Michael Leanza, a 20-year industry veteran, took his business independent just a few months before the market collapsed in 2008. And yet his business is thriving, thanks to what he calls his “active-passive” approach, a simple strategy any advisor can adopt that seems to work well for wealthy clients.

Leanza, founder and president of The Genwealth Group in Maplewood, N.J., got his training at a wirehouse before joining Bank of America, where he spent 17 years before going independent through LPL’s hybrid RIA program in May 2008. Leanza currently manages $120 million in assets for 120 clients, but he expects to grow his assets to $500 million over the next two or three years via high-touch service and his popular momentum portfolio strategy, a discretionary service he has offered since July 2009.

The strategy was born out of the panic of the market crash of 2008, an event that shook Leanza, who was raised on a steady diet of buy and hold since he joined the industry in the last eighties. “Buy and hold works when you’re in a long, secular bear market but not in the market we’re in,” he says. “I had to go back to the drawing board to improve client satisfaction by lessening downside risk. 2008 taught us that we had to move faster.”

Part of the problem is that few investors feel like investing in the market at its most opportune—when it has taken a drubbing. “In October 2008 I sat down with a very good client and he says that while he understood there are bargains when the market turns around, the pain level was just too high,” Leanza says. The client complained the market could drop another 30% before it turned tail—which is exactly what wound up happening—and he just didn’t want to subject himself to that nightmare ride. What’s more, he wanted Leanza to come up with a solution fast.

Leanza came back to the client with a momentum portfolio strategy, something he’d been toying with before the crash, “In it I use exchange-traded funds (ETFs) to keep costs low and enhance transparency,” he says. “It’s the perfect foil to active managers and hedge funds,” which are neither of those two things.

Leanza’s strategy is not to outperform the market, but to “deliver what it allows us to take.” In it, he manages the portfolio himself. It’s a beguilingly simple construct, nine ETFs that together provide a broad coverage of the entire market: The Dow, the S&P 500, the Nasdaq, mid caps, small caps, real estate, commodities, international and emerging markets. (Leanza’s portfolio doesn’t currently contain bonds.) “I’m not trying to target specific sectors, just capture where the market is moving,” he explains.

Leanza buys or sells based on an ETF’s 200-day moving average—he buys more when an ETF is above its average and sells if it falls below a pre-determined trigger point. “The key is to buy when the market is moving and go to cash when the market drops,” says Leanza, who considers cash an asset and will go to 100% cash if market movement means he deems it necessary. Using dispassionate triggers means Leanza avoids making emotional decisions: If a market sector rises he buys, if it falls he sells. “I’m not trying to time the market, I just react to it,” he says.

The decision to buy is a lot more straightforward than the one to sell—the ETF just has to be trading above its 200-day average. Exiting an ETF depends on volatility and how far it has moved from its 200-day average price, but there are nuances. “Just because the Nasdaq is 100% above its 200-day average doesn’t mean I’ll wait until it falls 20% before I sell it,” Leanza says.

Because sell decisions are based on when an ETF’s price has dropped, his clients aren’t immune to losses, but they won’t ride out a downward turn. “They can expect [downward] moves of 5% or 10%, but this strategy means a 20% move is difficult to experience.” This strategy has “given my clients to invest in equities knowing we’re going to avoid big drops.”

When Leanza sells out of an underperforming ETF, that money moves to cash, not into ETFs that are currently outperforming. While this might seem counter-intuitive, Leanza found that when he back-tested moving money from losers to winners, clients were better off just waiting in cash for an underperforming ETF to bounce back before buying it again. “The markets are like horses,” he says, and if the emerging market ETF drops, the chances are the others won’t be far behind. Rather, “just because emerging markets are down 40% doesn’t mean we have to sit on that loss,” when the client could wait comfortably in cash for its return only having lost 5% or so thanks to Leanza’s sell trigger.

The advisor says client feedback has been “overwhelmingly good.” “They like the new story, the comfort level, they know they can pass over losses fairly quickly and that’s the most important message this strategy delivers. It’s also simple enough that clients sell it as they’re explaining it,” to friends and family who often become referrals.

Leanza says his clients will willingly forgo a 20% gain to avoid a 10% loss. “The name of the game is capital preservation with upside potential,” he says. “They want some exposure, but what they really want is consistency, which is something we don’t do a great job of in this industry.”

To other advisors, Leanza stresses that the plan’s simplicity is key. “This strategy has taught me that to do less is to do it better, with consistency, accountability and transparency,” he says. “And that, to me, is what people want to buy these days.”


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