Dynamic Equity Growth Strategies for Market Success with Andrew Graham

This month on Financial Perspectives, we had the pleasure of speaking with Andrew Graham, CFA - Founder and Managing Partner at Jackson Square Capital - to delve into equity growth strategies and active management. 

In this episode, Andrew offers a comprehensive look at active investment strategies by focusing on tax efficiency, flexibility, and the ability to adapt to market changes. Additionally, he underscores the untapped potential within the semiconductor and software sectors, painting a vivid picture of the diverse opportunities available. He shares real-world insights, such as leveraging winners like NVIDIA, to illustrate the tangible benefits active management can bring to your financial portfolio.

Discussing his unique approach to equity growth portfolios -from the significance of maintaining the correct mindset to the art of balancing portfolio positions - Andrew explains how avoiding over-diversification and applying unconventional strategies can lead to long-term wealth. This episode promises to provide valuable insights for those seeking to optimize their investment portfolios and achieve long-term market success.

If you'd like to learn more about the show, have a topic or speaker to suggest, or would like to leave us a comment, email podcast@cfa-sf.org.


This podcast is produced by CFA Society San Francisco, a not-for-profit professional association, providing professional learning and career resources to over 13,000 investment industry professionals worldwide. To learn more about CFA Society San Francisco, visit our website or connect with us on LinkedIn.

The information contained in this podcast does not constitute financial or investment advice. Please consult your own financial advisor for information concerning your specific situation.

Transcript

Lindsey Helman: 0:05

Hello and welcome to Financial Perspectives, a CFA Society San Francisco podcast, where we interview and discuss trends with leaders from across the investment and finance industry. This month, our host, Tanya Suba-Tang, Membership Director with CFA Society San Francisco, had the pleasure of speaking with Andrew Graham, founder and managing partner at Jackson Square Capital. Listen in as they discuss equity growth strategies and active management.

Tanya Suba-Tang: 0:38

Hi, Andrew, welcome to Financial Perspectives.

Andrew Graham, CFA: 0:41

Hi Tanya, Thank you. Thanks for having me on.

Tanya Suba-Tang: 0:43

So you're a managing partner for Jackson Square Capital and author of Inside Market Newsletter, which is a financial services newsletter that you do daily, and today we're going to be talking about your investment philosophy and equity growth strategies, which I'm very excited to have a chat with you about.

Andrew Graham, CFA: 1:02

Yeah, me too. It feels like I'm giving my commencement speech back at my old university, so I'm very proud of my CFA background and the rest, and this is going to be fun.

Tanya Suba-Tang: 1:11

It is so kind of jumping into our questions. With passive strategies growing in popularity, what are the advantages of an active investment manager?

Andrew Graham, CFA: 1:20

Yeah, I think for many investors the dollar cost averaging in index funds and ETFs is an effective strategy, especially for younger investors who may just be starting out. But the benefits of active management I think apply more to the high net worth or ultra high net worth cohorts, right, and investors also over a given age, and I think that's something different for everyone. We see people who are over the age of 40 having a greater interest in active management because it offers more flexibility. You feel like you don't have as much time to make it up in case the indices happen to underperform for two or three years or whatever. So that's sort of the group that we're working with.

Andrew Graham, CFA: 2:02

I think that the first real reason for active management is tax efficiency. So you have these different tax slots and you have an opportunity to donate those low cost basis tax slots on individual positions. So you can do that as well on an index fund. What we'll find is some of these positions let's take NVIDIA, for example is up 16, whatever percent 9, 9000 percent that you know. You can break off the lowest basis stuff and make a donation that way and reduce your adjusted gross income and, I think, reducing exposure to you know, by selling the high tax loss shares from a given position is also sort of a luxury of active management. A given position is also sort of a luxury of active management. So I should also, I guess, at this stage say that our preference is to average up in positions. So we'll often have an equity position that has multiple tax locks on a given stock.

Tanya Suba-Tang: 2:56

What is your process for managing an equity growth portfolio?

Andrew Graham, CFA: 2:59

Yeah, there's a lot to that, but I also want to mention two other things. By the way, we're getting back to this passive versus active management. So maybe an underrated reason is sanity, and I was told at a very young age that desperate people make desperate decisions. And I think the ability to reduce exposure in an actively managed portfolio raise cash when markets turn or when you think things are tough. Now, for example, it's an advantage to keep everybody your client in the right frame of mind. It's very important to make good decisions. You have to be of the right mindset, and having a little bit of extra dry powder to reinvest the right time, I believe, is the right way to do it. And then the last reason I guess is just the ultimate goal of active management is long-term outperformance, and everybody at Jackson Square Capital is focused on building long-term wealth for our clients, and so it's where we ended up and that's where we're most comfortable On the subject of how the process of managing portfolios.

Andrew Graham, CFA: 4:01

So one of the things that I don't know maybe it was taught to me even before CFA school was to avoid over diversification. So if we're going to add alpha just off the bat, I think we have to find sort of the sweet spot for how many positions we want. For us that's about 40 to 45 positions, with an average starting position, you know, a value of about one and a half to 2%. And, by the way, some of the things that we do here are maybe somewhat unconventional, so we don't normally apply modern portfolio theory to client accounts. You know, I've been doing this 40 years and I should have learned a few things in that time. And writing every day keeps me very focused on markets and cross markets and global markets, and so I believe there's a time and a place for everything. And the conditions maybe for emerging markets outperformance are very difficult to achieve and they happen pretty infrequently. So we don't take in client assets and automatically put down a sleeve for EM or even international equities or whatever it's really idea generated. We consume a lot of sell side research, probably more than is physically healthy for a person, but I think it's necessary to stay on top of it. So writing every day, like I said, about macro conditions, bond yields, of the shape of the yield curve, cross market indicators Recently we had a classic one where the Russell 2000 was breaking out of long term you know range resistance but copper was lagging. I need to have both of those things moving at the same time in order to confirm that signal that was in the Russell. So you know what conditions lead to multiple expansion and contraction and so on. That's all. Those opinions are all formed by writing daily.

Andrew Graham, CFA: 5:50

I think the other thing that we do, that's maybe systematic or just a daily part of the daily function around us here, is take loss limits and so realize limits for us for managing taxable, you know, retail client assets that realize loss as a tax asset in a sense. And admitting when you're wrong, I think is an important trait for any portfolio manager. Like I said before, I would like to average up and build larger positions. On pullbacks. We first, you know, started with I'll use NVIDIA again as an example. It was not the company it is today and in no way was it, but it had a different, you know, set of characteristics that made it attractive at the time. And so that's just an example of a position that we've added up and built larger blocks.

Andrew Graham, CFA: 6:38

And then I guess the last thing on that mention is that you know, we do tailored portfolios for each client, so people are different and they also enter at different times. So I think it's selfish of us to have a model portfolio that is good like a perennial model portfolio. It changes, the world evolves and changes and we need to evolve with it. That's what that's all about. And changes and we need to evolve with it. That's what that's all about. So we may have some new accounts or portfolios that we put together that are fairly dissimilar. I think the longer that the accounts are open and the longer people are here, the more they have positions in common and little dispersion.

Tanya Suba-Tang: 7:18

So what are the quality factors for picking stocks for a client's portfolio?

Andrew Graham, CFA: 7:23

Yeah. So again, consume a lot of sell side research. We're looking for strong fundamental stories. So stocks move based on earnings estimate revisions. So we follow those more closely than anything else. Sometimes we get to a story, maybe late, and we'll let those positions do what they're doing. If, for some reason, everybody's on it and the stock's working and it's going to new highs, we'll wait for it to pull back until it gets to just technical oversold levels. So we spend all of our time in CFA world working on fundamental things and I think ignoring the technicals and so forth is a mistake and we've got to do everything. We have to use everything in our power to deliver outperformance and it's just much easier to pick up a position when it's short-term oversold. So again, yeah, we're looking for beat and raise results every quarter.

Andrew Graham, CFA: 8:16

One quarter with a miss is okay, two isn't, and it's fairly uncommon I shouldn't say it's uncommon but to have a position that doesn't miss over a 10-year period. Ultimately, that's our goal is to own something for a long time. Our goal is really to own anything that over 12 months and one day to get the favorable tax treatment. But it's a rule that served us well. We can always come back to the stock if we need to. But one miss is okay. Two, we've got a problem. Something's wrong. If you can't guide to the right number, if the management team can't do that after a miss, then there's some serious changes going on at the company, in my opinion. And so we're also, by the way, not looking to call absolute tops or bottoms, but usually only add a position, like I said, at short-term oversold levels. So those are stochastic measurements. And what else can I say? I guess there's just a lot of people who are ready to sell a stock at a given price level for emotional or target price reasons or something. But it's foolish. We'll go back to NVIDIA again. Just, you know, I'm going to sell the stock at 500 when it gets there or whatever, because these companies evolve as well and they change and it's okay.

Andrew Graham, CFA: 9:28

Right to have a stock go beyond the target price is what you want. You want to carry these things as long as you can go, and if they continue to beat and raise, we're going to stay in them. And If they continue to beat and raise, we're going to stay in them. And so anyway, yeah, taking all that sell-side research, filtering it through my 40 years of experience and some mainstream views, which we value. So our clients are working in every GIX industry and they offer just valuable perspective that we appreciate on everything from products to major themes and so forth. And we're located, of course, here in San Francisco and have a lot of exposure to, you know, semiconductor themes and software and so on. Yeah, I think that's about it. I mean, there's tons of stuff in there, but it's generally what we're looking for.

Tanya Suba-Tang: 10:11

Well, thank you, Andrew. I think our listeners are going to appreciate all of the insights you're able to provide, and you know you're sharing your investment philosophy and strategy. It was really a pleasure to speak with you today.

Andrew Graham, CFA: 10:22

It was my pleasure Anytime.

Lindsey Helman: 10:28

Thank you to this month's podcast guest, Andrew Graham, for sharing his investment philosophy and best practices. Join us next time for another Financial Perspectives episode, airing on the last Tuesday of the month.

Lindsey Helman: 10:45

Want to receive a shout out in the next episode or share your thoughts? Send in a message to the show through the link at the top of each episode description or email us at podcast@cfa-sf. org. We love hearing from our listeners and look forward to learning what you thought of this episode and any topics you'd like for us to cover next. Thank you for being a dedicated listener.

Lindsey Helman: 11:07

This podcast is produced by CFA Society San Francisco, a not-for-profit professional association providing professional learning and career resources to over 13,000 investment industry professionals worldwide. To learn more about CFA Society San Francisco, visit our website at cfa-sf. org or connect with us on LinkedIn.