rewrite this title NZS Capital Q1 2025 Shareholder Letter

Dear Investors and Friends,

The NZS Growth Equity strategy (“strategy” or “portfolio”) had a gross return of -3.45% and net return of -3.61% for the first quarter as compared to -1.35% for the Morningstar Global Target Market Exposure Index (the “Index”) over the same period.

PERIODIC RETURNS (%)[1]

QTD

1Y

3Y

5Y

SI

NZS GROWTH EQUITY (GROSS)

-3.45%

1.33%

5.82%

20.63%

15.47%

NZ S GROWTH EQUITY (NET)

-3.61%

0.68%

5.13%

19.86%

14.73%

INDE X

-1.35%

6.92%

6.87%

15.15%

9.23%

DIFFE RE NCE (% NET)

-2.26%

-6.24%

-1.74%

4.71%

5.50%

Click to enlarge

CAL ENDAR Y EAR RETURNS (%)[1]

YTD 2025

2024

2023

2022

2021

2020

NZS GROWTH EQUITY (GROSS)

-3.45%

21.24%

35.29%

-32.99%

22.64%

63.51%

NZ S GROWTH EQUITY (NET)

-3.61%

20.47%

34.44%

-33.44%

21.86%

62.49%

INDEX

-1.35%

17.20%

22.13%

-18.04%

18.57%

15.83%

DIFFE RE NCE (% NET)

-2.26%

3.27%

12.30%

-15.40%

3.29%

46.66%

Click to enlarge

*Since inception: January 1, 2020

Performance Overview

Markets were volatile throughout the quarter, with particular weakness in the IT sector, growth stocks, and the US. Despite our overweight in those areas, we were quite pleased with the level of resilience the strategy displayed amid the volatility, which we attribute to our portfolio construction process and individual stock selection.

In the quarter, Financials, Real Estate, and Materials contributed the most to absolute returns by sector. Progressive, a resilient holding, was the top contributor to performance, driven by continued share gains in auto policies and outperformance against their targeted level of profitability. Another resilient holding, HEICO (HEI), outperformed on continued strength in their Flight Support Group, which supports aircraft operators with aftermarket parts and services (discussed in more detail below). American Tower, BYD, and Linde were also top-five contributors.

The largest absolute detractors by sector were IT, Communication Services, and Health Care. Alphabet (GOOGL) was weak due to their larger-than-expected capital expenditure outlook and a perceived widening in the range of outcomes for AI. However, we remain optimistic about Alphabet’s positioning in AI. Our optionality position in Global-e was a top detractor from performance. Because global consumer brands utilize Global-e’s platform to localize ecommerce for their customers in foreign markets, global trade politics and worsening consumer sentiment understandably weighed on the stock. Taiwan Semiconductor (TSM), Cadence, and Microchip (MCHP) rounded out the top-five absolute detractors in the quarter.

Outlook

In the first five years of investing at NZS, there were several extended periods in the market where correlations ran high, driven by monetary policy and thematic trends, including Covid, GLP-1s, and AI. These extreme swings presented challenges for investors seeking uncorrelated performance in a market driven by a small number of very large companies. We were pleased to hold our own throughout this period while being underweight the Magnificent 7, but the first quarter of our 6th year certainly looked quite different. Uncertainty and dispersion have increased across the market. While we do not welcome the turmoil that accompanies excessive levels of uncertainty, our investment framework is specifically constructed to enable us to traverse an unpredictable and volatile future. Against this background of uncertainty, markets have pulled back and valuations have become more compelling across many sectors in which we invest, notably for businesses with disruptive growth potential and/or adaptable resilience.

The current combination of market factors makes us more excited about investment opportunities than we have been in recent years. We have been actively adding capital to positions where we see compelling opportunity on a multi-year horizon, and we are finding those opportunities in both the resilient and optionality portions of the portfolio.

Portfolio Positioning

We incrementally took advantage of market volatility in the quarter to best position the portfolio for the future. Given the changing opportunity set, sizable additions were made to several of our existing positions, including resilient holdings Trane (TT), Cadence (CDNS), and Amphenol (APH), and optionality holdings Nvidia (NVDA), Atlassian (TEAM), and Procore (PCOR). We introduced Marvell (MRVL), Reddit (RDDT), and Lemonade (LMND) as new optionality positions. We exited Chart Industries (GTLS), Ansys (ANSS), and Cameco (CCJ), and we trimmed resilient positions that outperformed in the period.

It is important to note that movements in the portfolio throughout the quarter were enabled by actions we took in 2024. Throughout last year, we were intentional in ringfencing our AI exposure in the portfolio; we are positive on the long-term trajectory of AI but felt that valuations and fundamental expectations in certain businesses didn’t meet our long-term hurdle rate. That thinking drove sizable trims in positions across both resilience and optionality, including in aforementioned stocks like Trane, Amphenol, and Nvidia. Vigilance in markets where everything seems to be going right creates budget to take more risk in markets where there is more controversy, and we were happy to add back to positions with a more attractive starting point relative to where we saw them throughout last year.

Overall, our optionality weight increased in the quarter. Sector positioning relative to the index remained consistent with prior quarters, with the portfolio overweight IT and underweight Consumer, Financials, Energy, and Utilities. We found attractive opportunities amid the broad-based weakness in IT and, as a result, ended the quarter with an IT weight of about 43%, up from about 42% entering the year. Financials, Industrials, and Consumer Discretionary, the next three largest sector weights, combine for another 35% of the portfolio.

Focus Position: HEICO, “Your Airline’s Favorite Supplier”

The north star of our business and investment process is non-zero sumness. We spend our days in search of companies creating more value in their ecosystem than they take, as we believe these businesses tend to be both more resilient to disruption, as well as the source of disruption to profit-maximizing incumbents.

HEICO is a resilient holding and an excellent example of a high-NZS business within the zero-sum industry of aircraft aftermarket parts. HEICO supplies aftermarket parts and services to the airline industry, as well as electronic components to the broader aerospace and defense industry. Long-term operators Larry, Eric, and Victor Mendelson (who assumed control of HEICO in 1990 and transformed the business into what it is today) run the business in a hyper-decentralized fashion with a customer-centric and entrepreneurial culture.

The nature of the aerospace industry requires zero-risk tolerance, and the regulatory approval process for each part in an aircraft is severe. Yet, the cost to manufacture most individual parts is insignificant (i.e., a Boeing 737 MAX has hundreds of thousands of individual parts and a list price >$100M). As a result, parts manufacturers typically accrue slim margins on OEM parts sold to aircraft manufacturers and then monopolistically price gouge on aftermarket parts sold to airline operators over the 20- to 30-year life of an airliner, in many cases achieving gross margins that would make a software company jealous. HEICO’s portfolio of third-party aftermarket parts subsidiaries carefully identifies and reverse engineers each component (usually improving the part), secures FAA approval of these “PMA” parts as functionally equivalent replacements for the OEM parts, and sells them at a 30- 50% discount vs. the OEM supplier, saving customers hundreds of millions of dollars annually. The business’ decentralized structure and focus on aircraft operators allows them to be more flexible for customers, as opposed to OEM part manufacturers who must serve and allocate production between aircraft operators and the

companies building new aircraft/subcomponents. HEICO’s positive relationship with the FAA and impeccable track record of quality (have delivered nearly 90 million PMA parts without incurring any service bulletins or airworthiness directives, which address manufacturing defects and safety concerns) have made them the clear power-law leader in supplying third-party parts, a market that is growing at multiples above air passenger miles growth but is largely unpenetrated relative to the total commercial aftermarket spending by airlines.

We also believe HEICO’s status as the preferred acquirer in A&D is evidence of a non-zero-sum approach. They offer sellers a permanent home for their business, decentralized autonomy in decision-making once they join (the majority of subsidiaries are still entrepreneur-led), a no-cost synergy playbook, and the positive externalities that come with being under the HEICO umbrella. Uniquely, they even encourage the individuals selling to retain a minority stake in the profits of the new subsidiary, leaving the seller upside and aligning incentives. The result is HEICO’s acquisitions are typically directly negotiated, non-competitive, and at reasonable valuations. Aircraft operators are also supportive of HEICO’s M&A given the key role they play in offering high-quality parts at a significant discount.

The business made headlines last year when Berkshire Hathaway appeared on the shareholder list. When questioned as to whether the Mendelsons would sell the business to a like-minded organization like Berkshire, we were pleased to hear them express excitement in having Berkshire as a shareholder, but state that HEICO is “not interested in selling the business”. Given our view of the long runway for NZS-fueled growth in the sector and the quality of management and culture at HEICO, we certainly hope to be shareholders of the airlines’ favorite supplier for many years to come.

Team Update

We are thrilled to welcome Alexandra Pope to NZS as Head of Investor Relations. With NZS now in its sixth year, Alex will be instrumental in our efforts to advance communication with our valued clients and in cultivating existing and future relationships. She was most recently the Head of Capital Partnerships at Avala Global and previously held similar roles at Calixto Global Investors, Trian Partners, and DWM. Welcome to the team, Alex, we are fortunate to have you! Please do not hesitate to connect directly with Alex at Alexandra@NZSCapital.com.

Conclusion

We thank you for your continued support and confidence, and we look forward to sharing our progress in the months and years to come. As always, we are here for your questions, comments, thoughts, and ideas.

Sincerely,

The NZS Team

Footnote

[1] Performance greater than one year is annualized. Performance data shown represents past performance and is no guarantee of future results. Performance data shown represents the NZS Growth Equity Composite. Individual client returns may vary. Please see important disclosures at the end of this document. Gross returns reflect the deduction of administrative expenses but do not reflect the deduction of investment management fees. Net returns are calculated using the maximum investment management fee. The benchmark for the NZS Growth Equity composite is the Morningstar Global Target Market Exposure Index NR USD. Please see the disclosures for index and composite definitions. An investment cannot be made directly in an index. Returns reported reflect the net total return index, which reinvests dividends after the deduction of withholding taxes.

IMPORTANT DISCLOSURES

There is no guarantee that the information presented is accurate, complete, or timely, nor are there any warranties with regards to the results obtained from its use. Past performance is no guarantee of future results. Investing involves risk, including the possible loss of principal and fluctuation of value.

Net returns are calculated by subtracting the highest applicable management fee (.65% annually, or .1625% quarterly) from the gross return. Gross returns are inclusive of reinvestment of dividends or other earnings. Actual fees may vary depending on, among other things, the applicable fee schedule and portfolio size. The fees are available on request and may be found in Form ADV Part 2A. Index performance does not reflect the expenses of managing a portfolio as an index is unmanaged and not available for direct investment and include dividends after the deduction of withholding taxes.

Performance data shown represents the NZS Growth Equity Composite, Individual client returns may vary. Please refer to your individual capital account statements, as available, and direct any questions to NZS Capital at info@nzscapital.com.

The Index refers to the Morningstar Global Target Market Exposure Index. Index returns do not take into account the impact of management fees. One cannot invest directly in an index.

Any projections, market outlooks, or estimates in this presentation are forward-looking statements and are based upon certain assumptions. No forecasts can be guaranteed. Other events that were not taken into account may occur and may significantly affect the returns or performance. Any projections, outlooks, or assumptions should not be construed to be indicative of the actual events which will occur.

Opinions and examples are meant as an illustration of broader themes, are not an indication of trading intent, and are subject to change at any time due to changes in market or economic conditions. There is no guarantee that the information supplied is accurate, complete, or timely, nor are there any warranties with regards to the results obtained from its use.

Top contributors and detractors represent extracted performance of certain holdings for the period. Portfolio returns are discussed at the start of this publication. A full list of holdings and their returns is available to investors upon request.

An investor should not construe the contents of this newsletter as legal, tax, investment, or other advice. NZS Capital, LLC claims compliance with the Global Investment Performance Standards (GIPS®)

GIPS® is a registered trademark of the CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.

The NZS Growth Equity Composite includes all portfolios that invest primarily in equity and equity-related securities (including preference shares, warrants, participation notes and depositary receipts). The companies can be based anywhere in the world. The Portfolio Manager believes the companies and their shares will benefit significantly from innovation, particularly due to advances or improvements in technology, have attractive fundamentals, and offer good prospects for growth. The portfolios will typically hold 50-70 names.

Click to enlarge

Original Post

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.