The Institute for Innovation Development interview series seeks to learn from innovative business leaders, uncover innovation best practices, and discover how to apply these insights into the financial services industry.
We recently sat down with Dan Darchuck, co-founder and CEO of Topturn Capital, an independent financial advisory firm headquartered in Monterey, Calif., which manages the Topturn OneEighty mutual fund and delivers innovative asset management strategies to institutions, individuals and leading financial advisors. Of particular interest is how they have successfully incorporated surfing references and terminology to communicate their unorthodox investment methodology and approach to investing.
Hortz: Besides your physical proximity to the California coast, why is your firm so steeped in surfing terminology and analogies?
Darchuck: Necessity, as they say, is the mother of invention. In a state as populous as California it is very difficult to come up with a unique name for a company that hasn’t already been taken. Early in our formation we were working with a marketing firm to develop some options. They were batting some things around, but hadn’t been able to develop anything that grabbed us. One evening during that process, our chief investment officer, Greg Stewart, said, “Dan, you’re an old surf dude from way back. Why don’t you go home and think up some surfing terminology that we can use in the name of the company.” I came back the next day with Topturn Capital. A topturn is the sharp turn you see a surfer make off the top of the wave to stay in the momentum of the moving water. I think it’s a perfect analogy for our investing style. If you don’t have momentum currently, get it … and, once you have it, do whatever you can to keep it. That is why we isolate and strive to ride performance momentum wherever it exists across asset classes and immediately pivot to attempt to stay clear of weakening conditions and downturns.
Hortz: You also have the notability of being one of the first hedge funds to advertise itself with an ad campaign and video series. What was your thinking?
Darchuck: Being one of the first came about a bit by accident. Our marketing team at Meyler Creative had encouraged us to hire a professional surfer to create a video with and it sounded like a fun, engaging way to get our message out. Somewhere during the process the folks at Meyler got wind of the fact that we could actually be one of the first, and that could potentially get us a little more coverage. They were right.
Hortz: To dig a little further into your investment process, you have stated that you are “enthralled by the purity, stability and predictability” of what you term as fundamental or primary assets – namely equities, bonds, commodities, currencies. Why do you characterize those asset classes with those particular words which seem, on the surface, to be antithetical to many investors’ experience with them?
Darchuck: At first blush “stability and predictability” may indeed seem opposite of investors experience with many of the primary asset classes. However, there is so much historical data and other information available on the long-term behavior of these sources of return, that when viewed from that different perspective, over appreciable periods of time, their respective attributes take on a more orderly appearance.
Hortz: In explaining your investment process, I am very taken by your wording on your website and investment deck of how your group compiled huge amounts of knowledge on primary assets then “systematically dismantled this knowledge, placed aside traditional thinking, and put the pieces back together in a way that we believe re-engineers the relationship between volatility and return.” That is a perfect example of an innovation thinking process! What exactly did that thinking process uncover and result in?
Darchuck: The dismantling we refer to took place over many years, during a good part of which we were working for one of the large Wall Street firms. Some of those years were great and others very difficult… 2000-2002, and 2008 for example. During that time we found ourselves increasingly challenging the company line. We felt strongly that there was a way to mitigate risk and generate workable returns. We also became convinced that most investors, especially those who are entrepreneurs, and therefore wealth creators in their own right, don’t want to give up sizable ground during market downturns. Ultimately, we came to the conclusion that we believe such results are achievable and that you don’t have to take outsized risk to accomplish it. To us, it makes little sense to remain static when you are immersed in a dynamic environment.
Hortz: What are some examples of traditional investment thinking you stripped out of your process and why?
Darchuck: One of the biggest aspects of traditional thinking we ended up taking to task was the whole concept of asset allocation. It seemed a bit like sitting down at the dinner table with grandma and being told that you need to fill your plate with a little bit of this and a little bit of that. All that approach accomplished for investors in 2008 was a bad case of indigestion … at best. Now, nine years later we have target-date funds that want to force a newly minted retiree into a portfolio heavily over-weighted towards bonds and cash equivalents at a time when the forward looking prospects for those asset classes appears very unfavorable. Doesn’t make sense.
Hortz: How do these different investment perspectives convert your money management process on primary asset classes into an “alternative” investment strategy?
Darchuck: From a 10,000 foot perspective, the strategy simply attempts to identify where, among the asset classes, momentum or velocity can be found currently. For example, if the prevailing momentum is clearly in the S&P 500 then we want the portfolio to be largely aligned with that asset class. To take it a step further, if the S&P is out of momentum then hopefully our models would guide us in the direction of an asset class that is generally negatively correlated to the S&P over any appreciable period of time. We try to engineer the relative physics of knowing that, just as in baseball, the greatest velocity of the ball is the split second that the bat hits the ball and then slows approaching its apex. If we can isolate these movements across multiple asset classes simultaneously, we think we have a good shot at generating serviceable returns with reduced volatility. Our alternative methodology, designed for our risk averse clients, allows us to attempt to shift and pivot without limitation to try to avoid most major downturns of different asset classes and to hopefully build in padding into our investment path to help avoid throwing “gutter balls.”
Hortz: How do you employ all that into a mutual fund vehicle, your OneEighty Fund?
Darchuck: The OneEighty Fund concept was really several years in the making. The investment premise is to tactically seek to adjust the weighting of the portfolio across 36 asset classes to capture the momentum of the market. We started with a retroactive application of the strategy. I wanted to see how the strategy would have behaved during difficult times in particular. Having completed that exercise, in 2011, we approached some of our clients with the concept and began running it in separately managed accounts. In 2015, having liked the results we were getting, we began to explore the idea of making delivery of the strategy a much more streamlined process by forming an institutional share class mutual fund. Once we were certain that the strategy could be replicated completely in that type of instrument, the OneEighty Fund was born.
Hortz: Based on your experience in developing your own path as a money manager and business leader, what would you advise other advisors and managers about the kind of business thinking and decisions necessary in today’s business environment?
Darchuck : Clearly, it is going to continue to be important to find ways to differentiate yourself and your firm from everyone else out there. All of the consultants in the world can tell you that you have to do it, but that doesn’t make it any easier. I think it has a lot to do with who your clients are. Do not get distracted by everything going on around you and just focus on the client. What is their background? What do they really want? Our work over the years has been primarily with the wealth creator, and now increasingly with advisors who serve that same market. One of our clients summed it up very concisely for us several years ago when he said, “guys I can tell you in one sentence what I want out of this relationship. I don’t want to ever have to go back to work.” That is the impetus for and driver of the investment methodology we have created here at Topturn.
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