One of my favorite quotes is “It’s not the strongest species that survive, nor the most intelligent, but the most responsive to change.” — Charles Darwin
The investment industry has gone through dramatic change over the last couple of decades as technology has improved every aspect of the business.
Any asset manager, with a long enough track record, who claims they haven’t made any changes to their process is, frankly, a liar. The markets and our industry are constantly changing, and you must be able to adapt.
I like to use the analogy of a house when it comes to changes to investment management philosophy; the foundation of your house rarely changes but you are constantly renovating to improve your experience over time.
The biggest ‘renovation’ we’ve made in decades was the switch to using affiliated funds to manage our strategies. Because of that our strategies have a long track record, but the funds have a shorter track record.
This brings me to a question that keeps popping up with our advisors.
- Should we use the strategy or the funds? The answer is yes, and it depends.
History
Let’s start with a little history lesson to lay the groundwork for this conversation.
The official corporate name for our firm is Potomac Fund Management, Inc and we now go by the name Potomac, for a myriad of reasons.
The reason we had “Fund Management” as part of our name is because that is exactly what we did. Our investment strategies invested in third party open-ended mutual funds.
Our process included sifting through the thousands of available mutual funds screening for risk adjusted return metrics. We would even use specialty funds for leverage and hedging, as the market would dictate.
The process was simple when the money was all at a single custodian but soon became labor intensive as the company began to grow and evolve.
The Evolution
Our business was historically run under the model of direct solicitation where financial advisors would open client accounts directly under Potomac. So, we had full discretion of the client account and controlled all the trading in-house.
As our strategies gained popularity, they were being added to various investment platforms across the industry. In these circumstances Potomac does not have discretion of the account. The trades are sent to the platform where the accounts are held, and the platform has discretion.
The more places we traded the more difficult execution became. Each platform or custodian has their own rules when it comes to things like mutual fund availability, trading costs, discretion, and cutoff times.
I recall an instance where one of our strategies had a buy signal on a Monday, the direct trades were executed and the platform trades sent out to the various third parties. Then two days later we had a sell signal based on deteriorating market conditions.
Guess what? One of the platforms never entered the original buy order. This wasn’t necessarily the platform’sfault since their agreements clearly state that orders will be executed on a “best efforts” basis.
It could have been a mistake, or they are just not used to our level of tactical trading as most platform strategies are low-frequency passive investments. It didn’t matter because they have discretion, and our job is to simply submit the trade.
Either way something had to change if our long-term plan was to place the strategies across multiple platforms. It is our duty to ensure that every client is delivered the same investment experience no matter where they access Potomac.
Our solution to this problem was clear. We had to control the investment experience in a pooled environment where no matter where the client accessed Potomac they would receive the same experience.
We made the business decision to launch our own proprietary mutual funds.
The Potomac Funds (Formerly Conquer Risk Funds)
We launched our own suite of mutual funds in June of 2020 with the goal of delivering a consistent client experience across every touch point for our strategies.
By housing all the trading in a pooled investment vehicle we were not beholden to the various trading restrictions, cutoff times, or third-party discretion of various platforms.
One account for each fund where we can trade with more speed and efficiency, with the goal of better risk adjusted returns.
These funds became the investment of choice for our strategies because they were simply a better vehicle to deliver our tactical investment philosophy.
Over time it became clear the pooled environment would be the gift that kept on giving,
For example, we recently added the ability to use Futures which will allow us to obtain yield on cash, while invested. This isn’t something that would have been possible in our old environment trading across multiple platforms.
So how do we answer the question of “What to use – Strategies or funds”?
Our strategies are the core of what we do and have a long-term track record.
The proprietary funds are simply the “investment vehicle” we have chosen to deliver the strategy.
They are not the same.
Each Potomac strategy will allocate to each of our four affiliated mutual funds at certain percentages. These percentages don’t change very often and will be dictated by the market environment and risk adjusted return momentum.
Sure, the “core” fund in each strategy is the star of the show but the strategy is based on how we combine our different funds.
There is a reason and rationale for how we create the allocations.
We would recommend that, if possible, advisors should implement the strategy first and foremost.
If the strategy is not available on your current platform, for whatever reason, it is certainly possible to create the allocations yourself using our mutual funds.
We display the strategy holdings quarterly on the back of the fact sheet and on our website specifically for this reason.
Ultimately, our advisors are free to do whatever they want–but let’s not conflate the two.
Either way you are getting our tactical management expertise, but the delivery method is your choice.
Potomac Fund Management ("Potomac") is an SEC-registered investment adviser. SEC registration does not constitute an endorsement of the advisory firm by the SEC nor does it indicate that the advisory firm has attained a particular level of skill or ability. This information is prepared for general information only and should not be considered as individual investment advice nor as a solicitation to buy or offer to sell any securities. This material does not constitute any representation as to the suitability or appropriateness of any investment advisory program or security. Please visit our FULL DISCLOSURE page. Potomac does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to the Potomac website or incorporated herein, and takes no responsibility for any of this information. The views of Potomac are subject to change and Potomac is under no obligation to notify you of any changes. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy will be profitable or equal to any historical performance level.
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