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As we approach the end of a year defined by awe-inspiring innovation and thoughtful reflection, we are excited about the transformative trends that are opening new opportunities for our portfolio businesses and the markets they serve. In this rapidly changing world, our six investment criteria remain unchanged, enabling us to explore these new frontiers with a discipline grounded in our three decades of experience.
As we approach the end of a year defined by awe-inspiring innovation and thoughtful reflection, we stand at the brink of extraordinary transformation, driven by unprecedented advances in technology, shifts in global governance, and changes in consumer behavior.
But as we look ahead, we must also acknowledge the turbulence, distortion, and doubt that has shaped our recent journey. Since the market crash in late 2021, rising interest rates, geopolitical tensions, and an increasingly complex macroeconomic environment have tested investors’ resilience and confidence. Throughout this period, many doubted that new industries—such as streaming media, ride-sharing, hyperlocal delivery, and certain ecommerce formats—could ever achieve profitability or even survive. Fast forward to today, and not only have we seen these industries validate their economic models, but many leading businesses in them have consolidated their competitive positions.
Netflix, for instance, faced heightened competition during the pandemic but emerged stronger by introducing ad-supported tiers and doubling down on proprietary content. Today, Netflix generates more free cash flow than its competitors combined, creating a self-reinforcing cycle of success. Similarly, DoorDash leveraged industry consolidation to optimize operations and enhance margins, solidifying its leadership position in food delivery. There are many more examples of moves from doubt to dominance—a dynamic that sometimes remains underappreciated.
Be it during periods marked by doubt or dominance, we have maintained our focus. For more than 30 years, our six investment criteria have guided us through market cycles, helping us identify and support businesses we believe are creating the future. This disciplined approach, grounded in courage and humility, has allowed us to pursue opportunities while adapting to the shifting landscape.
Periods of market disruption often provide moments of clarity. After the dot-com crash, mobility and cloud computing reshaped industries and drove long-term growth. Following the global financial crisis, a decade-long bull market emerged. Similarly, today’s environment presents opportunities for those who look beyond short-term volatility to focus on transformative trends that are redefining the global economy and, ultimately, life as we know it.
The Power of Resilience
The past three years have ushered in profound change. The COVID-19 pandemic disrupted industries and accelerated technological adoption, creating a seismic shift in how businesses operate and individuals interact with technology. As the world adapted, new challenges emerged, including the tech market crash of 2021 and the inflationary pressures of 2022. These events altered how investors perceive risk and opportunity, forcing a reevaluation of what it means to create and sustain value.
Geopolitical tensions further compounded these challenges. The war in Ukraine, shifts in global trade alliances, and evolving energy priorities have tested the resilience of supply chains and redefined national and corporate strategies. These pressures created an environment of uncertainty and volatility, but they also revealed opportunities for companies that were able to adapt. Many businesses that embraced innovation and displayed strong leadership have demonstrated remarkable resilience, showing that even in periods of crisis, flexibility and ingenuity can create growth.
Healthcare and technology sectors have exemplified this adaptability. Advances in telemedicine, automation, and artificial intelligence (AI) have expanded what is possible, improving productivity and unlocking new value. These sectors remind us that moments of crisis can catalyze progress and drive lasting change.
Many businesses that embraced innovation and displayed strong leadership have demonstrated remarkable resilience, showing that even in periods of crisis, flexibility and ingenuity can create growth.
We have seen many of our portfolio companies demonstrate this same level of flexibility, which has helped them reinforce their competitive positions in the face of volatility. Despite challenging macroeconomic conditions, businesses such as Netflix and DoorDash have continued to grow and innovate, demonstrating the importance of having a strong management team and the solid financial footing required to navigate uncertain environments.
Other companies, such as Keyence in Japan, exemplify how quiet innovation can redefine industries. By revolutionizing industrial automation, Keyence has empowered its customers to achieve unprecedented efficiency, earning a durable competitive edge. Ferrari, a global luxury brand, balances exclusivity and financial discipline to sustain its leadership in a highly competitive market.
These examples illustrate the importance of resilience and the ability to adapt, even amid volatility. We believe businesses with strong leadership, durable competitive advantages, and a focus on innovation are better positioned to thrive over the long term. Moving toward 2025, we believe many of our businesses are fundamentally stronger and more fairly valued than ever before, creating an attractive entry point for investors.
Select Growth vs. Russell 1000 Growth Index
Year-to-Date Return Decomposition (12/31/23 - 09/30/24)
The Dispersion of Opportunities
While the United States remains a hub of innovation, we must recognize that transformative progress is not confined to developed markets. Emerging markets, in particular, are demonstrating extraordinary potential, with innovation and growth emerging from economies once considered peripheral.
going where the growth is
Global Dispersion of Sands Capital Portfolio Businesses
Emerging markets remain a vital driver of global growth and transformation. The potential weakening of recent headwinds—including monetary tightening and domestic regulation in China—could provide a more constructive market backdrop. The opportunity for consolidation and market formalization remains an attractive secular trend, and we continue to see new business models, products, and services that better address the evolving needs of local consumers and businesses.
Attractive valuations further enhance the appeal of emerging markets. With forward price-to-earnings ratios significantly lower than those of developed markets, these economies can provide access to high-growth businesses at more reasonable entry points.
The Transformative Power of Artificial Intelligence
Few forces have shaped this decade as profoundly as AI. Since the public launch of ChatGPT in late 2022, AI has rapidly evolved from a conceptual novelty to a transformative tool, reshaping industries and redefining how businesses create value. AI’s meteoric rise stems from three key components: advanced algorithms, abundant data, and exponential increases in computational power. These elements can enable companies to reimagine workflows, improve efficiency, and unlock entirely new possibilities.
ai compute capacity will continue to explode, enabling better models
AI has powered significant breakthroughs across industries. In public safety, Axon uses AI to enable real-time multilingual communication, enhancing decision-making in critical situations. In finance, AI is revolutionizing risk management by identifying patterns in vast datasets that humans cannot see. AI applications in healthcare, such as predictive analytics, have allowed providers to anticipate patient needs and reduce hospital readmissions.
ServiceNow, a leader in enterprise software, applies AI to optimize workflows, eliminate bottlenecks, and empower teams to scale operations effectively. Similarly, Meta Platforms leverages AI to improve advertising efficiency, helping businesses connect with their audiences more effectively while optimizing marketing spending.
The potential for AI’s expansion is vast, but its continued evolution hinges on solving critical infrastructure challenges. AI requires immense computational power and robust networks to operate efficiently. Addressing bottlenecks in data storage, processing capacity, and latency is essential. We believe businesses and governments must invest in optical networking, edge computing, and next-generation semiconductors to fully unlock AI’s transformative capabilities.
Looking Forward With Optimism
If this year has taught us anything, it is that innovation does not move in lockstep with the macroeconomy. Progress endures even in the face of volatility, powered by the resilience of human creativity and the relentless pursuit of better solutions.
As we enter the new year, we do so with optimism and purpose. The past few years have reinforced the importance of resilience, discipline, and a steadfast commitment to our investment principles. By harnessing the power of AI and maintaining our focus on long-term value creation, we believe we are positioned well to navigate the complexities of today’s markets and capture the opportunities of tomorrow.
Progress may not always follow a linear path, but its trajectory is clear. With conviction, discipline, and an unwavering belief in our approach, we remain committed to our mission to add value and enhance the wealth of our clients with prudence over time.
Disclosures:
The views expressed are the opinion of Sands Capital and are not intended as a forecast, a guarantee of future results, investment recommendations, or an offer to buy or sell any securities. The views expressed were current as of the date indicated and are subject to change. This material may contain forward-looking statements, which are subject to uncertainty and contingencies outside of Sands Capital’s control. Readers should not place undue reliance upon these forward-looking statements. There is no guarantee that Sands Capital will meet its stated goals. Past performance is not indicative of future results.
All investments are subject to market risk, including the possible loss of principal. The strategy’s growth investing style may become out of favor, which may result in periods of underperformance. The strategy is concentrated in a limited number of holdings. As a result, poor performance by a single large holding of the strategy would adversely affect its performance more than if the strategy were invested in a larger number of companies.
Differences in account size, timing of transactions and market conditions prevailing at the time of investment may lead to different results, and clients may lose money. A company’s fundamentals or earnings growth is no guarantee that its share price will increase. Forward earnings projections are not predictors of stock price or investment performance, and do not represent past performance. Characteristics, sector (and regional, country, and industry where applicable) exposure and holdings information are subject to change and should not be considered as recommendations.
The Select Growth Tax Exempt Institutional Equity Composite’s net returns as of 9/30/2024 were QTD -1.0%, YTD 14.2%, 1-year 40.2%, 3-years -6.3%, 5-years 11.9%, 10-years 11.7% and since inception 12.1% relative to the benchmark, Russell 1000 Growth Index, which as of 9/30/2024 returned QTD 3.2%, YTD 24.5%, 1-year 42.2%, 3-years 12.0%, 5-years 19.7%,10-years 16.5% and since inception 10.8%, respectively. Past performance is not indicative of future results. GIPS Reports found here.
The specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. There is no assurance that any securities discussed will remain in the portfolio or that securities sold have not been repurchased. You should not assume that any investment is or will be profitable.