The initial threat of US tariffs on trading partners has led to increased volatility, sparking a near-bear market and, with the recent “pause” in tariffs, a rebound of equal size. Given these dramatic events—which threw a damper on an otherwise healthy underlying economy—we thought it would be helpful to use this blog post to provide some perspective on these events and explain how we are navigating through them.
As we explain in detail below, in general, we have confidence in the strength and profile of our portfolio holdings as it relates to tariff impacts. While most businesses will see some impact from a slower economy, we own companies that benefit from strong leadership positions, competitive advantages, and secular drivers, such as new innovations—and thus these companies are potentially better positioned to sustain above-average growth during this volatile period. That said, please know that we are closely monitoring events, leaning into quality companies, and making adjustments where needed to mitigate risks in a prudent fashion.
At a deeper level, we are analyzing their potential impact on portfolio holdings. While we acknowledge the uncertainty of the situation and its negative impact on the economy, we believe the type of companies we own in portfolios provides some mitigation of the impacts of tariffs. Specifically, we believe many portfolio holdings are well-positioned because of the following characteristics:
One of our core investment principles is to focus on businesses benefiting from secular trends (e.g., cloud computing, cybersecurity, AI, healthcare innovations, and many others). In many cases these tailwinds can continue to drive growth for companies even as overall economic growth slows. We typically own companies that pioneer many of these secular trends or shifts with innovations that provide an ability to grow despite headwinds, such as next-gen products or services. We believe each company in the portfolio benefits from a combination of multi-year secular trends and important innovations—growth drivers that are less reliant on the general economy—that can sustain growth over coming years.
Approximately 75-80% of the holdings in our portfolios are companies whose products or services are essential to their customers—often viewed as “must have” solutions versus “nice to have.” Examples include Microsoft and ServiceNow in cloud computing or our healthcare holdings, such as Intuitive Surgical or Krystal Biotech, where demand for the treatments they offer is fairly inelastic (as exemplified in the case of Krystal’s FDA-approved treatment for a deadly skin disease). We appreciate that consumers and businesses have discretion over much of what they purchase, so we have strong preference for companies that innovate offerings that are viewed as critically important to their customers.
Approximately 75% of the companies we own have pricing power—the ability to pass on higher costs or adjust their pricing structures to protect their profitability. This characteristic helps preserve margins if tariffs lead to increased input or supply chain expenses. One of the significant benefits of important innovations is that they often confer significant advantages and differentiation versus competitors, providing a foundation for pricing power. Examples of companies that have shown an ability to flex their pricing power include Netflix (the “new cable bill”), HubSpot (for its leading marketing automation platform), Procept BioRobotics (for its updated surgical robotic platform for treating enlarged prostates), and Amazon.com (for its Prime subscription service).
We own a number of holdings that are experiencing durable demand because their offerings can be considered “imperative” in the current environment. Clear-cut examples include cybersecurity, AI technology, and public safety technology. For cybersecurity, it can be argued that the current environment of high geopolitical tension and cyber threats should spur companies of all sizes to prioritize spending on cybersecurity. We own leading cybersecurity companies in the portfolio, including CyberArk, which is the standout leader in privileged access and identity management. Regarding AI, companies cannot forego their investment in embracing AI technologies. We own several of the leading technology companies, such as ServiceNow, Microsoft, and Amazon.com’s AWS, that enable companies to deploy AI to re-architect their business processes, gain efficiencies, and stay competitive. For public safety technology, Axon’s portfolio and bundle of less-lethal weapons (Taser), body and car cameras, and cloud offerings are directly tied to robust and steady police budgets, a growing imperative for many cities. Overall, we calculate that about 40% of our portfolio holdings represent leading companies that benefit from the “imperative demand” dynamic.
While no business is entirely immune to broader economic or market pressures, the majority of our companies held in the portfolio have durable, recurring-revenue business models that tend to be less sensitive to dips in consumer or business spending. We calculate that about 70% of our portfolio companies have a significant component of their business coming from recurring sources, such as subscription business models (e.g., cloud services, subscription content), recurring treatments (life-saving biotech treatments), or utility-like models (e.g., Microsoft 365 tech bundles). Furthermore, we are acutely aware of the potential for supply chain disruption or higher costs from Asian/China-based sources if high tariffs are implemented. Our assessment of supply chain risk reveals a generally lower risk of disruption for our companies, with the majority of portfolio holdings having no or low risk of supply chain issues. For example, we actively avoided investing in Apple (despite our love for the brand) due to its reliance on China for the bulk of its manufacturing base.
We remain at the helm and are navigating these events in a thoughtful and prudent fashion. As you might expect, we recommend staying the course as history has shown that markets eventually recover from various economic and geopolitical events—and that reacting to them out of fear can lead to sub-optimal outcomes. We remain confident in our portfolios because the holdings are supported by long‑term secular growth drivers, in many cases have mission‑critical products, often exhibit pricing power, and predominantly offer recurring revenue models with limited supply‑chain exposure. Resilience provides the umbrella for riding through storms.