2 of the most successful stock pickers of 2018 break down how a peculiar trait of Elon Musk holds the key to their success

REUTERS/Beck Diefenbach

Tesla CEO Elon Musk

• 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."

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.

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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.