In the first quarter of 2026, the NZS Growth Equity strategy experienced a net return of -8.91%, falling short of the Morningstar Global Target Market Exposure Index's -3.30%. This underperformance was primarily driven by a market downturn affecting growth stocks and a strategic overweight in software, compounded by rising concerns over AI's disruptive potential. Despite these challenges, the volatile market conditions created new opportunities for investment, particularly in growth equities that had become more attractively valued. Consequently, NZS Capital recalibrated its portfolio, focusing on software companies with high non-zero-sum characteristics and minimal 'seat risk' in vertical markets, while also increasing its allocation to the healthcare sector as fundamentals stabilized and valuations improved.

NZS Capital Navigates Volatile Markets with Strategic Portfolio Adjustments

In the initial quarter of 2026, the investment landscape proved challenging for the NZS Growth Equity strategy. The portfolio recorded a net return of -8.91%, notably below the Morningstar Global Target Market Exposure Index's -3.30% for the same period. This divergence in performance was largely attributed to a broad-based decline in equity markets, particularly impacting growth stocks, and an overconcentration in the software sector. These segments faced significant headwinds amid escalating uncertainties regarding inflation and interest rate expectations, along with pervasive fears of AI-driven disruption.

Despite the overall market weakness, some sectors within the portfolio demonstrated resilience. Materials and the semiconductor sub-sector, including companies like Lam Research (LRCX), ASML Holding (ASML), and Taiwan Semiconductor (TSM), made positive contributions to returns. These companies benefited from robust demand in AI infrastructure and memory, propelling semiconductor capital equipment spending. ARM Holdings (ARM) also emerged as a key contributor following the introduction of its in-house CPU design, which secured impressive revenue growth targets based on customer commitments. Linde PLC (LIN), a global leader in industrial gases, further bolstered the top-performing assets.

Conversely, Information Technology, Financials, and Healthcare were the primary detractors. Workday, Constellation Software, Atlassian, and other software holdings faced considerable pressure due to growing concerns about AI's potential to disrupt SaaS platforms and workforce efficiency. Gartner's disappointing 2026 outlook, exacerbated by AI disruption fears, mirrored the market's generalized apprehension towards software. Danaher (DHR) also experienced a notable decline.

In response to these market dynamics, NZS Capital actively adjusted its portfolio. The firm seized opportunities arising from the market sell-off, believing that certain growth equities were trading at their most attractive valuations in years. This led to a strategy of reallocating capital from resilient positions to more opportunistic ideas. A significant focus was placed on refining the software holdings. NZS Capital began incrementally adding to the sector in late February, prioritizing companies with high 'non-zero sumness' and low 'seat risk' in vertical markets. Examples include Tyler Technologies (TYL), Cadence (CDNS), Synopsys (SNPS), Axon (AXON), Toast (TOST), Roper (ROP), and Constellation Software (CNSWF), which primarily serve specific industries rather than broad enterprises. The firm also favors consumption-based pricing models, as seen with JFrog (FROG), Snowflake (SNOW), and Cloudflare (NET), as these are perceived to be less vulnerable to AI-driven labor displacement. Exposure to higher 'seat-risk' businesses, such as Workday (WDAY), Atlassian (TEAM), and Figma (FIG), was maintained at less than 3% of the total portfolio, with an eye towards their potential to adapt and introduce consumption-based revenue streams.

Healthcare also saw an increased weighting in the portfolio, as post-COVID fundamentals normalized and valuations became more appealing. New resilient positions were established in Stryker, and Intuitive Surgical (ISRG) was promoted from optional to resilient status. WuXi XDC was introduced as a new optionality position. These additions were partially financed by trimming Penumbra, which is undergoing acquisition by Boston Scientific (BSX).

This strategic rebalancing reflects NZS Capital's commitment to navigating an evolving market landscape by identifying undervalued assets and adapting its investment framework to emerging technological shifts.

The recent market volatility, particularly the widespread sell-off in software equities due to AI disruption fears, presents a fascinating case study in investor sentiment and strategic adaptation. While immediate returns might seem discouraging, NZS Capital's approach of discerning 'flowers from weeds' within the software sector and emphasizing 'non-zero sumness' offers a valuable lesson. It highlights the importance of looking beyond immediate panic and identifying companies that genuinely create enduring value, regardless of technological shifts. This strategic pivot towards vertical market software with lower 'seat risk' and consumption-based models suggests a forward-thinking perspective that could ultimately reward long-term investors. The firm's optimistic stance, advocating that 'the future belongs to optimists,' serves as a potent reminder for investors to maintain a long-term vision and seek out innovation and adaptability in an ever-changing world.