October 29, 2024 • 11 mins
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.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Lindsey Helman (00:05):
Hello and welcome to Financial
Perspectives, a CFA Society SanFrancisco podcast, where we
interview and discuss trendswith leaders from across the
investment and finance industry.
This month, our host, TanyaSuba-Tang, Membership Director
with CFA Society San Francisco,had the pleasure of speaking
with Andrew Graham, founder andmanaging partner at Jackson
(00:26):
Square Capital.
Listen in as they discussequity growth strategies and
active management.
Tanya Suba-Tang (00:38):
Hi, Andrew, welcome to Financial
Perspectives.
Andrew Graham, CFA (00:41):
Hi Tanya, Thank you.
Thanks for having me on.
Tanya Suba-Tang (00:43):
So you're a managing partner for Jackson
Square Capital and author ofInside Market Newsletter, which
is a financial servicesnewsletter that you do daily,
and today we're going to betalking about your investment
philosophy and equity growthstrategies, which I'm very
excited to have a chat with youabout.
Andrew Graham, CFA (01:02):
Yeah, me too .
It feels like I'm giving mycommencement speech back at my
old university, so I'm veryproud of my CFA background and
the rest, and this is going tobe fun.
Tanya Suba-Tang (01:11):
It is so kind of jumping into our questions.
With passive strategies growingin popularity, what are the
advantages of an activeinvestment manager?
Andrew Graham, CFA (01:20):
Yeah, I think for many investors the
dollar cost averaging in indexfunds and ETFs is an effective
strategy, especially for youngerinvestors who may just be
starting out.
But the benefits of activemanagement I think apply more to
the high net worth or ultrahigh net worth cohorts, right,
(01:40):
and investors also over a givenage, and I think that's
something different for everyone.
We see people who are over theage of 40 having a greater
interest in active managementbecause it offers more
flexibility.
You feel like you don't have asmuch time to make it up in case
the indices happen tounderperform for two or three
years or whatever.
So that's sort of the groupthat we're working with.
(02:02):
I think that the first realreason for active management is
tax efficiency.
So you have these different taxslots and you have an
opportunity to donate those lowcost basis tax slots on
individual positions.
So you can do that as well onan index fund.
What we'll find is some ofthese positions let's take
NVIDIA, for example is up 16,whatever percent 9, 9000 percent
(02:26):
that you know.
You can break off the lowestbasis stuff and make a donation
that way and reduce youradjusted gross income and, I
think, reducing exposure to youknow, by selling the high tax
loss shares from a givenposition is also sort of a
luxury of active management.
A given position is also sortof a luxury of active management
(02:46):
.
So I should also, I guess, atthis stage say that our
preference is to average up inpositions.
So we'll often have an equityposition that has multiple tax
locks on a given stock.
Tanya Suba-Tang (02:56):
What is your process for managing an equity
growth portfolio?
Andrew Graham, CFA (02:59):
Yeah, there's a lot to that, but I
also want to mention two otherthings.
By the way, we're getting backto this passive versus active
management.
So maybe an underrated reasonis sanity, and I was told at a
very young age that desperatepeople make desperate decisions.
And I think the ability toreduce exposure in an actively
managed portfolio raise cashwhen markets turn or when you
(03:23):
think things are tough.
Now, for example, it's anadvantage to keep everybody your
client in the right frame ofmind.
It's very important to makegood decisions.
You have to be of the rightmindset, and having a little bit
of extra dry powder to reinvestthe right time, I believe, is
the right way to do it.
And then the last reason Iguess is just the ultimate goal
(03:45):
of active management islong-term outperformance, and
everybody at Jackson SquareCapital is focused on building
long-term wealth for our clients, and so it's where we ended up
and that's where we're mostcomfortable On the subject of
how the process of managingportfolios.
So one of the things that Idon't know maybe it was taught
to me even before CFA school wasto avoid over diversification.
(04:08):
So if we're going to add alphajust off the bat, I think we
have to find sort of the sweetspot for how many positions we
want.
For us that's about 40 to 45positions, with an average
starting position, you know, avalue of about one and a half to
2%.
And, by the way, some of thethings that we do here are maybe
somewhat unconventional, so wedon't normally apply modern
(04:32):
portfolio theory to clientaccounts.
You know, I've been doing this40 years and I should have
learned a few things in thattime.
And writing every day keeps mevery 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 foremerging markets outperformance
(04:53):
are very difficult to achieveand they happen pretty
infrequently.
So we don't take in clientassets and automatically put
down a sleeve for EM or eveninternational equities or
whatever it's really ideagenerated.
We consume a lot of sell sideresearch, probably more than is
(05:16):
physically healthy for a person,but I think it's necessary to
stay on top of it.
So writing every day, like Isaid, about macro conditions,
bond yields, of the shape of theyield curve, cross market
indicators Recently we had aclassic one where the Russell
2000 was breaking out of longterm you know range resistance
but copper was lagging.
(05:36):
I need to have both of thosethings moving at the same time
in order to confirm that signalthat was in the Russell.
So you know what conditionslead to multiple expansion and
contraction and so on.
That's all.
Those opinions are all formedby writing daily.
I think the other thing that wedo, that's maybe systematic or
just a daily part of the dailyfunction around us here, is take
(05:57):
loss limits and so realizelimits for us for managing
taxable, you know, retail clientassets 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 wouldlike to average up and build
larger positions.
On pullbacks.
(06:18):
We first, you know, startedwith I'll use NVIDIA again as an
example.
It was not the company it istoday 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 exampleof a position that we've added
up and built larger blocks.
(06:38):
And then I guess the last thingon that mention is that you know
, we do tailored portfolios foreach client, so people are
different and they also enter atdifferent times.
So I think it's selfish of usto have a model portfolio that
is good like a perennial modelportfolio.
It changes, the world evolvesand changes and we need to
(07:01):
evolve with it.
That's what that's all about.
And changes and we need toevolve with it.
That's what that's all about.
So we may have some newaccounts or portfolios that we
put together that are fairlydissimilar.
I think the longer that theaccounts are open and the longer
people are here, the more theyhave positions in common and
little dispersion.
Tanya Suba-Tang (07:18):
So what are the quality factors for picking
stocks for a client's portfolio?
Andrew Graham, CFA (07:23):
Yeah.
So again, consume a lot of sellside research.
We're looking for strongfundamental stories.
So stocks move based onearnings estimate revisions.
So we follow those more closelythan 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
(07:44):
stock's working and it's goingto new highs, we'll wait for it
to pull back until it gets tojust technical oversold levels.
So we spend all of our time inCFA world working on fundamental
things and I think ignoring thetechnicals and so forth is a
mistake and we've got to doeverything.
We have to use everything inour power to deliver
(08:04):
outperformance and it's justmuch easier to pick up a
position when it's short-termoversold.
So again, yeah, we're lookingfor beat and raise results every
quarter.
One quarter with a miss is okay,two isn't, and it's fairly
uncommon I shouldn't say it'suncommon but to have a position
(08:25):
that doesn't miss over a 10-yearperiod.
Ultimately, that's our goal isto own something for a long time
.
Our goal is really to ownanything that over 12 months and
one day to get the favorabletax treatment.
But it's a rule that served uswell.
We can always come back to thestock if we need to.
But one miss is okay.
Two, we've got a problem.
(08:45):
Something's wrong.
If you can't guide to the rightnumber, if the management team
can't do that after a miss, thenthere's some serious changes
going on at the company, in myopinion.
And so we're also, by the way,not looking to call absolute
tops or bottoms, but usuallyonly add a position, like I said
, at short-term oversold levels.
So those are stochasticmeasurements.
(09:07):
And what else can I say?
I guess there's just a lot ofpeople who are ready to sell a
stock at a given price level foremotional or target price
reasons or something.
But it's foolish.
We'll go back to NVIDIA again.
Just, you know, I'm going tosell the stock at 500 when it
gets there or whatever, becausethese companies evolve as well
and they change and it's okay.
(09:28):
Right to have a stock go beyondthe target price is what you
want.
You want to carry these thingsas 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 beatand raise, we're going to stay
in them.
And so anyway, yeah, taking allthat sell-side research,
filtering it through my 40 yearsof experience and some
mainstream views, which we value.
So our clients are working inevery GIX industry and they
(09:51):
offer just valuable perspectivethat we appreciate on everything
from products to major themesand 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 stuffin there, but it's generally
what we're looking for.
Tanya Suba-Tang (10:11):
Well, thank you , Andrew.
I think our listeners are goingto appreciate all of the
insights you're able to provide,and you know you're sharing
your investment philosophy andstrategy.
It was really a pleasure tospeak 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 hisinvestment philosophy and best
practices.
Join us next time for anotherFinancial Perspectives episode,
airing on the last Tuesday ofthe month.
Want to receive a shout out inthe next episode or share your
thoughts?
Send in a message to the showthrough the link at the top of
(10:51):
each episode description oremail us at podcast@cfa-sf.
org.
We love hearing from ourlisteners and look forward to
learning what you thought ofthis episode and any topics
you'd like for us to cover next.
Thank you for being a dedicatedlistener.
This podcast is produced by CFASociety San Francisco, a
(11:12):
not-for-profit professionalassociation providing
professional learning and careerresources to over 13,000
investment industryprofessionals worldwide.
To learn more about CFA SocietySan Francisco, visit our
website at cfa-sf.
org or connect with us onLinkedIn.
Hello and welcome to Financial
Perspectives, a CFA Society SanFrancisco podcast, where we
interview and discuss trendswith leaders from across the
investment and finance industry.
This month, our host, TanyaSuba-Tang, Membership Director
with CFA Society San Francisco,had the pleasure of speaking
with Andrew Graham, founder andmanaging partner at Jackson
(00:26):
Square Capital.
Listen in as they discussequity growth strategies and
active management.
Tanya Suba-Tang (00:38):
Hi, Andrew, welcome to Financial
Perspectives.
Andrew Graham, CFA (00:41):
Hi Tanya, Thank you.
Thanks for having me on.
Tanya Suba-Tang (00:43):
So you're a managing partner for Jackson
Square Capital and author ofInside Market Newsletter, which
is a financial servicesnewsletter that you do daily,
and today we're going to betalking about your investment
philosophy and equity growthstrategies, which I'm very
excited to have a chat with youabout.
Andrew Graham, CFA (01:02):
Yeah, me too .
It feels like I'm giving mycommencement speech back at my
old university, so I'm veryproud of my CFA background and
the rest, and this is going tobe fun.
Tanya Suba-Tang (01:11):
It is so kind of jumping into our questions.
With passive strategies growingin popularity, what are the
advantages of an activeinvestment manager?
Andrew Graham, CFA (01:20):
Yeah, I think for many investors the
dollar cost averaging in indexfunds and ETFs is an effective
strategy, especially for youngerinvestors who may just be
starting out.
But the benefits of activemanagement I think apply more to
the high net worth or ultrahigh net worth cohorts, right,
(01:40):
and investors also over a givenage, and I think that's
something different for everyone.
We see people who are over theage of 40 having a greater
interest in active managementbecause it offers more
flexibility.
You feel like you don't have asmuch time to make it up in case
the indices happen tounderperform for two or three
years or whatever.
So that's sort of the groupthat we're working with.
(02:02):
I think that the first realreason for active management is
tax efficiency.
So you have these different taxslots and you have an
opportunity to donate those lowcost basis tax slots on
individual positions.
So you can do that as well onan index fund.
What we'll find is some ofthese positions let's take
NVIDIA, for example is up 16,whatever percent 9, 9000 percent
(02:26):
that you know.
You can break off the lowestbasis stuff and make a donation
that way and reduce youradjusted gross income and, I
think, reducing exposure to youknow, by selling the high tax
loss shares from a givenposition is also sort of a
luxury of active management.
A given position is also sortof a luxury of active management
(02:46):
.
So I should also, I guess, atthis stage say that our
preference is to average up inpositions.
So we'll often have an equityposition that has multiple tax
locks on a given stock.
Tanya Suba-Tang (02:56):
What is your process for managing an equity
growth portfolio?
Andrew Graham, CFA (02:59):
Yeah, there's a lot to that, but I
also want to mention two otherthings.
By the way, we're getting backto this passive versus active
management.
So maybe an underrated reasonis sanity, and I was told at a
very young age that desperatepeople make desperate decisions.
And I think the ability toreduce exposure in an actively
managed portfolio raise cashwhen markets turn or when you
(03:23):
think things are tough.
Now, for example, it's anadvantage to keep everybody your
client in the right frame ofmind.
It's very important to makegood decisions.
You have to be of the rightmindset, and having a little bit
of extra dry powder to reinvestthe right time, I believe, is
the right way to do it.
And then the last reason Iguess is just the ultimate goal
(03:45):
of active management islong-term outperformance, and
everybody at Jackson SquareCapital is focused on building
long-term wealth for our clients, and so it's where we ended up
and that's where we're mostcomfortable On the subject of
how the process of managingportfolios.
So one of the things that Idon't know maybe it was taught
to me even before CFA school wasto avoid over diversification.
(04:08):
So if we're going to add alphajust off the bat, I think we
have to find sort of the sweetspot for how many positions we
want.
For us that's about 40 to 45positions, with an average
starting position, you know, avalue of about one and a half to
2%.
And, by the way, some of thethings that we do here are maybe
somewhat unconventional, so wedon't normally apply modern
(04:32):
portfolio theory to clientaccounts.
You know, I've been doing this40 years and I should have
learned a few things in thattime.
And writing every day keeps mevery 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 foremerging markets outperformance
(04:53):
are very difficult to achieveand they happen pretty
infrequently.
So we don't take in clientassets and automatically put
down a sleeve for EM or eveninternational equities or
whatever it's really ideagenerated.
We consume a lot of sell sideresearch, probably more than is
(05:16):
physically healthy for a person,but I think it's necessary to
stay on top of it.
So writing every day, like Isaid, about macro conditions,
bond yields, of the shape of theyield curve, cross market
indicators Recently we had aclassic one where the Russell
2000 was breaking out of longterm you know range resistance
but copper was lagging.
(05:36):
I need to have both of thosethings moving at the same time
in order to confirm that signalthat was in the Russell.
So you know what conditionslead to multiple expansion and
contraction and so on.
That's all.
Those opinions are all formedby writing daily.
I think the other thing that wedo, that's maybe systematic or
just a daily part of the dailyfunction around us here, is take
(05:57):
loss limits and so realizelimits for us for managing
taxable, you know, retail clientassets 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 wouldlike to average up and build
larger positions.
On pullbacks.
(06:18):
We first, you know, startedwith I'll use NVIDIA again as an
example.
It was not the company it istoday 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 exampleof a position that we've added
up and built larger blocks.
(06:38):
And then I guess the last thingon that mention is that you know
, we do tailored portfolios foreach client, so people are
different and they also enter atdifferent times.
So I think it's selfish of usto have a model portfolio that
is good like a perennial modelportfolio.
It changes, the world evolvesand changes and we need to
(07:01):
evolve with it.
That's what that's all about.
And changes and we need toevolve with it.
That's what that's all about.
So we may have some newaccounts or portfolios that we
put together that are fairlydissimilar.
I think the longer that theaccounts are open and the longer
people are here, the more theyhave positions in common and
little dispersion.
Tanya Suba-Tang (07:18):
So what are the quality factors for picking
stocks for a client's portfolio?
Andrew Graham, CFA (07:23):
Yeah.
So again, consume a lot of sellside research.
We're looking for strongfundamental stories.
So stocks move based onearnings estimate revisions.
So we follow those more closelythan 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
(07:44):
stock's working and it's goingto new highs, we'll wait for it
to pull back until it gets tojust technical oversold levels.
So we spend all of our time inCFA world working on fundamental
things and I think ignoring thetechnicals and so forth is a
mistake and we've got to doeverything.
We have to use everything inour power to deliver
(08:04):
outperformance and it's justmuch easier to pick up a
position when it's short-termoversold.
So again, yeah, we're lookingfor beat and raise results every
quarter.
One quarter with a miss is okay,two isn't, and it's fairly
uncommon I shouldn't say it'suncommon but to have a position
(08:25):
that doesn't miss over a 10-yearperiod.
Ultimately, that's our goal isto own something for a long time
.
Our goal is really to ownanything that over 12 months and
one day to get the favorabletax treatment.
But it's a rule that served uswell.
We can always come back to thestock if we need to.
But one miss is okay.
Two, we've got a problem.
(08:45):
Something's wrong.
If you can't guide to the rightnumber, if the management team
can't do that after a miss, thenthere's some serious changes
going on at the company, in myopinion.
And so we're also, by the way,not looking to call absolute
tops or bottoms, but usuallyonly add a position, like I said
, at short-term oversold levels.
So those are stochasticmeasurements.
(09:07):
And what else can I say?
I guess there's just a lot ofpeople who are ready to sell a
stock at a given price level foremotional or target price
reasons or something.
But it's foolish.
We'll go back to NVIDIA again.
Just, you know, I'm going tosell the stock at 500 when it
gets there or whatever, becausethese companies evolve as well
and they change and it's okay.
(09:28):
Right to have a stock go beyondthe target price is what you
want.
You want to carry these thingsas 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 beatand raise, we're going to stay
in them.
And so anyway, yeah, taking allthat sell-side research,
filtering it through my 40 yearsof experience and some
mainstream views, which we value.
So our clients are working inevery GIX industry and they
(09:51):
offer just valuable perspectivethat we appreciate on everything
from products to major themesand 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 stuffin there, but it's generally
what we're looking for.
Tanya Suba-Tang (10:11):
Well, thank you , Andrew.
I think our listeners are goingto appreciate all of the
insights you're able to provide,and you know you're sharing
your investment philosophy andstrategy.
It was really a pleasure tospeak 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 hisinvestment philosophy and best
practices.
Join us next time for anotherFinancial Perspectives episode,
airing on the last Tuesday ofthe month.
Want to receive a shout out inthe next episode or share your
thoughts?
Send in a message to the showthrough the link at the top of
(10:51):
each episode description oremail us at podcast@cfa-sf.
org.
We love hearing from ourlisteners and look forward to
learning what you thought ofthis episode and any topics
you'd like for us to cover next.
Thank you for being a dedicatedlistener.
This podcast is produced by CFASociety San Francisco, a
(11:12):
not-for-profit professionalassociation providing
professional learning and careerresources to over 13,000
investment industryprofessionals worldwide.
To learn more about CFA SocietySan Francisco, visit our
website at cfa-sf.
org or connect with us onLinkedIn.
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