U.S. Global Investors has faith that its trading desk adds to the firm’s overall performance. Traders at the San Antonio-based money manager have discretion to add to or reduce existing positions, based on how stocks move in the marketplace. That’s unusual, since mutual funds typically don’t give their desks the same leeway a hedge fund or a proprietary trading desk would have.
“About 80 percent of what we do is trading, and 20 percent is acting more like a portfolio manager or analyst,” says Michael Nasto, a 15-year veteran and senior trader at the $5 billion firm whose primary investment focus is in natural resources.
Technology and quantitative analysis is what drives the process, Nasto says. All stocks within the portfolio have pre-set moves that trigger an alert to the trader. The trader then runs a stock through five separate models that tell him how much a particular position should be adjusted. The position could be expanded or trimmed from 1 to 3 percent, depending on how far the stock moved, Nasto says.
This philosophy of trading around positions is the brainchild of the firm’s top investment strategist, Frank Holmes, a former trader on the Toronto Stock Exchange. Holmes, CEO and CIO of the publicly traded firm (GROW), brought in a handful of quant analysts to build the models based on Prado’s law: when a stock makes a big move, 80 percent of the time it reverts to the mean.
“As a trader, I love volatility,” says Nasto, who traded at a hedge fund at GAMCO Investors before joining U.S. Global two years ago. Nasto, who has an options background, says it took him about six months to get used to running the models. It takes him from 20 seconds to two minutes to complete the models, depending upon how familiar he is with a stock. “The quicker you can get through the models, the quicker you can get through to the trade, and hopefully get there before the competition,” he says.
The natural resource sector has been hot the last few years, and U.S. Global has tripled its assets since the end of 2004. Its World Precious Minerals fund has logged a five-year annual return of 36.5 percent, compared with 22.1 percent for its peers, according to Morningstar. Nasto says the firm has grown in importance in the eyes of the sellside and frequently gets first calls when merchandise is shopped. “We’re seeing about four or five times more flow than when I first started,” he says.
U.S. Global hands off most of its orders to the sellside and does some electronic DMA- about 5 percent of its trading. Nasto says that he and Oscar Nelson, the other trader on the desk with him, are not worried about paying a full commission to brokers. If they’re busy making decisions about the portfolios and running through their models, they believe, they more than offset the higher commissions on a full-service trade with higher returns. “When you get right down to it,” he says, “it’s how we perform as a firm that really matters.”
U.S. Global Investors Equity AUM: $5 billion Desk: 2 traders Broker List: 40 firms Avg. Commission: 4 cents OMS: Bloomberg TCA: Bloomberg & JPMorgan