THREE CORE IDEAS DEFINE OUR APPROACH
NZS believes companies creating benefits for all constituents — shareholders, employees, customers, society and the planet — will be long-term winners.
The world is governed by complex adaptive systems that teach us to expect the unexpected, make broad predictions and focus on fundamental risk. Investment approaches that rely on narrow predictions, high conviction, reversion to the mean, moats and other such tools do not appreciate the pace of disruption. Successful investors must truly understand a company’s adaptability while avoiding narrow predictions.
Portfolio construction addresses uncertainty by distinguishing between Resilient and Optional positions. Resilient positions are larger and require fewer and less bold predictions to be successful. Optionality positions are smaller, offer more asymmetry of returns but require bolder (and thus less accurate) predictions.
These two sleeves provide exposure to the opportunities in the market but allows for more sensible portfolio constructions. In short, portfolio managers must think about being wrong as deeply as about being right.
For more information on our investment philosophy, please see our whitepaper Complexity Investing.
Portfolio Construction
Our portfolio construction process of Resilience and Optionality is designed to eliminate bias and match position size with our assessment of the real underlying risk of a business and its range of outcomes.
Resilient names are highly adaptive in the face of disruption. These are typically stable, long-term investments. They have a lower risk of disruption and are exposed to a narrower range of predicted outcomes.
Optionality positions comprise of small positions, each with the potential to make a meaningful impact on return. Portfolios will have many more of these stocks. Optionality investments rely on more precise predictions with a wider range of outcomes.
Source: NZS. Figure is used for illustrative and discussion purposes only.