Now here’s a result you’d be happy to share with your clients – Rowan Street Capital returned 78.5% for investors in the first half of 2023. Put another way, they almost doubled their clients money in six months. A huge result.
But, and there is so often a ‘but’ with these great results, you need to zoom out. Go back to their 2022 year end letter and the fund declined 61% last year. Or, put another way, Rowan Street lost more than half of their investors money in a year.
For investors that have been riding the wave of the past 18 months, you can guess the stocks Rowan Street have invested in: the once high-flying tech stocks. The four companies that have headlined their great result for H1 2023 – Spotify +103%, Meta +138%, Trade Desk +72% and Shopify +86% – were also some of the biggest losers in 2022.
This is a great read for those interested in fast-growing tech stocks. Because as Rowan Street make clear, the changes in the share prices for these companies had very little to do with business performance. Instead, these swings from one extreme to the other have been driven by the valuation multiple investors were willing to pay. It has been driven by psychology rather than business fundamentals.
In 2020, the [price-to-sales] multiple [of Rowan Street’s portfolio] skyrocketed 81% from 9.6x to 17.4x as market participants were in a euphoric state of mind towards technology and digital platform businesses. However, the following 2 years saw a drastic decline in valuations. 2022 was a maximum point of pessimism for our portfolio companies, as the multiple declined to 4.8x — a 72% decline from the peak levels and almost half of where it was pre-Covid in 2019. In 2023, however, we are seeing a substantial rebound in confidence in our portfolio companies’ future prospects, where the valuation multiples are getting back to more normalized levels.
In hindsight it is easy to look back and see how investor psychology was driving these big swings in share prices. In the moment, it’s a lot harder to keep our heads and remain long-term investors. Hopefully the more market cycles we live through and the more investor letters like this we read, we’ll be better prepared for next time. Because that is one thing we can be certain of, there will be a next time.
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