What to Do About Today's 'Wall of Worry:' Robertson Stephens' Stuart Katz

Seems like the right time for Stuart Katz, chief investment officer and principal of Robertson Stephens Wealth Management, to put his near-term tactical asset allocation strategy to work.

“We’re very mindful of the near term but are deliberately constructing portfolios for the long term,” he tells ThinkAdvisor in an interview.

The prospect of rising interest rates calls for a tactical adjustment in those long-term portfolios, he maintains, citing, for example, floating-rate bank notes, constructed to rise with increasing interest rates.

In the interview, Katz, previously with Goldman Sachs for 15 years, discusses what is top of mind for most advisors right now: rising interest rates and rising inflation.

He expects the rate of inflation to decrease once the Federal Reserve removes “the excessive liquidity it had injected into the market” at the height of the coronavirus pandemic.

Turning to a controversial topic, digital assets, New York-based Katz warns that many people who invest in them “should be prepared to experience not only volatility but potentially full impairment and loss.”

Rather than cryptocurrencies, he prefers investing in blockchain technology.

“Companies who take advantage of blockchain could be winners” — and, he says, he’s actively seeking them out.

Robertson Stephens, a boutique RIA headquartered in San Francisco and focusing on ultra-high net worth clients, is enjoying an unprecedented growth spurt.

In 2021, it doubled its assets under management to about $3.9 billion. Six new advisor teams joined last year, five of them in the third and fourth quarters.

The RIA added four new offices for a total now of 12 nationwide.

Katz, chair of the firm’s investment committee, was a winner last fall of a 2021 LUMINARIES ThinkAdvisor recognition award for thought leadership.

In our recent phone interview, he commented on what goes into making a great leader as well as RSWM’s expansion plans:

“First, is organic growth. Second, is what many in the industry would call acquisitions. We call it partnerships,” says the native New Yorker.

They are “of critical importance to the firm but without compromising focus on [our] culture.”

Here are excerpts from the interview:

THINKADVISOR: What impact will rising interest rates have on your clients’ investment strategies?

STUART KATZ: Rising interest rates for retired people, especially those who have fixed income in their portfolios, will create a risk and headwind [potentially leading to] negative performance.

What do you do proactively to avoid this?

You need to start with a financial plan. And there are certain tactical adjustments we make in the near term to reflect the macro environment of material facts [such as rising rates] that are present in the marketplace that potentially influence our portfolio positions.

For instance, we’re introducing into our portfolios floating-rate bank notes that are structurally set up to rise with rising interest rates.

And we’re structuring our portfolios, for many clients, with a shorter duration in order to be less impacted by rising interest rates.

Are rate increases ever good for equities?

History shows that interest rates have room to rise in response to a growing economy before becoming negatively correlated with equity performance.

Rising yields accompanied by positive GDP growth have been associated with positive equity returns, though in the mid-to-high single-digit range, not in the double-digit range.

What’s another example of an event that has influenced your tactical strategy?

A perfect one would be the reopening of the global economy in 2021. [We adjusted] the positioning of certain asset classes that would have a greater exposure and sensitivity to growth and value — such as financial services and energy.

So we’re very mindful of the near term but are deliberately constructing portfolios for the long term.

How valuable is having a financial plan?

To have an investment portfolio without a financial plan, is like getting in a car and not knowing your destination.

Our view is designed to protect capital over time so that [clients] aren’t trading portfolios in reaction to a given moment.

What’s your thinking about the rising rate of inflation?

Supply constraints justify this rising inflation. But there’s a tremendous amount of pent-up demand both in consumer households and in corporations.

There are reasons now to justify removing the excessive liquidity that the Fed had injected into the market when we were at the height of the COVID crisis.

As that liquidity is taken out, we should expect the rate of inflation to come down to what would be closer to a longer-term trend.

But food, energy and other types of goods and services will continue to have high prices, albeit the change in those prices will moderate and not be as steep. And our portfolios reflect that.

When could inflation be a good thing?

A set of rising prices within a certain range is a reflection of a robust economy with good activity.

The Fed and general markets would prefer an environment where there’s more of a bias toward inflationary pressure than deflation.

What are your thoughts about Bitcoin and other cryptocurrencies?

Digital assets have demonstrated an extraordinary amount of volatility — approximately 70% annually. I believe they’re highly speculative and that people who want to invest in them should be prepared to experience not only volatility but potentially full impairment and loss.

However, crypto would be perfectly suitable to invest in if people have a financial plan and enough liquidity in order to live their life and not have it impaired or disrupted in the presence of a potential crypto decline and loss.

But how they size it in their investment portfolio is a critical question.

What sort of priority does blockchain have to your way of thinking?

That’s where our interest is more focused — that underlying technology of the distributed ledger — and companies and infrastructure that take advantage of it, such as financial services.

Companies who take advantage of blockchain technology could be winners.

So we’re investing in the private markets, looking for those winners utilizing blockchain but not necessarily investing or trading around whether Bitcoin goes up or down.

How bullish are you about the stock market this year?

There’s a reason to have a wall of worry for a variety of reasons: rising interest rates, inflation, high valuation multiples, geo-political concerns, potential policy mistakes by the Fed or other central banks.

Still, it’s important to put that wall of worry in context. The global economy continues to unfold with healthy household and corporate balance sheets.

There’s pent-up consumer demand for various goods and services. There’s corporate demand for mergers and acquisitions, stock buy-backs, capital investment.

Though the pace of growth of corporate earnings and GDP will likely slow in 2022, we have an optimistic outlook for equities; but we don’t expect them to be as strong as they were in 2021.

We’re concerned with regard to fixed income.

You and your firm recently won multiple 2021 LUMINARIES awards, ThinkAdvisor’s industry recognition awards. You were honored for thought leadership and in other categories. Are you a born leader or a made leader?

I believe I was a made leader with a growth mindset that recognizes that your thoughts and efforts can be powerful if you focus them in a very constructive, positive way.

Many believe that great leaders are born, not made. Those who subscribe to this view feel that if you don’t exhibit strong leadership ability from a young age, there’s little chance you ever will.

The truth is that great leaders are also made. Effective leaders invest time and energy to develop skills, consciously or unconsciously, that empower them to mobilize other people and organizations.

Was this a lesson learned while attending Harvard Business School or after you began your professional career?

I became self-aware of that lesson while in business school, and then I had the privilege to witness it and practice it in subsequent years after graduation.

The lesson is that anyone can become a leader as long as they’re serious about developing and investing in their skills.