Despite a flat benchmark return during November (-0.2%), we saw a sharp rise in volatility and a rotation from Growth (stocks) to Value (stocks). Growth managers underperformed and returns are back to levels seen a few months ago.
Although periods of volatility are inevitable for concentrated growth investors, they can feel uncomfortable. If we look through the volatility to our underlying process, the quality of our founders, the expanding moats of our businesses and the margin of safety in each position, it is easier to shift focus back to the long-term. Since inception of the Fund in November 2022, this process of aligning with what we view as the strongest founders building the strongest businesses and purchasing them at attractive prices has generated net returns of 30.8% pa.
At the heart of this process is the quality of our founders and their track record of bouncing back stronger after each period of adversity.
We are in a unique position to gather data here; the median tenure of a CEO globally is ~4.8 years – they’ve almost run their business through one economic cycle. The median tenure of our founder-CEOs in the Fund is ~19.0 years – the same founder-CEO, running the same business through many economic cycles. The circumstances change but it trends to a ‘rinse and repeat’ of the same exceptional execution our Fund’s founder-CEOs have proven out over the past 10 to 30 years.
The chart below speaks to this. It is a custom index showing the long-term investment performance of our current Quartile 1 Founders. These are our 80 highest quality founders globally out of a universe of ~800 founder-led stocks. All stocks in our portfolio must be drawn from this Quartile 1 Founders Index. If we zoom out, we see that although each period of adversity felt consequential at the time it ended up becoming more of a speed bump along the way – our founders bounce back again and again and again.
Our Founders – a track record of surviving and thriving through volatility
Source: Ziller Quartile 1 Founder Index (AUD), weekly prices from LSEG
With this in mind, volatility can become an asset or opportunity. During late 2022, we saw the largest market dislocation for growth stocks of the past decade, Nvidia and Palantir were down ~66% and ~82%, respectively. Since then, less than three years later, they are up ~16x and ~25x, respectively. Having the confidence to lean into opportunities volatility presents can offer compelling returns over a relatively short period. Our work on our founders and the businesses they are building allows us to be ready for these opportunities.
Since the beginning of November our TRR, the Total Rate of Return we estimate for the portfolio over the next 5 years, has increased by 3.2% pa and is >20% pa¹, we have also leaned into a few portfolio holdings where valuations have presented compelling opportunities. Of course, we may see further volatility over the short and medium term, but we are optimistic about the setup the current dislocation has presented for portfolio returns over the next 5 years.
¹Not a guarantee or promise of future returns.
Disclaimer: Please note that these are the views of the writer and not necessarily the views of Ziller. This article does not take into account your investment objectives, particular needs or financial situation. Some small changes were made to this article, based on updated information.