By Hamlin Lovell, NordicInvestor
In February 2020, Jupiter Asset Management became a minority owner of NZS Capital through a strategic investment. As part of this partnership, Jupiter is now the exclusive distributor of NZS’s global growth unconstrained-styled investment portfolios, and has plans to launch Jupiter-branded mutual funds based on these strategies in the near future. Initially, the priority will be to target institutional investors.
Magnus Jahnke, Jupiter’s Head of Nordics, has been working with the NZS team since the partnership was agreed. “We are really excited to be working with NZS and have already made huge progress with the team in the Nordic region,” he said. “Our early conversations with clients suggest that this approach to investing in global growth companies will be of great interest and indeed we already have a Nordic investor invested with the team.
“Brad and Brinton are talented fund managers whose approach is clearly aligned with Jupiter’s culture and focus on high conviction, active fund management, with a strong focus on ESG. We look forward to working closely with them to develop products which offer our clients a differentiated approach to meeting their financial goals.”
NordicInvestor spoke to Adam Schor, President at NZS about non -zero outcomes in the information age.
“The business school orthodoxy 30 years ago was that companies existed to maximize shareholder value. Now the new paradigm is stakeholder capitalism: that shareholder value can be improved via maximizing value for all stakeholders, resulting in a “win-win” scenario. This is a Non-Zero Sum game, which is so important to us that it gave the firm its name”, says NZS Capital’s President and Chief Risk Officer, Adam Schor, who was previously Director of Global Equity Strategies at Janus Henderson, where most of the team worked together.
A Non-Zero Game is one framework for analysing ESG. The NZS approach to assessing companies’ ESG performance is more qualitative than quantitative, not least because numerical scores can be manipulated by companies that want to game the system. “NZS is woven into the assessment of companies’ culture and business model, including their sustainability and adaptability. ESG cannot be just bolted on to investment analysis – it is inherent to the success of an investment”, says Schor.
The wider NZS world view is that the economy is made up of complex adaptive systems, which give rise to non-normal, asymmetric and fat-tailed distributions, which can only be modelled using power laws that map out wide ranges of outcomes as some firms will ascend an exponential curve while others see their revenues – and equity value – asymptotically approach zero. Therefore, unexpected things happen more often than expected, and forecasts are prone to be spuriously precise. “To make accurate predictions, you need not only the growth rate, but also the duration of growth, correct, and these are both getting more difficult as the pace of disruption is accelerating”, says Schor. “We expect that the current transition from the information age to the AI age is going to be far more disruptive than the development of computing over the past 50 years, because it is much more unpredictable, and is happening much more quickly”, he adds.
Naturally, NZS still form views about a distribution of future outcomes, in terms of how broad or narrow the range is and what valuations this may or may not justify. The best performing stocks of 2020 include some that NZS liked and others they avoided. According to NZS, Shopify and Tesla are two examples of firms that could justify current valuations based on plausible scenarios. “Shopify makes under some plausible scenarios of its share of global commerce, while Tesla’s valuation could work if there is a massive shift to electric vehicles, which it ends up dominating”, says Schor. NZS did not own Zoom however because, “we could not determine if videoconferencing is a feature or a platform. If it is a feature, it can be replicated by others. If it is a platform, which adds more functionality, that would be very different. Now that the stock has gone up sharply, its valuation determines a narrower range of predictions”, he points out.
Of course, these projections can fall prey to overconfidence, and this behavioural bias is combatted through the mutual trust and understanding the four investment managers (co-founders Brad Slingerlend and Brinton Johns, along with Joe Furmanski and Joe Bathgate) have built up over 12 to 20 years of working together at Janus Henderson, where their Janus Henderson Global Technology and Innovation fund outperformed its benchmark, the MSCI AW Information Technology index, by 1.5% per year and was ranked in the top quartile of the peer group, between May 2011 and November 2018.“We know what each others’ biases are and all compensation is based on firm not individual success. We have a lack of ego and we carry out pre-mortems, writing notes discussing what could go wrong. This gives some pause for thought and makes us work harder to refute counterarguments”, says Schor.
As a boutique, NZS can focus exclusively on its own strategies rather than resourcing other teams, and is less index-sensitive than are some large firms. “We can think about long term investment decisions and are more willing to deviate from the index and take more risk for long term payoffs. And our culture is more our own too”, he adds.
Though NZS want to avoid overconfidence, they still need to have the courage of their convictions to pick individual companies that could become winners. “We are not just buying into a theme like e-commerce and investing into entire sectors or sub-sectors. The winner takes all economics of platform businesses mean that there cannot be five platforms, and we need to take a view on which ones will succeed. We will have some stocks that do not achieve what they had planned”.
Optionality and Resilience
At the top level, NZS takes a barbell approach, pairing core holdings in resilient firms with a larger number exhibiting optionality. Covid-19 has been a boon in accelerating many of the technology megatrends that NZS are exposed to. For instance, they have owned Amazon, Google and Netflix within the FANGMAN complex, and their resilient bucket. The concept of optionality is based on companies emerging as major players through innovation and adaptability, whereby the best of them can graduate to the resilience bucket.
“The optionality bucket is to some degree applying a venture capital mentality to investment in public equities, though with more liquidity allowing for exits where firms disappoint – as not all will hit their targets”, says Schor.
The team invested in pre-IPO private equity at Janus Henderson and could contemplate doing so again, providing a liquidity event was envisaged within 18-24 months. NZS keeps abreast of private markets for intelligence anyway. Co-founder, Brad Slingerlend, lives near Silicon Valley and has his finger on the pulse of nascent technologies being invested in by the local PE and VC communities. His weekly SITAL (Stuff I Thought About Last Week) podcasts reveal a stream of consciousness around an eclectic mix of technologies at varying stages of development – and which are not necessarily yet mature enough to feature in the portfolio. Quantum computing is an example of an emerging technology that is too early stage for NZS.
Trading and Rebalancing
Accelerating technological change need not imply short term trading however. Average portfolio turnover of 30% implies an average holding period of three years. The biggest reasons for exiting positions altogether are a change in the investment thesis. NZS also looks to control the left tail, downside risk, through disciplined position sizing, and adjusting position sizes, top slicing winners so they do not become outsized risks. “We want to make sure that successful names do not become riskier, but will add to successful “optionality” names that are transitioning into resilient companies”, says Schor.
There can be a two-way traffic between the optionality and resilience buckets, and occasionally firms may come round full circle to where they began.
A good example of an optionality position coming of age would be Nvidia, which has evolved from a graphics company to the engine for artificial intelligence, a better long-term position with more comfortable predictions, and thus moved from the optionality to the resilience bucket.
“Online real estate broker, Zillow, at one stage had potential to become a more resilient platform that might benefit from network effects. Now Zillow has moved its business model into bidding for houses online, it is a much riskier business model and we would now place Zillow in the optionality bucket”, says Schor.
Disney has also moved from resilience to optionality, though for exogenous reasons rather than any endogenous change to its business model. “We are not confident that a vaccine will necessarily reverse behavioural patterns that have led less people to visit movie theatres or theme parks. Some people may be content to stay at home, so the range of outcomes is wide”, says Schor.
Technology and other industries
NZS runs one dedicated technology fund, and technology also currently makes up around 70% of the global select and global unconstrained strategies.
Two core sectors in which NZS picks stocks are semiconductors and cloud services. “Semiconductors are not immune from cyclicality, but are now less cyclical than historically. We are overweight semis as a structural growth story, that provides the picks and axes for digital transformation in terms of cloud, 5G, AI, robotics, Internet of Things, and supply chains”, says Schor. Meanwhile, cloud services are now climbing an accelerating ‘S’ curve, spurred by Covid and security threats.
Thinking laterally, technology per se might not always be the largest sector weighting for NZS. Technology will increasingly transform multiple other sectors that are also likely to be fruitful for stockpicking: “the coming AI revolution could reduce costs in industries ranging from healthcare to food supply and energy. Wearable devices can facilitate monitoring of blood pressure, blood sugar and sleeping habits, and allow for prevention rather than treatment, while new drugs can be developed much faster through AI. Meanwhile food supply chains are becoming more efficient and less wasteful. And renewable energy can also be much cheaper than traditional energy”, says Schor.
