Dear Investors and Friends,
The NZS Growth Equity strategy (“strategy” or “portfolio”) had a gross return of +24.96% and a net return of +24.76% for the second quarter as compared to +14.79% for the Morningstar Global Target Market Exposure Index (the “Index”) over the same period. Year-to-date, the strategy generated a gross return of +14.03% and a net return of +13.63%, versus +11.00% for the Index.
*Since inception: January 1, 2020; returns as of June 30, 2026. One cannot invest directly in an index.
Performance Overview
Equity markets were strong in the second quarter of 2026. As we noted in our last quarterly letter, weakness in the first quarter provided some of the most attractive valuations in growth equities we had seen in some time. That starting point met seemingly insatiable demand for AI infrastructure, progress towards geopolitical stabilization, and generally positive earnings reports, which drove strength in the second quarter. The portfolio outperformed the index, primarily due to our overweight in Semiconductors, stock selection in areas like Software and Industrials, and our zero weight to Energy. The resilient and optional portions of the portfolio both carried their respective weight in terms of contribution to returns and outperformed.
Information Technology contributed the most to absolute returns, though Industrials and Communication Services also outperformed. Each of the top-five individual contributors to absolute returns were in the Semiconductor industry and, more importantly, in the AI infrastructure ecosystem. In addition to the improving outlook reflected in chips broadly, ARM Holdings (ARM) shares were further lifted by the company’s announced plan to develop its first in-house chip, a CPU for AI workloads. Lam Research (LRCX), which is a critical supplier of etching equipment used in the production of semiconductors, saw strengthening tailwinds to their outlook as some key chip manufacturing customers publicly committed to higher capital expenditures to expand capacity. ASML Holdings (ASML), Taiwan Semiconductor (TSM), and Marvell (MRVL) were also top-five contributors.
Only Real Estate and Healthcare contributed negatively to absolute returns, but Materials and Financials lagged. Intuitive Surgical (ISRG) was the top individual detractor to absolute returns in the quarter. While fundamentals remain solid for Intuitive Surgical, the stock’s multiple has not been immune from the broad de-rating in “quality growth” stocks we’ve seen outside of the AI ecosystem (see discussion below). Nintendo (NTDOY) was weak in the period after issuing forward guidance that disappointed due to the increasing costs of memory chips going into their gaming hardware. The other top-five detractors were Tyler Technologies (TYL), ON Semiconductor (ON), and CoStar Group (CSGP).
Portfolio Positioning
Over the quarter, the team actively added net basis points to Information Technology, Healthcare, and Communication Services and reduced exposure to Consumer Discretionary, Real Estate, and Financials. The portfolio remains overweight Information Technology, Industrials, and Healthcare.
Those familiar with our strategy may know a key part of our process concerns reassessment of optional positions that outperform their way into the “middle” of the portfolio. If the team determines that the range of outcomes has narrowed enough for promotion to a resilient position, we add capital; otherwise, we trim the position back to optionality. While we might leave incremental upside on the table, we believe this strict reduction in overactive stocks with wide ranging outcomes allows us to continue benefiting from further upside without letting risk run. This quarter, the portfolio had five positions that worked their way into the middle – a few even ran all the way through the middle in a single day. This situation is unusual and perhaps symptomatic of the volatility in the market. In the cases of ARM Holdings, Marvell, Lattice Semiconductor (LSCC), and Snowflake (SNOW), we trimmed the positions back to optionality. For example, Marvell rallied significantly after Jensen Huang extolled the company as “the next trillion-dollar company” on stage at Computex in Taiwan. While we agree it’s within the range of outcomes, in our view, Jensen’s statement only resulted in the market applying a higher valuation to a stock whose fundamental range of outcomes remained unchanged; thus, we trimmed Marvell. Quanta Services (PWR) also ran into the middle during the quarter, and we ultimately decided to add capital and promote the position to resilient, reflecting our view that the fundamental range of outcomes for Quanta’s business – a US provider of craft labor for electricity generation, transmission, and distribution infrastructure – has continued to narrow.
Elsewhere, NVIDIA (NVDA) was added back to the portfolio as a resilient position late in the quarter. NVIDIA had been a long-time holding in the portfolio before we exited in the third quarter of 2025. The stock has since lagged the broad surge in the AI semiconductor ecosystem as the market began contemplating budding risks to the GPU’s market share in AI compute. This scenario was our primary concern when we exited the position, but we now think the lowered valuation more than compensates for this type of risk. Further, NVIDIA’s growth relative to competitors indicates the GPU is actually taking share at present. Other new additions to the portfolio were optionality positions in ON Semiconductor, Descartes (DSGX), CATL, CrowdStrike (CRWD), Datadog (DDOG), Lumentum (LITE), and Axogen (AXGN). We also added materially to ASML, Amphenol (APH), Intuitive Surgical, and Axon.
Healthcare: Are investors going homeopathic?
A trend we’ve been discussing is the steep derating in what was previously considered the “quality growth” cohort. This group has historically traded at premium multiples for perceived uncorrelated durable growth, strong returns on capital, and high terminal value. Businesses within this cohort that haven’t been deemed “AI beneficiaries”, however, have seen their valuations cut significantly. Of course, part of this broad derating is simply tied to higher interest rate expectations weighing on valuations. But, given that higher interest rate expectations did not dampen all corners of the market (e.g., AI), it seems likely to us that there is another element at play – namely, capital being reallocated from quality growth to feed the AI behemoth. Some days you can almost hear the torrential rush of dollar bills. Why invest in a company that aims to compound earnings in the low-to-mid double digits per year when you can invest in companies whose stocks are going up 10% a week?! We’re of course being provocative with that statement and, to be fair, many of these left-for-dead compounders have simply not provided much earnings growth to compound (e.g., we’ve been waiting for a broad industrial recovery for years at this point). Further, AI has widened the perceived range of outcomes for many sectors – software, marketplaces, IT services, and insurance brokers, to name a few. In sum, regardless of whether we agree or disagree with the market, in most cases we understand the factors underlying the capital influx/efflux.
With that preamble, one sector that we’ve found increasingly attractive is Healthcare. Following the prolonged post-pandemic hangover, fundamentals have turned the corner and returned to growth. We also wonder if disruptive forces are actually more likely to have positive impacts on long-term industry growth. As an example, certain markets in the sector may be negatively impacted by the adoption of GLP-1s, but perhaps a larger number of markets stand to profit. The orthopedics industry could benefit at the margin from increased longevity and/or more patients meeting strict BMI cutoffs that many surgeons use for a hip or knee replacement. We are also intrigued by the longer-term potential for AI to assist in the front-end of the drug discovery process, which could improve trial success rates and lead to more drugs reaching production. This scenario would benefit suppliers of capital equipment, consumables, or services in drug manufacturing. The U.S. BIOSECURE Act was signed into law in late 2025 (with bipartisan support) and prohibits federal agencies and recipients of federal funds from procuring or using biotechnology equipment or services provided by designated “companies of concern”, primarily targeting China. In theory, this legislation could drive a period of increased U.S. demand for capital equipment and drug manufacturing services. Lastly, the Healthcare sector is somewhat uniquely untethered to the future of AI infrastructure capex – something that can no longer be said for anything closely tied to even broad macroeconomic outlook. We think this distinction makes the sector valuable from a portfolio construction perspective.
Given this combination of improving fundamentals, the potential for emerging tailwinds in the industry, and the potential portfolio construction benefits of including a sector uncorrelated to AI capex spending, we’ve been surprised by the extent of multiple compression in the Healthcare sector. Given this context, last quarter we incrementally added net capital to some of our existing holdings in the sector, including Intuitive Surgical, HeartFlow (HTFL), and Stryker (SYK), and we introduced Axogen and WuXi XDC (WXXWY) as optionality positions. Axogen provides nerve grafts used for peripheral nerve repair. Following BLA approval of their Avance nerve allograft and related positive momentum in insurance coverage, we think Axogen is highly asymmetric to a future where nerve repair becomes standard-of-care, including for patients undergoing a mastectomy or prostatectomy (PSA to look into Axogen’s tech if you or someone you know could benefit). WuXi XDC is a China-based Contract Research, Development, and Manufacturing Organization (CRDMO) focused on bioconjugates, an exciting research area that is rapidly developing new therapies. The aforementioned U.S. BIOSECURE Act provided us an attractive entry point into this rapidly growing business and will also keep a lid on position size given the range of outcomes. In short, we think a modestly higher dose of this “quality growth” sector is good for our portfolio’s health, and we’ve been incrementally expressing this view.
Team Update
We are excited to welcome Cecile Stone to NZS as an Investment Operations Associate. Cecile recently graduated from the University of Colorado Boulder Leeds School of Business and will support Nick Perez, our Director of Operations. Welcome to the team, Cecile!
Conclusion
Thank you to our investors for your continued trust, support, and insights. Interacting with our partners is a valuable part of our process. Please reach out to Alexandra Pope ([email protected]) if you would like to connect and, as always, we appreciate any questions, comments, or ideas.
The NZS Team
Original Post
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
