Curious about Zevenbergen Capital’s investment perspective? Check out an excerpt from our quarterly client letter for our thoughts on 4Q21.
Zevenbergen Capital
4Q21 Equity Review & Perspective
Hat Trick: The U.S. stock market accomplished a rare feat in 2021, threading together three calendar years of double-digit gains. At first glance, it appeared to be cause for celebration. Under the surface, the effect was more sobering. The Russell 3000® Growth Index’s rise was dominated (for the quarter as well as year) by a short-list of mega cap technology companies deemed defensive “security blankets”, as risk appetite ebbed amid a loop of anxieties (inflation, coronavirus variants, interest rates) that sapped investor enthusiasm. Market cap concentration created a very challenging backdrop for active managers, with more than 85% underperforming for 2021. (Price declines were often severe outside of the largest ten U.S. stocks.) High beta/growth issues were shed precipitously after the Federal Reserve set the stage for earlier rate hikes, contributing to an outright bear market for many high growth companies. The reversal of fortune was indiscriminate, a reaction to the framework that higher rates impact growth companies disproportionately. Valuations indeed contracted; however, companies that offer a rare combination of predictable revenue, growth and high gross margin should deserve a premium, as opposed to those burning cash with widening losses. Declines, pullbacks, corrections, bear markets: whatever the definition, the direction is never as pleasant as a rally. While resets are painful, it’s not the first time ZCI’s growth strategies have experienced a drawdown. There have been more than 70 market “panic attacks” since the beginning of the bull market in 2009 (yes, really) and each turned out to be buying opportunities. There may be “taper turbulence” to experience, but as always, we will be focusing on what lies ahead.
What got you here won’t get you there? The sentiment change for high growth/volatility/valuation investments was abrupt, leading investors to believe that a return to 2020 is unlikely. It’s easy to blame high valuation as rationale for selling, but that may be shortsighted for capturing future growth prospects. ZCI’s investment decisions are not based on a single number or metric alone. Profitable business models, size of opportunity, durability of growth and capable managements will always be what matter most. We can contend with endless market variables, but in general, these have little impact on how high-quality companies execute over the long term. The pandemic may have left a permanent mark on many sectors of the economy, but at the same time, it created a generational moment that accelerated digital conversion across industries. The secular trends that made digital an increasingly important part of the economy are still in place and nothing has dislodged the need for transformation that increases businesses flexibility. Companies that solve problems, improve life/work/industry and reduce enterprise or consumer friction will continue to be the basis for our vision of growth discovery in 2022 and beyond.