Macro themes that dominated the market for the last fifteen months—Covid, WFH, then vaccine/reopening—are fading. What comes next?

Accurately identifying which new habits that formed during the pandemic are durable is going to be essential. Gavin Baker, CIO of Atreides Management, joined us to identify these trends and discuss the outlook for secular growth stocks.

Here’s a pared-down version of our salon. You can watch the full interview here.

On tech facing a regime change

“It’s all going to come down to what happens with inflation and rates around the end of the third or beginning of the fourth quarter this year. We will know around then if inflation is transitory or structural. If this is structural, then there will be a regime change. It’s highly unpredictable how tech and growth will perform in that regime. 

“Tech performed terribly in the seventies, but tech companies today are not the same as tech companies back then. They were generally very asset heavy; they had manufacturing plants in the United States, they were making computers.

“Warren Buffett said inflation swindles the equity investor by compressing return on assets due to the inflation in assets. But over the very long term, the compounded returns of the stock should converge with its return on invested capital (ROIC). The highest ROIC firms in the market today are tech companies. With rates rising, the discounting of future cash flows will pressure multiples. But the fact that they have high ROIC means they are not going to be fundamentally affected by inflation. 

“Thinking in terms of value and growth leads to a fixed mindset. I try to be a make money investor, so I instead think about GDP sensitive versus secular. The essence of being secular is you can grow independent of GDP. A lot of these tech companies did really show they were secular growth stocks last year because we went through a sharp, but severe recession and they grew right through it. Now, they were helped by work from home dynamics, but I think you would see a lot of these companies grow through most recessions because they are secular.”

On portfolio positioning

“I’ve lived through multiple cycles. The first market I saw was the Nasdaq