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Expensive Traders and Pals,
The NZS Progress Fairness technique (“technique” or “portfolio”) had a gross return of +4.09% and internet return of +3.93% for the third quarter as in comparison with +7.60% for the Morningstar International Goal Market Publicity Index (the “Index”) over the identical interval. Yr-to-date, the technique has generated a gross return of +20.18% and a internet return of +19.60%, versus +18.26% for the Index.
*Since inception: January 1, 2020; returns as of September 30, 2025.
Efficiency Overview
The rally in fairness markets that started within the second quarter of 2025 continued into the third quarter. The technique had optimistic returns however did not sustain with the index.
Within the quarter, Data Expertise, Communication Companies, and Industrials contributed probably the most to absolute returns. Specifically, Alphabet’s (GOOG)(GOOGL) a number of re-rated greater after a optimistic ruling within the federal antitrust case in opposition to the corporate. Alphabet additionally benefited from the market’s rising appreciation of their sturdy place in AI, together with their internally developed TPU processors and the potential for Gemini to energy different AI brokers. Lam Analysis (LRCX) and ASML Holding (ASML) benefited from elevated enthusiasm round reminiscence spending tied to AI and additional confidence in Intel’s (INTC) capacity to maintain CapEx following a number of fundraising bulletins. Taiwan Semiconductor (TSM) and United Leases (URI) rounded out the highest 5 contributors within the quarter.
Financials, Well being Care, and Client Discretionary detracted probably the most from the portfolio’s absolute returns. Constellation Software program’s (OTCPK:CNSWF) underperformance within the quarter was partially resulting from founder Mark Leonard unexpectedly stepping down from his place as CEO resulting from well being causes. Fiserv’s (FI) a number of took one other hit after the corporate diminished their natural progress outlook for the yr, citing macro situations and a few delays in new product uptake and buyer implementations. Roper (ROP), Chipotle (CMG), and American Tower (AMT) had been additionally among the many top-five detractors.
For the year-to-date interval ending September thirtieth, the top-five absolute contributors to returns had been Amphenol (APH), Lam Analysis, Alphabet, Taiwan Semiconductor, and ASML Holding. The highest-five absolute detractors from year-to-date returns had been Fiserv, Chipotle, Danaher (DHR), Atlassian (TEAM), and Constellation Software program.
Portfolio Positioning
Given the altering alternative set, identify turnover was elevated within the quarter. Workday was added again to the portfolio as a resilient place, Gartner was added as an optionality place, and materials additions had been made to Constellation Software program and Roper, as we consider the “AI disruption” narratives surrounding these companies have doubtless been overplayed. New optionality positions had been additionally initiated in Synopsys (SNPS), Monolithic Energy (MPWR), ServiceNow (NOW), Figma (FIG), and monday.com (MNDY). We exited NVIDIA (NVDA), an funding held within the portfolio since inception, late within the quarter in favor of different names throughout the AI ecosystem (see “Widening vary of outcomes” under). Likewise, Microchip (MCHP), Autodesk (ADSK), CyberArk (CYBR), ON Semiconductor (ON), and Thor (THO) had been offered from the portfolio.
Exiting the third quarter, the technique’s resilient weight was ~59%, up from ~57% on the finish of the second quarter. Regardless of power in IT, the portfolio’s IT obese declined modestly within the quarter resulting from lively portfolio selections. We stay underweight Client, Financials, and Vitality.
Widening vary of outcomes
Technological progress is probably finest imagined as a collection of accelerating punctuated equilibria. As we take into consideration platform development over the a long time, every successive part shift follows extra shortly on the heels of its predecessor and, importantly, tends to have the next magnitude impact on the worldwide financial system. As a sanity examine, we are able to merely mirror on the timeline over the previous 60-odd years as we have moved from the mainframe to shopper/server, the web, cloud, smartphone, and now, Synthetic Intelligence. Tobi Lütke, the founder and CEO of Shopify, just lately made the next statement:
“I believe people are extremely good at transferring a goalpost. There’s some expectation-related model of hedonistic treadmill that we typically discuss, which simply strikes ahead. We regulate to our circumstances extremely shortly. Folks accomplish their targets and we by no means cease to consider it. I believe it is actually, actually arduous for us to evaluate our personal surroundings and what’s occurring round us. Once more, the Turing check was the most effective takes we have had. Now, individuals criticize as a result of it isn’t ok — I suppose it wasn’t — nevertheless it was the perfect check that individuals usually check with about determining if one thing is clever. And we handed it. There have been no parades. No front-page information. No ticker tape parades. We must always have.”
As we enter the age of AI, we’re confronted with the most important platform shift but. Certainly, AI threatens the enterprise fashions of the most important corporations on the planet whereas promising superb advances in human productiveness. Throughout instances like these, it’s tough to examine the sheer magnitude and scope of impression such a expertise may need over the approaching a long time. The very nature of those adjustments additionally fuels hypothesis about corporations that appear prone to reap the best advantages from the approaching upheaval. It could actually make our jobs as lively managers each thrilling and unnerving. Within the face of such overwhelming potential, one fact stays sure: part shifts inevitably render those that maintain on to tight predictions, whether or not optimistic or pessimistic, woefully shortsighted.
Our job throughout instances like these, as we see it by the lens of advanced adaptive methods, is to try to take away slender predictions from the portfolio. The truth is at all times the identical : Nobody – be they an govt, knowledgeable, or investor – is aware of the long run. The perfect we are able to do is to establish when a prediction has turn out to be dependent upon the alignment of too many variables and transfer the portfolio away from these slender predictions. We proceed to search out nice corporations, the place one could make broad predictions about their future success, buying and selling at enticing valuations. Within the present market surroundings, these companies have usually averted being swept up within the hype round AI.
How can we establish slender predictions? We search for indicators of euphoric projections. We pay attention to the propensity to fund these projections by more and more speculative conduct. We keep vigilant on valuation. As we take a look at what’s driving the market at this time, it seems a good portion is reliant upon more and more slender predictions. In consequence, we proceed to adapt the portfolio in measured steps to defy a slender worldview and be nicely positioned for achievement in a wider vary of future outcomes.
Focus Place: SailPoint, Inc. (SAIL)
Earlier this yr, researchers found a zero-click vulnerability, “EchoLeak”, in Microsoft 365 Copilot, which represented the primary recognized zero-click assault on an AI agent. On this vulnerability, an attacker might ship a seemingly regular e mail containing hidden directions that the AI assistant would course of when the person later requested Copilot a query about mentioned e mail, ensuing within the person unknowingly exfiltrating delicate knowledge to the attacker’s server. Thus started the AI period of cybersecurity, the place AI brokers are simply as weak to assaults as office workers.
SailPoint is a pioneer in id governance and administration (IGA), which includes managing and securing dynamic entry to essential purposes and knowledge for each enterprise id. This functionality requires deep, broad controls for correct entry authorization, automating features like account provisioning, and entry certification throughout all identities. Id governance is important for operationalizing zero-trust safety by serving to corporations obtain dynamic real-time safety and stop individuals from sustaining everlasting, exploitable, high-level permissions and entry.
The NZS group has had an extended historical past investing in all facets of the zero-trust safety panorama – from Safe Entry Service Edge (SASE), to end-point administration and safety, and id safety (e.g., IGA, privileged entry administration [PAM], and id and entry administration [IAM]) – and we had been buyers in SailPoint till the corporate was taken non-public by Thoma Bravo in 2022. We had been happy to see SailPoint relaunch as a public entity this yr. Many enterprises are nonetheless shifting away from the previous “citadel and moat” safety of the final decade to zero-trust safety, and the emergence of agentic AI is dramatically increasing the full addressable marketplace for id, particularly IGA. The pattern is probably not remoted to safety software program, as AI brokers might increase the general software program market reasonably than shrink it (in distinction to the market consensus). This view, partly, informs the addition of a number of software program shares to the portfolio, as referenced in Portfolio Positioning above.
Up till just lately when discussing id, we had been virtually completely speaking about human identities – workers in gross sales, IT, finance, and so on., in addition to the non- worker workforce of contractors, consultants, and third-party suppliers/distributors who’ve entry to methods /knowledge – who’re weak to assaults like phishing, malware, and ransomware. Within the new world of AI, nevertheless, knowledge and methods are additionally being accessed and manipulated by digital entities. Because the zero-click assault above highlights, they’re no much less weak to exploitation. Thus, by way of safety, these non-human entities needs to be handled as equal to their human counterparts.
We personal SailPoint as an optionality place as a result of this new TAM of machine identities and complicated AI brokers is each large and extremely tough to handle. In corporations which have begun to undertake AI, we’re already seeing non-human accounts outnumber their human counterparts. In some instances, these machine identities outnumber human identities 10 and even 20 to 1, which means that the TAM for IGA is multiples bigger on the planet of AI. Moreover, these non-human identities are usually very activity particular, making them short-lived and continuously being provisioned up and down each second of the day. These dynamics make governance extremely tough and essential within the grand scheme of safety.
With SailPoint solely just lately growing their monetization framework for non-human identities, we see an ample runway for top-line progress coupled with continued margin growth as this new vertical scales. Based mostly on our analysis, we consider that these situations might allow SailPoint to proceed their sturdy progress whereas probably enhancing their non-GAAP working margins from roughly 17% at this time to a determine nearer to best-in-class software program friends that may have margins >30%.
Conclusion
Thanks in your continued belief and engagement with NZS Capital. We stay enthusiastic in regards to the alternatives forward. As at all times, we welcome dialogue and admire your perspective.
The NZS Crew
Unique Put up
Editor’s Word: The abstract bullets for this text had been chosen by Looking for Alpha editors.
