June 2020 – As published on Sun Valley Property News
We sat down with Robertson Stephens’ Chief Investment Officer, Stuart Katz, to discuss the current market situation and what opportunities the firm is exploring with clients amidst the new landscape.
What is your view on a post-pandemic world?
Society is asking more frequent and intense questions about populism, nationalism, deglobalization, and regulation. This health crisis has acted as an accelerant for technological disruption and innovation. It reminds me of readings from the economist Joseph Schumpeter (1883-1950) who discussed the “gale of creative destruction” that revolutionizes economic structure.
The current pandemic is a catalyst impacting globally consumers, companies, and governments. We anticipate consumer demand will come back slowly in the absence of a vaccine and profit margins for many corporations will be compressed moving back towards long-term averages. We see several major areas of changing behavior that will create corporate winners and losers. They include (i) remote work, (ii) cybersecurity, (iii) cloud computing, (iv) e-commerce, (v) healthcare diagnostics and delivery, and (vi) ESG.
These trends will lead to the creative disruption of traditional industries and occupations leading to stronger businesses. These developments will provide opportunities for clients with a durable investment portfolio structured to preserve and grow wealth through a detailed financial plan.
What’s your current market outlook?
This environment provides little certainty in the near term other than we know corporations, households, and building owners are losing cashflow while taxes will increase to pay for the stimulus, and people are concerned about their health and survival. Uncertainty remains elevated yet we believe this market is creating investment opportunities for clients with patient time horizons. However, we believe equity markets are overly complacent about near term risks surrounding reopening the economy and fundamentals.
Currently, equity and credit markets seem to be anticipating different recovery timelines although there is often cross contamination of fear and greed between these markets creating unpredictable levels of volatility. We believe the most prudent course of action for qualified investors is investing with proven active strategies in both public and private markets. Simply relying on a passive approach to invest in the good, bad, and ugly without any distinction between the relative winners and losers is unwise.
How do you construct portfolios to capture opportunities?
Pandemic or not, our Investment Office is committed to constructing investment portfolios that address clients’ near-term safety and income needs and long-term growth objectives. Portfolio construction without a financial plan is akin to getting into a car without knowing your destination. We adhere first to principles regarding rebalancing and tax efficiency.
Our portfolio solutions begin with disciplined asset allocation and rigorous strategy selection. Additionally, we identify investment themes that we believe are more durable over time than a given macroeconomic or market cycle. Our process also includes flexibility for high conviction tactical decisions. We currently recommend underweights to high yield debt and non-US developed equities.
We believe this dynamic process of focusing on thematic and alternative strategies with differing fundamental return drivers, time horizons, and risk profiles yields a portfolio more robust in terms of delivering attractive risk adjusted returns.
Why active management?
For investments in industries or sectors defined by innovation and disruption and lack of transparency – technology, healthcare, small cap, emerging markets, non-investment grade credit, to name a few – an active approach may be the best way to find opportunities and pursue investment themes. For example, our focus on digital infrastructure.
The process surrounding “how” we select an approach is important to our clients. We incorporate both quantitative analysis and judgement to identify managers and strategies that employ bottom up fundamental research, and experience in an effort to weight quality business models at attractive valuations. This contrasts with passive funds that employ “top down” formulas. We think active manager flexibility, for example, can help a fund demonstrate superior “downside capture”, i.e. capturing less of the downturn in the overall market when times are bad while obtaining most of the upside of rising markets. In other words, active management can be an important part of the defense for our clients’ portfolios.
Many investors are hopeful, that the various stimulus policies will be broad enough to raise entire industries and support passive sector investments. We recommend rather than passively relying on hope that investors actively choose advisors with an investment office that has intense focus, process, and patience to persevere and guide portfolios over the long term just as you would carefully choose an expert river guide to navigate the Middle Fork of the Salmon River.
Why alternatives now?
There are several potential structural benefits to the alternative markets. First, private companies constitute a larger portion of the overall US economy with millions of private companies compared with only a few thousand publicly listed companies which is less than half the number from approximately 15 years ago. Second, private markets are less efficient and offer investors opportunities to capture “illiquidity premiums.” This is increasingly driving investors to evaluate alternatives in a world where long-term growth and reliable income may be difficult to achieve.
Alternative investments should be assembled understanding how they can work together with a client’s traditional portfolio. We use them to serve three key purposes, which include core, diversification, and enhancers. Core holdings may include allocations to secondaries that purchase LP and GP interests in funds that are well into the harvest period in an effort to reduce “J-Curve” risk, increase cash flow relative to primary funds and reduce blind pool risk. Secondary funds also provide an opportunity to invest in a pool of private companies across vintage years, sponsors, and geographies. Diversification solutions may include hedge funds which offer differentiated returns and risk management due to increased public market dispersion and dislocations. Finally, enhancers may include distressed credit and private equity to potentially enhance returns in an environment where defaults are increasing and active ownership, long term focus, and sophisticated security structuring are required to succeed.
We believe that alternatives are a robust opportunity set where they can have lower correlations than public investments and may dampen overall portfolio volatility. However, there is a wide dispersion of performance that makes manager selection critical. Our Investment Office has deep alternatives experience as institutionally-trained investors across an array of markets, strategies, and geographies.
Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. This material is for general informational purposes only, does not constitute investment advice and should not provide the basis for any investment decision. Information, views and opinions are those of the author and not necessarily Robertson Stephens, are current as of the date of this presentation and are subject to change. Alternative investments present significant risks such as illiquidity, long time horizons, reduced transparency, and loss of principal and are not suitable for all investors. Asset allocation and diversification strategies do not ensure profit or eliminate the risk of loss in declining markets. © 2020 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere.