How a Top Fund Manager Played the Tech Stock Selloff

When it came to one of the stock market’s biggest names, Dan Hanson, manager of the top-performing Neuberger Quality Equity Fund NBSLX, used the Iran war-driven selloff to put into practice the old Warren Buffett advice: “Be greedy when others are fearful.”

Hanson, who has led the $3.7 billion portfolio to top-decile performance over the last three years in the highly competitive large-blend Morningstar Category, took advantage of the downturn to make Nvidia NVDA a top holding in the fund. Another top holding for Hanson: Elon Musk’s privately held SpaceX, which is expected to have its IPO this summer.

Hanson sat down with Morningstar to talk about other top holdings, his view on picking quality stocks, and how sustainable investing is integrated in his approach.

Leslie Norton: Did the stock market selloff at the start of the Iran war give you any opportunities?

Daniel Hanson: We are patient and disciplined, but when the market gives you an opportunity, you need to step up. We initiated a meaningful position in Nvidia, which became a top-10 position in March of greater than 8%. It’s a business we’ve followed for many years. We’ve met with CEO Jensen Huang a number of times. He’s a phenomenal leader and entrepreneur. Nvidia brings incredible value to clients in terms of reducing the cost of compute.

Norton: What changed?

Hanson: Suddenly, the stock went from being a crowd favorite to derating. Nvidia was caught in the crosshairs of multiple compression in secular growth since Oct. 1, which was amplified by the risk-off environment in March. We made a meaningful purchase at 20 times current year earnings, 16 times forward earnings, which was a discount to the market. At the same time, Jensen was talking with great conviction about the product road map, the value for customers, and revenue visibility, with a three-year run rate of a trillion dollars. And now we’re back at all-time highs in the markets, supported by continued robust fundamentals.

Norton: How did you fund the Nvidia position?

Hanson: We reduced exposure to financials but didn’t make a full exit. We used both Mastercard MA and Intuit INTU as a source of funds. They’re impressive businesses but are in the category of “shoot first, ask questions later” in terms of market skepticism around AI.

Norton: How do you shop for your stocks?

Hanson: We look at three legs of the stool. The first defines quality through the financial fundamentals—top-line growth that’s driven not just by pricing power but underlying organic demand. I like to see a good, reliable profit stream that allows the business to reinvest in R&D, in brand, in know-how, and that shows up, ultimately, as a return on investment capital, through a cycle. The second leg looks at management through a private-owner lens, taking a three-, five-, seven-year view on this management team, the governance, the board of directors. The CEO of a typical S&P 500 company is only on the job for five years. Ideally, our holding period is longer, so we want to have a sense of the bench strength, what’s the likely succession, what’s the company culture.

Third, we look for businesses that are essential. We own a number of hyperscalers. In the 1970s and 1980s, there was an adage that you didn’t get fired for hiring IBM IBM if you managed IT for a large corporation. Today, that’s the role of the hyperscalers. They have the IT infrastructure backbone for the Fortune 1000.

We’ll pay a bit more than a market multiple for some high-growth, high-quality businesses, but that’s complemented by some classic value stalwarts, names like Berkshire BRK.A, Cigna CI, Cencora COR, United Rentals URI.

Norton: Let’s talk about SpaceX, a private company in your portfolio.

Hanson: Our prospectus allows us to own up to 15% in illiquids or privates. We didn’t change our underwriting for a private company. It had a 21-year history, operating successfully with billions of dollars of cash flow and profits and revenue. Now they’re pursuing an IPO. What’s not fully understood—these are three mega-cap businesses with meaningful optionality for growth. The launch business is a mega-cap business worth more than all the legacy aerospace defense rolled up into one: Boeing BA, United Launch Alliance, which is their [joint venture] with Lockheed Martin LMT, Northrop Grumman NOC, etc. Second, the Starlink communications business has over 11 million subscribers globally, and over 10,000 satellites in low Earth orbit. They have unmatched capability. Over 3 billion people now have potential access to Starlink service, and you can imagine what that brings in terms of economic empowerment and opportunities as they continue to launch and grow subscribers.

Norton: How about xAI?

Hanson: It’s the third mega-cap business, with the phenomenal Colossus 1 and 2 data centers they’ve built in Memphis, unmatched in terms of compute, which they put up in a short time. There’s a shortage of compute infrastructure. The xAI team has proven exceptional acumen at stacking up infrastructure. Over time, there will be more upside from the software layer they put on top of it.

When xAI and SpaceX merged in February, the deal was modestly valued at $250 billion. As the team executes, and you look at the market reception for the likes of Anthropic and OpenAI, there’s meaningful upside. OpenAI is now valued north of $800 billion, and there’s talk that Anthropic is worth north of $900 billion, or even a trillion, in a fall IPO market.

Norton: Let’s turn to Elon Musk, the CEO and founder of both SpaceX and Tesla TSLA. Tesla has had a number of corporate governance challenges. Is it necessary to put guardrails around him?

Hanson: If past is prologue, look at what this team has executed. Gwynne Shotwell, the president and COO, has been with the company since its 2002 formation and has driven the organization to accomplish unimaginable feats. You have a really deep bench that has delivered audacious accomplishments. Elon is a person of controversy. But one way to frame it is to think about Steve Jobs relative to Tim Cook at Apple AAPL. Jobs was the visionary who inspired and attracted amazingly talented people. He was also mercurial and could be extremely difficult to work for, to put it charitably. Tim Cook was a phenomenal steward of the business and brought the operational discipline to take Apple to a multi-trillion-dollar business.

SpaceX has that tag team of Musk, and Gwynne and the team running the trains on time and providing confidence to customers. Past is not predictive, but it’s a pretty good place to start. Yes, Elon has a dominant ownership position, but importantly, he has equitized the team, which is part of the magic. Musk’s mercurial nature is a feature, not a bug. As an investor, you go in eyes wide open.

Norton: Until recently, your fund name contained the word “Sustainable.” What happened?

Hanson: The fund was launched in 1994 as a socially responsible equity strategy. Around 2018, the name was updated to Sustainable, with no change to the philosophy or process. Last year, we evolved the name from Sustainable to Quality, again with no change. The prospectus contains a dozen pages of our sustainable-investment criteria. We look for businesses that have positive impact, that have ethical leadership. In the US, “sustainable” had become a controversial term, and if you asked 10 different people what it meant, you got 10 different answers. People came to view it as a synonym for “thematic.” Our goal is to communicate effectively. We believe that what investors in sustainable and ESG are looking for is identifying, frankly, high-quality compounders with first-class business practices.

Norton: Let’s talk about stocks. What’s the thesis for United Rentals?

Hanson: People think of it as a cyclical, heavy machinery, but it’s a network economy business. They have the network to drive fleet utilization higher than competitors, to provide turnkey, soup-to-nuts solutions for large infrastructure projects. Through management know-how and their systems, they’ve evolved to a high-return business model. They’ve talked about how using Palantir PLTR technology dramatically increased their utilization and effectiveness. So they’re serving customers in an effective way that gets a good margin. And they’re able to participate in the infrastructure boom without some of the cyclical downsides of a pure industrial manufacturing business. We like the very high return on investment capital through increased utilization of the fleet. It really drives a flywheel of upside. Following a strong first-quarter earnings report, we believe United Rentals is fairly valued at 20 times. It has a long runway for healthy returns in line with low-double-digit earnings growth as United shares in a still fragmented market.

Norton: What else do you like?

Hanson: Interactive Brokers IBKR is a top-10 holding for us. It really fits our paradigm of a differentiated, owner-driven business that creates value for its customer through its unique technology-driven approach. They have a dramatically lower cost and ability to have effective execution for their customers in trading. Much of that savings from their commitment to technology is passed on to the customer, but they do keep some for themselves. So they’ve got industry best-in-class margins north of 70%, where the competitors are in the 40s. In many cases, they provide, essentially, the white-label back-office and execution capabilities for midsize banks around the world to provide brokerage services to their customers. The real value of this business is the long-term double-digit structural growth in customer accounts.