Kristen Jackson, President & CEO, Grant Street Asset Management

In an interview with Invest, Kristen Jackson, President and CEO of Grant Street Asset Management, discussed the firm’s strategy in optimizing its client portfolios, including their methodology behind balancing risk and leveraging technology. “It is a management process and our long-term goal is to keep people invested because the markets go up over time,” Jackson said. 

How does GSAM approach asset allocation for high-net-worth clients in the current economic environment? 

When we approach asset allocation for a client, our initial conversation has very little to do with the current economic environment. We first focus on a client’s ability to take risk with their money. Their risk target is often influenced by the amount of money for investment, goals, and time horizon. Equally as important is defining their willingness to take risk and ensuring they understand their risk tolerance. We get specific about the client’s threshold for downside risk relative to upside return-in other words, dollar loss and dollar gain or risk versus reward. Marrying the two provides us with a general asset allocation range that is most appropriate for each client, assuming long-term market returns. We then overlay the current economic environment, considering the stage of the economic and stock market cycles, interest rates and valuations to design strategic growth and defensive portions of their portfolio that maximize risk adjusted returns. 

How does GSAM balance risk and diversification within client portfolios? 

The client’s overall asset allocation guideline is the primary driver of risk in the portfolio, and that typically is a range of target weights to cash-like investments, bonds, alternatives, and stocks. Our investment committee spends a lot of energy on portfolio construction within each of those sleeves to maximize growth and balance downside risk. We believe in broad diversification over a market cycle because it smooths out the ups and downs that can occur when certain segments of the market get overheated. 

How do you assess the risk-return profile of different investment types for optimal allocation? 

To truly understand how an investment is going to act within an overall portfolio allocation, it comes down to statistics: standard deviation, historical returns, correlations, among other points. We do a lot of scenario planning. For example, we may ask how each of the positions in the portfolio today would react if inflation were to spike unexpectedly. Some positions will go up, while others will likely fall. Understanding the interconnected nature of each position, the factors that drive price movements, the potential magnitude of that movement, and the overall impact on the portfolio is something we quantify for risk management. We often pair positions that we know are “higher” risk with ones that moderate risk in challenging environments to optimize allocation and return. Within the alternatives market there are additional factors to consider, such as liquidity. If the investment is illiquid for some time, we require additional return and diversification benefits to benefit the portfolio overall. 

What alternative investments could gain prominence over the next few years? 

We have seen an explosion of alternative investment strategies in our industry over the past decade. Some provide excellent diversification of returns and others provide returns not too different from stock and bond markets, while charging much higher fees and locking up capital. It’s important to have a thorough due diligence process to be able to sort through everything that’s out there today. We look at what we are trying to do with that alternative-do we want it to act like a stock and get stock-like growth or act as a diversifier and protect us during downside shock. 

In the coming years, we expect private debt and equity to continue to grow. Farmland is also an alternative that is growing in availability and provides a unique risk/return profile because it’s uncorrelated to stocks and bonds. Finally, we expect to see an increase in alternative strategies that provide unique tax write-off opportunities for wealthy investors. 

How do you address behavioral biases the clients may have when making investment decisions? 

Our investment committee relies heavily on economic data and market research for decision making. Doing so allows us to set aside the noise of headlines or investor fears that can influence behavioral biases. When making discretionary adjustments to portfolios, we ask ourselves if this adjustment is appropriate for the next six months to a year or longer. If it feels like a short-term adjustment, it likely isn’t rooted in the data. Our goal is to keep our clients invested because the markets go up over time. Once that resonates with them, they do very well in the long term. 

How does GSAM measure and communicate investment performance? 

We review performance with our clients in two ways. First is the net earnings growth on investments. This answers “how much money have I earned, net of Grant Street’s fees”. The second is the more traditional percentage returns, and we always benchmark our performance. We compare returns to a blend of indexes similar to the client’s asset allocation. Percentage performance answers the question “did I get enough return for the risk I took”. We find that many clients who come to us from another advisor know percentage returns, but they are unsure whether they are outperformed or underperformed relative to how much risk they took. 

How does GSAM leverage technology in enhancing portfolio management? 

Technology advancements have reshaped the way advisors serve clients-in a good way. Our firm was founded in 1993, and to say technology has changed since we started is an understatement. Within portfolio management specifically, our systems have increased the speed with which we can adjust portfolio strategies across our entire client base. It has also helped us to minimize error, efficiently manage highly customizable portfolios, and maximize tax-savings within portfolios. We are currently exploring how artificial intelligence can continue to improve efficiency gains. 

Technology also creates scale within the business. Over the past two decades, we’ve invested heavily in new applications, and a key part of our strategy has been that the many systems need to talk to one another. If you have half a dozen different systems that don’t integrate with one another, your work becomes redundant across systems. 

How does GSAM develop strategies for generational wealth transfer? 

At Grant Street, we believe growth should span decades and generations, and we focus on lasting partnerships. We are working with the fourth generation of many families who started with us when the firm was founded. Our experience with transitions and taking care of the next generation is part of the fabric of Grant Street. We like to start working with young adults within families, teaching stewardship of capital, and reinforcing their family’s financial values. When we’re working with adult children of older clients, we want to be a reliable support for them as they are likely to be involved in their parents’ financial affairs eventually. Families spend their entire lives working, earning, and building wealth to make the next generation better off. It’s a great privilege to develop tailored strategies to grow their legacy and guide their next generation.