How an Elon Musk trait is key to Zevenbergen Capital’s strategy, success

Tesla
CEO Elon Musk
REUTERS/Beck
Diefenbach

• Tesla
  CEO Elon Musk is an example of a chief executive who helped
  build his firm from the ground up and has big ambitions for its
  growth.
• Such founders are a huge draw for Zevenbergen Capital
  Investments, a Seattle-based firm that’s also run by a founding
  CEO.
• The Zevenbergen Genea Fund has surged 44% this year,
  outranked only by one fund in Morningstar’s universe of US
  equity funds. 
• Of visionary founder/CEOs, a Zevenbergen portfolio
  manager said: “They’re willing to take risk that a rent-an-MBA
  executive or a successor manager may not be willing
  to.”

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It’s almost impossible to talk about Tesla without mentioning its
CEO Elon
Musk. 

Even before his high-profile attempt to take the
electric-car maker private, Tesla’s brand identity was
inextricably linked to the entrepreneur who had the vision for
the company and is still firmly in the driver’s seat. 

This founder/CEO trait is shared by Jeff Bezos of Amazon
and Reed Hastings of Netflix.
And it’s a cornerstone of the investing strategy that has helped
Zevenbergen Capital
Investments produce one of the best-performing equity
portfolios of this year.

The Zevenbergen Genea Fund has earned a 44% year-to-date return,
and only one US equity fund in Morningstar’s
universe boasted a stronger performance as of Thursday. It
aims to invest in large, disruptive companies at their early
stages of growth. Its performance easily trounces the 5%
average scored by all US funds, the S&P 500’s 8.8% return,
and the Russell 3000’s 10% gain, even as
fewer mutual funds succeed at beating their benchmarks this
year compared to 2017. 

The Seattle-based firm is a poster child of its own strategy.
Nancy Zevenbergen founded the firm in 1987 and still sits on the
six-person investment team.

“It’s hard to overstate the importance of people at Zevenbergen
Capital, but also as an investment approach,” Anthony Zackery,
one of the firm’s portfolio managers, said. 

“And the founder/CEOs? We prefer them because they have an
appetite to think longer-term and they’re willing to take risk
that a rent-an-MBA executive or a successor manager may not be
willing to.”

Despite Musk’s recent run-ins with investors, reporters, and

regulators, Zevenbergen Capital is standing by Tesla for
the long haul; it was the Genea fund’s third-largest holding as
of the most recent regulatory disclosure on June 30.

“We still believe in what they’re doing,” Zackery told Business
Insider on Wednesday. “The company has executed on what it
set out to do, maybe not always when they set out to.” 

Other examples of founder-led companies abound in the
Zevenebergen Genea portfolio including Amazon, its top holding,
and Netflix. 

Bezos and Hastings “recognized where the world was moving early
and were not afraid to invest aggressively in building out the
infrastructure in the case of Amazon
or content in the case of Netflix,”
Joseph Dennison, a Zevenbergen Capital portfolio manager,
said. 

Still fired up

There are founders of smaller companies who also attracted
Zevenbergen’s investor dollars. They include Chip Paucek, the CEO
and co-founder of 2U, a
$287 million company that helps colleges offer online-degree
programs. Its stock has soared 36% this year and more than 500%
since the company went public in 2014.

Paucek recognized early that the internet can create a better
experience for graduate educators, and “displays a rare
passion for the education space and a business he has built
essentially from scratch,” Dennison said.

Another example is Michael Hsing, the co-founder of Monolithic
Power Systems, a semiconductor company.  

“He doesn’t have to work another day in his life, but when we
asked him ‘what’s your future with the company,’ he’s still fired
up,” Zackery said. “He’s still really excited about what’s going
to happen in the next 5-10 years, and that shows the importance
or the value of these founder/CEOs who have long-term visions.”

It’s about big risk and big reward

The faith that entrepreneurs display in their companies also
informs Zevenberg Capital’s conviction in active management, even
though investor dollars continue to flood the passive space.

According to a
Moody’s report released earlier in August, investors
have pulled more money from actively-managed stock funds at the
fastest year-to-date pace on record. And, Goldman Sachs found
that through August 15, $78 billion flowed into US equity
exchange-traded funds and passive mutual funds, while $84 billion
was
withdrawn from US active mutual funds.

But like active management, building a successful company is
about having the nerve to take big swings. 

“Would Jeff Bezos, Bill Gates, and Warren Buffett be three of the
richest people on earth if they’d just owned S&P 500 ETFs or
index funds?” Zackery asked, responding in the negative.

“They assumed significant risk on endeavours they had significant
conviction in, and that’s our approach to active
investing.” 

It’s worth mentioning that although Buffett has been
a huge advocate of passive S&P 500 funds for the everyday
investor, his company, Berkshire
Hathaway, built its fortunes by investing in specific,
successful companies.  

At the end of the day, company fundamentals still matter,
especially if an investor wants to avoid the trap of a cult of
personality.

The key thing Zevenbergen considers on a company’s books is its
revenue growth. That’s because it’s as clean a read as one can
get on customer demand, pricing, and market-share opportunities.
A 15% growth rate is the firm’s typical hurdle.

“Our product is an unapologetic mix of art and science,” Dennison
said.