October 25, 2014

Money Management

Algorithm & Blues

Shocked by a volatile market, investment firm Intech will now find out if its pure-math approach can add up again.

Mike Vogel | 10/1/2010

Intech investment formula
Intech bases its investment process on the formula above. [Photo: Scott Wiseman]
Walking through the penthouse offices of Intech Investment Management in West Palm Beach, two things strike the visitor. One, the offices convey an astonishing blend of science and sensibility. Paneled, curvilinear halls — there's hardly a right-angle in sight — and unusually shaped decor are meant to evoke mathematical concepts. Stunning works of art, some melding equations into their subjects, adorn sprawling conference rooms and offices.

Two, the offices feel empty. And in fact, 64 people work in space created for 125 barely three years ago, when Intech had $69.7 billion in assets under management and seemed on its way to much, much more.

But that was nearly $30 billion ago.

While its logo is visible on CityPlace's signature building in downtown West Palm Beach, Intech maintains a very low profile. "I wasn't sure I even wanted our name on the building," says CEO Robert Garvy.
Intech's up-and-down journey begins with a Princeton University mathematician, E. Robert Fernholz. He is an expert in stochastic calculus, a branch of math used to predict the behavior of systems or processes in which there's a lot of random variation — the diffusion of particles in space, for example. For a half-century, economists and analysts also have used it to study the movement of interest rates and stock prices. In today's market, stochastic calculus is used to model everything from option pricing to derivatives, hedging and automatic trading.

In 1982, Fernholz published a paper presenting insights about stock market equilibrium that he derived using stochastic calculus. Five years later, he left Princeton and used his theorem as the basis for Intech, an investment firm he founded under Prudential Insurance.

Robert Garvy
Robert Garvy became a partner in the business in 1991 and moved the company to Florida. Intech capitalizes on the volatility of stocks within a particular group such as the S&P by reweighting the companies in the index, selling the ones outrunning the index's return line and buying the underperformers. [Photo: Intech]
Fernholz's novel approach attracted the attention of an Atlanta-based investment consultant, Robert Garvy. "I was fascinated by the intellectual power of stochastic portfolio theory," says Garvy, who in 1991 became Fernholz's partner.

Fernholz and his research team stayed in New Jersey. But Garvy was a Floridian. A 1960 graduate of Melbourne High School who had lived in Florida since he was 11, "I first learned how to sail in a little pram" in Melbourne. He began his bachelor's at the University of Florida and finished at the University of South Florida before earning an MBA at Georgia State University.

Garvy moved Intech — then managing only one investment fund focused on companies in the S&P 500 — first to Titusville and then to Palm Beach County. The firm took awhile to bloom. It catered to institutional investors — pension funds, insurers, union funds — but even their sophisticated administrators found Intech's process alien.

In making investment decisions, Intech ignores all the so-called "fundamentals" — whether the economic outlook is conducive to higher sales at Walmart or whether a new Red Lobster menu item means more revenue for Darden. Indeed, Intech couldn't care less why a stock goes up and down. There are other such "quantitative" firms that ignore fundamentals. But Intech is the purest form of quant, caring only about a stock's movement relative to other stocks and the benchmark.

Tags: Banking & Finance

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