Friday, 25 July 2014
Last updated 1 hour ago
Apr 7 2011 | 3:42pm ET
Sharon Snow, CEO of Manassas, VA-based Metropolitan Capital Strategies, compares their investment strategy—which has achieved a 13.7% compound return over five years with only 3.5% drawdown—to climbing stairs.
“When you get the opportunity to invest with a very high confidence factor, you invest,” Snow explained during a recent interview with FINalternatives, “You go in, you make your return, and then you pause on the landing and wait for another opportunity….We call it a different approach to investing from what we’ve all been taught, which is to buy the market and hold the market for long periods of time.”
The strategy is the brainchild of Dave Schombert, Metropolitan’s president and CIO.
“Dave had been working with Smith Barney since 1996 and had run his own money and his strategy prior to that. [He] started running clients’ money in 1996 and the thing that fascinated me about Dave was that he kept all his clients safe in the tech meltdown, [during] which most of the people I knew had lost a tremendous amount of money.”
Snow says she spent a lot of time analyzing what Schombert was doing and in 2003, partnered with him. “From then on we ran our clients’ money in this strategy. In about ‘05 and ‘06 we realized it was going to be difficult, in a broker/dealer environment, to do what we do, so we started toying around with the idea of leaving [Smith Barney] and starting our own firm and in 2007 it came together and we did that.”
The resulting firm, Metropolitan Capital Strategies, qualifies as woman-owned and, with just under $100 million under management, is considered an “emerging” manager, specializing in separate accounts.
The firm continues to employ Schombert’s investment strategy, at the heart of which is the belief that in any given five-year period in the market, there are “generally six to 15 times” that the broader market goes up 10% to 20%.
“It typically revolves around the… earnings of the companies that make up whatever broad indexes you want to use,” says Snow. “Some of those have lower risk than others, sometimes you can make money. So, Dave’s strategy has always been to…exploit those times when the risk is low but the double-digit upside is present.”
When the risk is high, Snow and Schombert stay out of the market, meaning their fund is not always 100% invested. Asked if this could be a hard sell to clients, Snow said that once clients had been with them awhile, they grew comfortable with the approach.
“They understand that not being invested all the time reduces all kinds of risk—market risk, systemic risk, credit risk, geopolitical risk, etc.,—but certainly it’s not standard in our industry and as you know, it’s not common and in fact it’s actually discouraged. So, it is difficult at times to get people to understand it is definitely in their best interest. I think certainly in the global meltdown it’s becoming clear to people that there are times when you should not be invested.”
Metropolitan invests chiefly (although not exclusively) in exchange-traded vehicles. Snow says the reason is simple¬—they’re lower risk, particularly during times of market stress. She cites 9/11 as an example:
“There only a few ETFs available back in that day, in the early 2000s, but there were ETFs available. The indexes fell about 8% where individual companies—and I’m talking during 9/11—individual companies fell overnight up to 40%.
“The indexes allow you to reduce risk and they give you opportunities to invest in those double-digit upside potentials in a much-reduced risk fashion. So, we like ETFs, there are 1,154 of them, they cover every asset class, every sector in the market, you can get countries you can get commodities now, you can even get interest rates, all kinds of things in ETFs and we believe they reduce risk.”
Currently, she says, they’re invested in six ETFs, but those six investments mean they are exposed to over 2,000 companies
“We’re in some broad-based ETFs like the S&P 500, like the large-cap and the small-cap ETFs, so we have a diverse portfolio…We only have six investments that we have to watch, and we’re in every sector and almost every industry that comprises our domestic market.
“Right now we are most interested in the U.S. domestic market because the earnings of the companies that make up these ETFs are strong relative to the timeframe that we’re in and typically, when the fundamentals are good, those are time periods that you see those double-digit upside opportunities in the market.
“We also have a slight overweight to technology and it is our opinion that technology is one of the main industries in the US that is strong, we’re seeing replenishment of inventories, people are buying products in that area – Apple’s a good example of a company that has strong sales and shows strong earnings.”
Snow says they hold ETFs, on average, for seven weeks to four months.
Winning Over Institutions
They are tactical money managers, she says, and that can be a problem in an industry “set up for style boxes.” A manager like Metropolitan, she says, doesn’t “fit into a box,” which makes it difficult to get pensions, endowments, foundations institutions and consultants to allocate to them.
But that may be about to change.
Deborah George, founder of Growing Emerging Managers’ Services, is responsible for Metropolitan Capital’s institutional client development. She says Metropolitan is offering a product that should appeal to institutional clients:
“I can see the value for an institution,” says George. “We’ve achieved a 13.7% compound return over 5 years and only 3.5% drawdown and that’s incredible—and we think, in a hedge fund of funds, this is a beautiful strategy. It protects your down side while giving you tremendous upside, really competitive upside.”
As a woman-owned, emerging manager, Metropolitan is a “natural fit” with managers of managers like Progress and Leading Edge, says George, who “put together pools of managers for their pension clients.”
Metropolitan has also identified a few “very forward-looking pension funds” says George. These institutions “love the strategy,” she says, but wish the firm was “a little bit bigger,” which doesn’t seem to daunt her:
“We’ll get there,” she laughs.
Jul 8 2014 | 10:48am ET
The surge in derivatives regulation is among the most complex challenges facing the financial services industry today. Northern Trust’s Joshua Satten recently spoke with FINalternatives to share insights into the challenges presented by new regulation and explore how the industry is responding. Read more…