either you have a choice either chase returns and accept volatility, or play it safe and sacrifice upside. We reject that compromise. We believe returns matter and risk management matters.

Speaker 2:

So, you know, when it comes to risk, you know I really, you know, want to ask folks how they define it, because I think it can be defined in different ways. Oftentimes, a lot of people equate volatility with risk and I try to, you know, preach that volatility and risk are not necessarily the same. You know, volatility it's more of just a price swing, of a security. I look at risk as being a permanent loss or more so, not being able to reach your financial goals, and I believe there is definitely risk and also not taking enough risk. So, you know, being aware, you know, is important to pay attention in the market, but with the amount of you know media that we have today. I look at it the same way I look at sports media.

Speaker 2:

You started off with First Take back in 2010. Now you have what feels like 50 different channels talking about the same stuff. So the noise is bombastic, michael. It's coming from us every different angle. We get updates on our smartphones. Investors are reacting to instant sentiment changes in news feeds and I think it's important to block out that noise. Again, I think it's important to pay attention, but when it comes to listening to the media, I think they more so react to sentiment changes and you know hyperbolic headlines rather than delivering facts. So I think it's important to keep your news sources to two or three trusted sources. Of course, lead like media being one of those choices.

Speaker 1:

I don't know if I'm a news source at this point, but maybe I'm getting to that point. You know, usually when I say breaking news it's something more sarcastic than not. Let's talk about Howard Capital Management's approach to markets the active side and let's talk about the history of the firm a little bit. I was not that familiar with the company, but you guys are fairly sizable.

Speaker 2:

Yeah, absolutely so. Howard Capital was established back in 1999 by Vance Howard. He's our CEO and lead portfolio manager man at the helm. His idea for creating Howard Capital actually stemmed more than a decade back. Vance married his wife, karen, while attending college at Texas A&M and they actually had a waste management company, a trash compaction business, which they were able to have a successful exit on. Vance, by the way, has always been passionate about the markets, even when he was a pro college kid he was trading penny stocks. But getting back to the trash business, he had a successful exit from that business and they had their first little nest egg, and so he started to put that money to work.

Speaker 2:

And then Black Monday happened, the 87 crash, where the market dropped over around 23% in a single day. And so you can imagine when you have your portfolio drop by about a third in a single day and you just don't know how to deal with something like that, because you've never been through something like that. You don't know how it could cause potentially some lasting pain, and so that essentially drove Vance to go out and find some of the best managers and traders he could find in the world One of the more popular ones that advisors may know well, being Ed Sakota, the famous commodities trader. But he just went and learned from these traders for the next several years and eventually he came up with a concept that remains the foundation of our risk management process today, which we call the HCM byline, and he came up with that in the mid 90s. Which we call the HCM byline, and he came up with that in the mid-90s. It started as Vance basically tallying up the new highs and new lows on the various stock exchanges New York Stock Exchange, american Stock Exchange these various exchanges Some don't even exist anymore and tallying up the new highs and new lows on a big yellow legal pack. And that was his system. So we've come a long way since that point. We've got a fully autonomous system now. We put a couple million dollars into it over the past couple of decades and we've come up with something we believe is pretty consistent. Obviously it's not perfect. Nothing is but it's protected a lot of principal for our clients.

Speaker 2:

So Vance Howard founded Howard Capital in 99, just in time for the dot-com bubble burst. But with the help of the byline we were able to navigate through that pretty well. And then 2008 comes around. We navigated that successfully. So Vance has been around managing money for his clients since 92. So he's seen a thing or two. Just like that farmer's commercial, michael, he knows a thing or two because he's seen a thing or two. And so Vance and Howard Capital do things a bit differently.

Speaker 2:

Vance thinks more like a trader. He doesn't necessarily think like a CFA or a CFP. He was not mentored by, you know, cfas and CFPs. He was mentored by hedge fund managers. And I want to preface this, michael, by saying you know I'm not saying one is right or wrong, it's just a different approach. In fact, I work with a lot of fundamental managers and wholesalers. I believe pairing a quantitative tactical manager with a fundamental manager creates a more comprehensive approach to investing and gives a more full spectrum of the market in a less more adaptive and less vulnerable portfolio through market cycles, by balancing shorter term flexibility with long term conviction.

Speaker 2:

But getting back to, vance thinks like a trader, you know, not a CFA, cfp, cfas and CFPs. In our opinion, michael, think in a little bit more of a theoretical, academic way. They emphasize fundamental management. For the most part they emphasize strategic rebalancing and buy and hold. Everything Vance is looking at is on a mathematical and technical basis and he listens to the probabilities. He wants to identify and trade securities that have a high probability of success and he's not just trying to diversify across the board for diversification sake. He wants to identify and trade securities that have a high probability of success and concentrate more so into those areas. So again, it's just a different approach and again I welcome the fundamental managers out there. Please reach out to me. I love partnering with those guys because I believe in manager diversification as well.

Speaker 1:

Let's talk about that byline approach a little more. Is it from an actual in-practice perspective or from a backtesting perspective? Does it tend to be a better approach for large-cap names, mid-caps names, small-cap names, us international? I'm trying to get a sense of sort of where do you find? Where's the historical success really been?

Speaker 2:

Well, this historical success, the byline, can be overlaid on any investment class. It is our market barometer, michael. It is basically telling us if the market's healthy, if the market's getting sick or if the market has cancer and overall, you know, put very simply, it's a proprietary trend following indicator. It's looking at the overall breadth of the market and telling us to take appropriate action. If it's trending upwards, we want to maximize upside participation. If it starts trending downwards, we might take a little more defensive stance and protect some capital for our investors when it works best. Howard Capital specializes in tactical, trend-focused strategies. The byline works best when there's established trend.

Speaker 2:

2022 was a tough year for a lot of managers, and we were one of them. It was actually the worst year Vance Howard has ever had in his trading career, so he was not going to sit there and be dogmatic saying he's got the end. All be all equation. So if markets evolve, so do we, and we haven't seen a market like that in 40 or 50 years. So you know, this start of this year has been a little bumpy too, you know. So, long story short, what I'm getting at is if there's an established trend 2008, there was an established trend. 2020, there was an established trend. If there's a trend, one way or another our firm is designed to perform. If there's no trend, we might struggle a little bit, but we feel like we've made some enhancements to our system since 2022. Not full-blown changes, Michael, some enhancements, and I think our investors are going to see some favorable results, uh, from that?

Speaker 1:

yeah, certainly. Um, that was a a year for the record books. I don't know people still really fully appreciate how difficult that was. Um, I do like the uh, the mantra on the website uh, for whatever it's worth around. Uh, tactical, stay tactical, not traditional. And I think that lends itself to sort of a bigger discussion around cycles under which tactical tends to do better. We've been, arguably, in an environment which has largely favored passive indexation, really, I'd argue, since QE3 2012,. Last set of many years have actually, I think, been challenging for active and tactical strategies. Last set of many years have actually, I think, been challenging for active and tactical strategies when you think through, as you communicate to advisors, the value proposition of the active funds.

Speaker 1:

That you guys run what do you tell them in terms of sort of thinking broadly about cycle-wise when they should be considering active in general.

Speaker 2:

I think they should be considering active if they feel like it's going to be dependent on the client. I don't think anybody should be considering active if they feel like it's going to be dependent on the client. I don't think anybody should be dogmatic one way or another. Passive versus active.

Speaker 2:

I think the byline in our tactical process, michael, was completely built with the idea that emotions derail investment returns. We believe it's the number one cause that investors are underperforming the market. We think behavior finance is very real and clients struggle with discipline. They tend to chase returns near highs and sell out near bottoms, and so that's why Vance built our system. You know the 87 crash was said to be fueled by computer-driven trading and investor panic. So the byline's big purpose is to put a systematic, rules-based approach in place to combat emotional decision-making. We're removing our emotions completely from the investment decision-making process. So I think a blend of both is always kind of the way to go, michael. I don't.

Speaker 2:

You know, passive has its place. You get the simplicity and cost efficiency, but then you know, on top of that active management to adapt to changing conditions. And I think a big thing, michael, is, you know, we're the markets, in my opinion, in our opinion, have evolved since the 21st century and you see AI and advancements in technology. If advisors are strictly doing the strategic buy and hold, they could potentially be replaced by AI in the upcoming years. So they need to find ways to add value and also avoid fee drag.

Speaker 2:

If the clients are looking for performance, michael, if the clients are looking for outperformance, then you want active management, because if you're using passive money management no real ability to outperform the market you get index returns, less fees. So with an active tactical approach, you know we're striving to outperform the market. Cover the fees, avoid fee drag creates an alpha we feel like if we do that, not only will you have happy clients but you'll also, you know, promote their long term adherence to your process, keep them invested and probably get more referrals referrals from it and make more money from stuff like that.

Speaker 1:

Talk about some of the ETFs that you guys have more money from, stuff like that. Talk about some of the ETFs that you guys have. I'm going to share my screen to show the HCM Defender 100. And so you've got, as I understand it, three ETFs and a few mutual funds as well. But talk to me about the ETF suite in general and what's been the reception. Obviously, with this fund in particular, it has quite a bit of assets.

Speaker 2:

Yeah, so our Defender ETFs, I mean we've got three. We partner with Direction ETFs for a third ETF, but our two defender ETFs are essentially you know, they're five years old at this point, a little over five years but they're incorporating the same tools. We've been running since the beginning and I feel like, if you know, if the investors know, the why and the how behind the backbone of our process. The ETFs are relatively simple to figure out LGH is our form of the S&P 500, and QQH is our tactical version of the NASDAQ 100. And we're using our proprietary tools to try and get enhanced returns of the index within a disciplined risk management framework of the index. Within a disciplined risk management framework, these ETFs are, you know, a lot of our advisors have used them, you know, on a smaller level, as a core complement to strategic and passive allocations like the SPY and the Qs, to allow their core allocations to be a little more dynamic and risk adjusted and at least strive to deliver alpha within the core segment. On the larger scale, on the institutional scale, 100 million plus they are a great complement as a satellite holding to a more passive core allocation, where it's a more secure, growth oriented investment solution in our opinion, because we're you because when it comes to these funds there's really Traditional investing tends to when you're trying to outperform, you can over-concentrate in certain sectors or stocks. We feel like that is taking on a bit, a good bit of risk and even some of the best pros struggle to find those winning sectors and stocks consistently, and you also add the business risk and industry risk when you're doing that.

Speaker 2:

So our approach is we're taking broad market-leading indexes that are already tough to beat. We essentially, when we were creating these, you know, Michael, the last 10 years large cap, mega cap has been dominating and there's many reasons why that we can get into and we're looking, we want to see it brought in now. You know we'd like to make more ETFs in different categories, but the large cap space has been where it is. So these are broad based, market leading indexes that are tough to beat in terms in in and of themselves, and then we're adding our tactical tools to dynamically adjust exposure to those indexes to try and get enhanced returns in an uptrending market and prefer, uh, preserve your capital in the imminence of a significant downturn.

Speaker 2:

You know the byline is overlaid on everything we have, including these ETFs. It's not a hedging strategy. It's not a market neutral strategy. It's not trying to pull you out every time the market hiccups. Frankly, volatility is the price of admission to the equity market. It's pretty run in the mill. So our byline is not designed to pull you out every time the market hiccups, or else we get whipsawed all over the place. We seek to outperform. What we don't want to experience is a 30, 40, 50% decline that can take years to come back from and derail a financial plan, especially for clients nearing or in retirement.

Speaker 1:

Do you get a sense from the conversations you have with advisors that there's an increasing concern around a big decline like that, especially just given where valuations are for broader averages?

Speaker 2:

I think there's always tends to be that case, Michael. It kind of goes back to what we were talking about it, as there's always reasons to sell. You look at the news media. Oftentimes they're, you know, always telling us every single year why the next big recession is about to happen, or reasons why we shouldn't be invested and we should be, you know, heading towards the sidelines, and so, again, that's why we trade a system and we try to remove the process. And you can go back 10 years, Michael, and you can look at I mean, you can go back farther than that. There's always reasons to sell. We can go ad nauseum about that, but just in the past 10 years. Let me go through this.

Speaker 2:

So, in 2015, the big conversation about why the next recession was happening was the global stock sell-off in 2015. You know, the global stock sell-off in 2015. Then, in 2016, it was the huge issue surrounding Brexit. In 2017, then it was the major hurricanes we were experiencing. In 2018, then, you know, it was the repo market blowing up.

Speaker 2:

Then, in 2020, was this little unknown thing called COVID. 2021, it was the supply chain crisis. In 2022, it was rate hikes. In 2023, it was bank failures. Last year, it was the AI bubble fears, and now it's tariffs and continued inflation. So there's always going to be reasons to sell, Michael. But you know, history is clear that you know reacting to these fears and panic selling is rarely the correct decision. No one's really ever made a dime panic selling. There's always going to be those reasons and sorry. So we, you know, we, we want to understand that and you know the worst case scenario hardly ever happens. And so if you fall into those panic cells, Michael, then you'll be left on the sidelines when the market's rallying and you'll also have trouble deciding when to get back in and miss out on those gains. So you know we want to put in a systematic, repeatable process to combat those human emotions, that kind of derail our investing success?

Speaker 1:

How active are the portfolios in general? I mean, there's always this kind of this question of being tactical, where you're just in time for the tactical decision to work, versus being tactical where you might be more moving off of what ends up being noise as opposed to signal.

Speaker 2:

Oh, great question. So it kind of just depends. I mean, I know we're talking about our ETFs, our mutual funds. We're going to trade a little bit more in and but the you know. And our mutual funds are more active and tactical. You know, they're actually picking sectors and stocks based on, primarily, our relative strength model. Our ETFs are more two protocols of tactical management.

Speaker 2:

Most of the advisors we work with and investors we work with look at us as a good balance between strategic and tactical, especially with our ETFs. Strategic obviously never really gets out of the market. They'll rebalance occasionally, you know. And then there's the complete opposite side, where we could be trading hundreds of times, you know, but we want to, just we want to. We want the byline, for instance, our macroeconomic indicator.

Speaker 2:

It's not going to pull us out a lot. Again, it's not designed to pull us out of a correction. What we want to avoid is the significant drawdown. So we don't come out a lot and, to be honest, we'd rather not sell at all. We only see it appropriate when the probability of a bear market or recession is growing in intensity and likely to develop. Now, since 2022, we may have made some enhancements within our funds to allow us to to get in and out of our more concentrated positions a little bit more efficiently. Works is a little bit more of a shorter intermediate term trend indicator within with that works in conjunction with the byline. But even that, you know the goal of that is maybe to make one trade a month, so not trying to trade too often. And obviously the question will come up. There is with taxes. So far in the five years our ETFs have not produced a taxable event, but there's no guarantees of that obviously going into the future.

Speaker 1:

Yeah, that's always an underappreciated aspect of the ETF world. People don't understand the heartbeat dynamic, right. That kind of resets the cost basis across similar baskets, which is what makes the ETFs tax efficient. And, to your point, it's not like you can always be fully tax efficient being active, but you certainly have a higher probability of doing so. I want to talk about behavior, since you mentioned behavioral finance a few times here. So I want to talk about behavior, since you mentioned behavioral finance a few times here. I remember my college days when they would teach us about CAPM and modern portfolio theory and all this sounded great academically but in reality, nobody ever really invests based on that. Because they're investing based on behavior, because we're human beings and we have emotions, do you find that in general, there's more demand for active after, like, a big decline has already taken place?

Speaker 2:

right, it's like people kind of fighting the last war to some extent I um, after a decline, um, yeah, I would tend to think clients look more so for tactical money management out of a decline and the reason for that being probably that they didn't perform so well and you know they would look into hire someone with expertise in a track record some serious decline. Our firm saw just as much inflows as we did when we crushed in 2020 as midway through 2022 because they were looking for someone to be able, with a track record of navigating various market cycles, to do it better than how they may have been doing it. Again, not saying we're the end-all be-all, but we've been through a lot of market cycles, we've seen a lot, and you mentioned modern portfolio theory. That you know we could talk a good bit about that.

Speaker 2:

First of all, it's not modern, michael. It was actually. It came out in 1952 by Harry Markowitz. But the idea around it is that markets are perfectly efficient and the best way for investors to have success is to diversify across various asset classes and categories to give them the highest possible return for the least amount of risk. But there's a few things that modern portfolio theory. There's a few assumptions that they make that we just don't believe are accurate, one of the biggest ones, being that you know it assumes that investors will behave rationally. Um, so I don't know about your experience with dealing with investors in bad markets, michael, but, um, point being, I think the big flaw of modern portfolio theory is that you know it, it it, it assumes investors will behave rationally when they rarely do, especially in a severe downturn a severe downturn. So that's number one. Number two is modern portfolio theory equates volatility with risk and, like I had mentioned earlier, I think it's important not to incorporate one with the other. They are not the same. Permanent loss and inability to meet your financial goals are a big deal, and that's true risk. To us, true market risk, volatility is simply a price swing of a given security, measured by standard deviation, which is how modern portfolio theory looks at it. But volatility works on a two-way street, michael. As you know, there can be as much there is as much upside volatility as there is in downside volatility, and if you can't capture upside volatility, you're never going to make any money in the market.

Speaker 2:

You can look at things like what's the real risk? How do you define risk? What's the risk if you've got a 50, 55, 58 year old? That's got a few years to retirement and they've only got $150,000 saved. Is it more risky for them to invest in? In simple terms, is it more risky for them to invest in Procter and Gamble or IBM or is it more risky for them to invest in Tesla or Nvidia? I would argue that it's more risky to invest in IBM or Procter Gamble because, even though they're great value stocks and a well-run business and provide a great dividend, their returns are not going to get them where they need to go. They need to take on some more volatility. So if the S&P drops 25%, tesla and NVIDIA could drop more than that. But again, it's a two-way street and NVIDIA and Tesla have both doubled several times over the last couple of years. So it really just depends on the client, you know, and getting them around.

Speaker 2:

The fact that just because something is moving up and down a decent bit in the shorter term doesn't inherently make it risky, because bonds, in today's market especially, can be as risky or more risky than stocks. They've been correlated after the last number of years 2020. Agg Aggregate Bond Index drew down 30% 2022,. The 20-year treasury was down 30% and with inflation, sticky inflation and high rates, the traditional 60-40 portfolio might not do the same thing that it did a couple of decades ago. So I think the conversation needs to be reframed and investors need to be. Investors need to be open minded to potentially adjusting how things may have been done a decade or two ago.

Speaker 1:

Yeah, I think that's very well articulated. You had mentioned the point about you know large cap dominance and you said you know we should talk about. We'll talk about the reasons for some of that. I guess that's the big question, right? It's like is there an argument for a large cap dominance to persist, or are we at a point now where that passive tech momentum you know is nearing its final days, which should result in some other, better opportunities? I'm curious if there's a view that other advisors have expressed to you on that, or even a house view at Howard Capital Management around you know that kind of large cap tech momentum you and Howard Capital Management around that kind of large cap tech momentum.

Speaker 2:

First of all, I think absolutely there is an argument to be made for large cap and mega cap to continue their dominance. But I want to preface it by saying I hope the market I'm rooting for the market to broaden out. We all are. I think it's very healthy going forward. I think it's very healthy going forward. But, as you know well, michael, there are a lot of reasons why large cap and mega cap can continue their dominance. Obviously, based on historical precedent, they're about 50% above their historical price to earnings historical price to earnings. But I want to say that price to earnings might need to be looked at a little bit differently in this market. I mean, you look at how much cash has been injected into our system since the COVID pandemic. It's close to 50% of the overall cash that has been fueled in just today. So the market feels like it's disconnected from its fundamentals a little bit and it's, you know this higher liquidity is, you know, fueling computer driven trading and momentum factors. You know I look at the stock market essentially as a giant pile of cash. It's constantly shifting around with the attempt to generate ROI and these big companies that cannot go to cash like we can. Necessarily, they look at large and mega cap as a safe haven. Michael, there are several reasons for this.

Speaker 2:

One large and mega cap leaders are the ones at least in the S&P and the triple Qs. They're typically industry leaders. They have incredibly strong balance sheets and an R&D advantage with tremendous amount of cash buildup that they have. Again, they're a hedge against inflation. A lot of their products have inelastic demand so they can continue to raise prices a little bit and people will still buy iPhones, right. They typically have very consistent returns as well as steadily growing dividends, and they've got international exposure now without necessarily having all the international risk. You know globalization globalization as well as you know how we do business and and the technology has flipped its head in the world of how come these companies are doing business now it's just the largest and strongest players that are dominating everywhere. You look at apple. They're selling iphones everywhere. Uh, there's a starbucks everywhere in the world. Nike's selling everywhere.

Speaker 2:

So these companies, and not just in the United States, a lot of the companies that are doing this and dominating this are US companies. So you essentially, by staying in these bigger, stronger companies, you still get the benefits of international exposure without directly taking on international risk. It goes back to modern portfolio theory and diversifying for diversification sake. You didn't necessarily want to be an international over the last 5-10 years. I mean, don't take my word for it, just go look at the returns it's been able to generate. It's been a lot higher returns here in America and it's essentially like I said these large and mega caps are looked at as a safe haven for these larger companies that can't go to cash.

Speaker 2:

And they're the same companies that are getting 401k and retirement plan monies dumped to it in it every single month. So they've got a little backstop there. I don't expect them to just tank while the rest of the market doesn't. Those companies dominate, are the largest weighting companies in major indexes. Risk rises, michael, and you know this as well as I do. When systemic risk rises and we get into a serious downturn, all assets tend to correlate to the downside. They all tend to go down together. So what are we going to do about that? We want to have a process in place to mitigate that loss in a severe downturn. I think Howard Capital has an approach that can help with that.

Speaker 1:

Yeah, and there aren't that many firms that have the longevity as far as public funds go, while being truly active from that side of things, I think that's a big benefit to what you guys are doing.

Speaker 2:

Yeah, no, I mean most tactical managers. You'd see and I'm not trying to doo-doo on any tactical managers, it's just most of them we see have been around, you know, after 2008, where you know we got. If you were to go on our website, michael howardcmcom anybody can howardcmcom you can download our byline brochure which shows the actual trades of our risk management system, the backbone of our system, going all the way back to 2000. So those are real trades and of course you know we're not perfect. We don't, again, we don't claim to be the end all be all, but we have successfully navigated.

Speaker 2:

In our opinion, four of the last five bear markets did well. In the dot com bubble, our strategies were positive in 2002. In 2008, we were down less than 10% that whole decade, that lost decade from 2000 to 2010,. I think the market S&P returned about 7%, 8% in those 10 years. Our longest running portfolio strategy was up over 100% in that time. And then we did really well in COVID and 2022, again wasn't a great year for us, but we haven't seen a market like that in 40, 50 years, if not ever, where we both had the bonds and the equities heading to the downside. So again, if you can deal with. What I tell people is you know, if you invest in Howard Capital, give us three or four years. If you're judging us by any individual quarter, you could be disappointed, but if you give us three or four years, you're going to be very happy.

Speaker 1:

Yeah, it's always important to get that long-term perspective. You mentioned sort of the idea of pairing it against passive and I've made that argument myself that diversification comes from more than just asset class. It comes from strategies. Again, you talk to a lot of advisors and allocators. Typically, how do they think about weighting active versus passive? Meaning is an active equity portfolio, like what you guys are building out across different funds. Is that half of an equity allocation against passive? Is it a third, a 10?, like you know what? What do you typically see in terms of those ranges?

Speaker 2:

Are you talking about Michael? When it comes to an advisor building a model, okay, yeah, I'd say. I mean in this again, it's going to go back to the clients. There's no end all be all solution for anybody. Any really good advisor is going to pay attention to what their clients are saying A lot of times.

Speaker 2:

I like to do it in pie slices, I like to break it up in about thirds you can give Howard Capital the growth, the tactical growth portion of your portfolio, because even though we certainly have defensive know, we trade fairly aggressively when we're in the market. Then you've got your. You know, I don't necessarily, I'm not necessarily a fan of your traditional bonds. You know passive bonds right now. So hiring an active manager to manage your fixed income portfolio as well, and then you're at the third for more passive strategies to keep the cost down and keep it simple. I think that is, overall, kind of the way I like to view things.

Speaker 2:

But again, there's no one size fits all. It's going to be dependent on the client. You can lean more towards strategic if you want, if you feel like the client's competent, emotionally disciplined, understands the markets and how they're going to move up and down and realizes that they're not linear in terms of moving one way or another, that there's going to be some hiccups and potholes along the way. So then, yeah, if they have that discipline, then you can put a little bit more in the passive.

Speaker 2:

But again, if that same advisor is looking to compete or not advisor, if that same client is looking to compete with his advisor and maybe you know higher net worth guys, sophisticated guys, trading some of his own money then maybe he wants to. The advisor might recommend, you know, a more sophisticated approach, rather than buy and hold, you know, for these high net worth guys, because they don't want to just ride out. You know, you, you, when it comes to passive exposure, you're getting pure beta. You know, s&p does 30%, you'll get 30%, minus advisor fee. If it's down 30%, you're riding it down with it. So I think you know we are seeing, you know, at least in the high net worth, sophisticated kind of space when it comes to investing them, leading more towards an active, tactical approach these days.

Speaker 1:

Eric, there's a, I'm sure, a lot of people listening that love the idea of active at this point. They want to learn more about power capital. Talk to me a little bit about how, from a communication perspective, you guys differentiate against other active managers yeah, certainly.

Speaker 2:

Um, so, communicating with us, you can go, uh, howardcmfundscom or howardcmcom. Those are both our websites. Howardcmfundscom will take you right to our funds and etfs page. There should be a number there. Just ask to speak to the etf or mutual fund guy. You'll, uh, you'll, ring my line.

Speaker 2:

Um, in terms of you know some of our other offerings or just straight marketing literature, just go to howardcmcom, you'll find the same number and you can reach out that way and, um, you can, um, consider us different from other active managers from the standpoint of you know, we're not trying to again. There's again going back to. We're not saying we're the end, all be all or necessarily saying we're better than fundamental managers approach is a little bit more in line with the way the modern markets are operating these days. If you believe that in a rising computer-driven trading, if you believe that the speed of the markets are continuing to move faster and faster and they want to be able to spawn based on real time data, we're looking at real time data and trading what's going on in the markets right now. We're not trying to guess or predict what's going to happen. We're not trying to call tops or bottoms. You know we're not trying to be the next Bernie Madoff. We're trying to follow the trends of the market. If the market's in an uptrend, we want to you know, fully participate and, you know, possibly juice it up a bit to get some upside potential. If it gets into a downtrend, we want to start taking the layers of capital. Again, not trying to predict things. Our whole goal is to try and catch the majority of the upside while avoiding the majority of the dial inside. So we're not necessarily like trying to individually select stocks and you know it's not necessarily a fundamental approach. We're looking at what's moving and that's one thing we can measure, and measure accurately. If we're trying to predict things that were happening, we might take longer to come into fruition. That we thought.

Speaker 2:

I feel bad for some of the small and mid capcap managers. I'm rooting for them. They've been pounding the table over the last three, four years. Mid-caps are undervalued right now, saying this is the year, this is the year. So we'll see. I'm rooting for it, but it's just a little bit more.

Speaker 2:

We're using algorithms to determine how exposed to the market we should be and if we're in the market where we should be invested. And we believe the one thing we can measure accurately is movement. Michael, we can measure movement. We can see if Apple's moving as fast or faster than Amazon, or if Tesla's moving as fast or faster than Microsoft. So you could think of it kind of like a racehorse and, as you as the investors, you own the racetrack you want. Let's say, you hop on the horse that's bleeding the pack, but if you see another horse catching up at a mathematically faster pace, we can hop on that horse. So we're trying to strive to maximize upside capture while adhering to a disciplined risk management framework that goes all the way back to, you know again, signals going all the way back to 2000. Completely removing emotions, we're taking out the guesswork and we're listening to math and probability, not assumptions and intuition.

Speaker 1:

Everybody. Please make sure you learn more about Howard Capital Management on their website. Curious about their funds. Obviously a lot of information there. I'm going to be hopefully doing more of these podcasts with Eric and various members of Howard Capital Management in the coming months. I like having a kindred spirit on the active side, especially one that's done as well as you guys have. So again, congrats on that. Again, folks, this will be the end of the conversation under Lead Lag Live. This is a sponsored podcast and hopefully I'll see you all on the next episode. Thank you, eric, appreciate it.

Speaker 2:

Absolutely.

Speaker 1:

Michael, See you next time. Cheers everybody.

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Michael A. Gayed, CFA

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