NZS Capital Growth Equity Fund Q3 2022 Update
The third quarter was marked by the continued tussle between investors, policymakers, dictators and the painful landing of the pandemic-bloated economy. In the short term, we expect uncertainty to persist; however, in the long term, we know that the future, as always, will be determined by the optimists. Investing, like almost everything in life, is a form of storytelling. When someone buys or sells a stock, they are creating a story about the future.
But, of course, no one can accurately predict the future, and relying on the past can be just as problematic. Therefore, the stories we tell should be based on what we can clearly discern in the present, no matter how hazy the surroundings may seem. We then experience these stories as they unfold in real life, checking the facts of our narrative with reality to identify plot holes, inconsistencies, and elements of truth that help us refine our story.
Some types of plots tend to unfold more often than others, there are always unexpected twists and, if you’re lucky, a deus ex machina. At NZS Capital, we believe that stories of optimism – where the protagonist is adaptable and creates more value than they take (non-zero sum) – occur far more often than stories of cynicism and pessimism, where the characters are rigid in their beliefs and extract too much value from society. The market, however, tends to be more cynical than optimistic, which creates cycles of fear.
Investing in the stock market is like buying a ticket for a movie you don’t have much a priori knowledge. We can make educated guesses based on the title and trailer, but sometimes a seemingly feel-good rom-com has an unexpected horror subplot. Current market volatility involves a tension between two completely different storylines about how our economic future will unfold.
One Story is an apocalyptic film in which government policymakers, in an attempt to rewrite their “certified rotten” pandemic policy script, send the economy sliding off a cliff while geopolitical tensions send humanity into nuclear armageddon. . Here there are no heroes, and the only way out is time and patience. Like Major King riding the bombshell in Dr. Strangelove, this film ends with more uncertainty and questions than it began with.
The other script, however, has a happier ending. The foundation of this second narrative is the self-healing capacity of the economy, innovation and hope resulting in a long cycle of World War II-like prosperity, investments in green energy and a steady increase global economic resilience. The first story implies that the last forty years of globalization, low interest rates, deflationary forces and rising inequality will meet with long and hard punishment.
In contrast, the second story plays on the resilience and ingenuity rooted in human evolution. Of course, there are thousands of ways the future could unfold, and we won’t know the end until the lights come up and the curtains close.
Advantageously managing this uncertainty is what defines our investment process at NZS Capital, as we focus on adaptability, non-zero-sum outcomes and matching investments to their potential range of outcomes rather than predicting the future with precision. Like the complex world around us, the global economy is dominated by power laws and extremes.
Humans, however, tend to be linear thinkers, so we can miss emergent, game-changing events unless we train ourselves to look outside our typical mental boundaries to regularly scan left field and at the same time. -of the. Some of the best stories of the future could be written in surprising locations and combine different subjects and technologies in new ways. It is important to note that in times of volatility, policy changes and technological disruption, economic resources often shift and refocus on new emerging areas.
A series of events, as the world has recently experienced, can create pivot points for society. We continue to see significant opportunities in the drivers of the global economy’s analog-to-digital transition, such as software, semiconductors and the Internet. But we expect resources and attention to shift to new origins of asymmetry in areas such as AI, automation, healthcare and other sectors of the economy.
While we can’t know the exact storyline of what lies ahead, we can prepare ourselves appropriately for all the potential plot twists. The Optionality tail of our strategies is designed to seek out and leverage innovation wherever it evolves, while the Resilient head of each portfolio is designed to deliver sustainable growth. We continue to see opportunities across the spectrum of businesses that we believe will play a key role in scripting our economic future.
The NZS Capital Growth Equity strategy was down 4.58% net of fees in the third quarter of 2022; in comparison, its global market benchmark fell by 6.75%. Since the beginning of the year, the strategy was down 34.75% net while the index fell from 25.41%. Since its inception, the strategy has grown cumulatively 31.52% net compared to a 2.44% return to the benchmark. The NZS Capital Select strategy was down 2.70% net in the third quarter of 2022, with a net year-to-date decline of 31.42% and a cumulative net gain of 41.89% since its creation.
Thank you for your continued trust, interest and support.
About NZS Capital
The research process at NZS Capital is driven by complex adaptive systems and the unpredictability of the world around us. Our view of the world, which is not based on narrow predictions of the future, is ideal for long-term investors as the global economy shifts from analog to digital. We believe that companies that maximize non-zero-sum outcomes for all of their constituents, including employees, customers, suppliers, society and the environment, will also maximize long-term outcomes for investors. These adaptable businesses will take part as the economy continues its decades-long transition from analog to digital, sector by sector. Our worldview informs our portfolio construction process, which combines a relatively small number of resilient companies (larger positions) with a long tail of option companies (smaller positions). Resilient businesses have very few predictions underlying their success and a narrow range of outcomes, while optional businesses have a wider range of outcomes and their success depends on a more specific view of the future. We believe this combination of long-term growth and asymmetric upside is well suited to accommodate the increasing pace of change across the global economy. Our investment framework is in Complexity investment.
There is no guarantee that the information presented is accurate, complete or timely, nor any guarantee as to the results obtained from the use of it. Past performance is not indicative of future results. Investing involves risk, including possible loss of principal and fluctuation in value.
Net returns are calculated by subtracting the highest applicable management fee (0.65% per annum or 0.1625% per quarter) from the gross return. Gross returns include reinvestment of dividends or other income. Actual fees may vary depending on, among other things, the applicable fee schedule and portfolio size. Fees are available upon request and can be found in Part 2A of Form ADV. Index performance does not reflect the expense of managing a portfolio because an index is unmanaged and not available for direct investment.
All projections, market outlooks or estimates contained in this presentation are forward-looking statements and are based on certain assumptions. No forecast can be guaranteed. Other events that have not been taken into account may occur and materially affect returns or performance. Any projection, outlook or assumption should not be construed as an indication of actual events that will occur.
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NZS Growth Equity and NZS Select are denominated in USD.
The benchmark for the NZS Growth Equity Composite and NZS Select Composite is the Morningstar Global Target Market Exposure NR USD. The index is designed to provide exposure to the top 85% free-float market capitalizations in each of two economic segments, developed markets and emerging markets.
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Editor’s note: The summary bullet points for this article were chosen by the editors of Seeking Alpha.