In the event, there was no explosion. Instead, there was a clean-up effort that lasted years and the undamaged reactor did not reopen until 1985. However, the public’s confidence in the safety of nuclear power had eroded and Three Mile Island was eventually closed in 2019.

Grow your own

Despite the energy source remaining shrouded in speculation, in September 2024, Constellation Energy announced that Three Mile Island would be reopening, with Microsoft as the sole purchaser of its energy on a 20-year contract. The motivation? Powering Microsoft’s data centres for the growing presence of AI.

Microsoft is far from the only company to anticipate the burgeoning need for energy in coming years and to take matters into its own hands. However, as investments in AI have shot up in recent years, investments in energy, and specifically renewable energy, have tanked.

See also: Aegon: Data centres are the new dividend drivers

By 2030, the US Electric Power Institute estimates the energy demands of data centres could account for more than 9% of all US energy consumption. Currently, this sits at 4%. Jim Wright, fund manager of the Premier Miton Global Listed Infrastructure fund, says the phenomenon could lead to “a land grab” for energy supply and generation, exemplified by the Microsoft deal.

“The requirement for additional electricity will stretch the system capacity, particularly at seasonal and daily demand peaks. The inevitable solution is more investment in generation capacity, which will include renewables, batteries, gas-fired generation and nuclear power,” Wright explains.

“The costs, lead times and technological and regulatory challenges make new nuclear, either in the form of Small Modular Reactors or large power plants, a longer-term solution. There is considerable momentum, as shown by Meta’s recent request for developers to provide between one and four gigawatts of new nuclear capacity in the US to power its AI data centres.

“The growth in electricity generation capacity will require significant capital expenditure and changes the long-held perception of electricity utilities, which may now be classed as ‘growth stocks’ for the next decade.”

Read the rest of this article in the January edition of Portfolio Adviser Magazine

Working within a thematic strategy there are several structural themes that draw our attention. We are currently focused on US datacentre power demand, which is set to more than double by the end of the decade (50GW by 2030, up from 21GW in 2023). The renewables sector should benefit as hyperscaler companies like Microsoft, Google, Meta and Amazon have all made net-zero pledges, which will increase their demand for clean energy capacity.

We have also seen sharp rises in the rollout of utility scale solar production in states including Texas, Ohio and Florida resulting in an attractive investment opportunity.

Q: How do you see sustainable and ESG-oriented investing evolving from here?

We will start to see more impact-focused strategies as socially conscious generations (gen-Z and millennial investors) look to allocate their capital to strategies that aim to make a positive difference in the world.

See also: Generation next with Sarasin & Partners’ Tom Kynge: People skills are key

In ESG investing, we will see a less narrow, more nuanced approach to assessing companies, where fewer businesses are automatically thrown into the ‘penalty box’ and there is a greater effort by investors to collaborate, understand and partner with management, to improve their operations via engagement.

Access to relevant ESG and impact data underpins the efficacy of these approaches and, as such, we will see great improvements as these disclosures become more standardised across the marketplace.

Q: What will be different about the investment sector a decade from now?

The way we interact with data will be enhanced and soon we will be able to engage with visual analyses of trends more easily than crunching numbers in Excel. Future iterations of large language models will be trained on corporate datasets and will improve how we download, index and absorb relevant information.

This will increase efficiency for analysts and portfolio managers trying to understand the drivers of business models and creating forecasts.

Lastly, the demographic composition of the industry will become more diverse as larger numbers of women and ethnic minorities enter and progress through the profession.

Read the rest of this article in the October issue of Portfolio Adviser magazine

In its third year, the benchmark – managed by CCLA Investment Management – ranked 119 leading global companies on how they manage and report on workplace mental health. It uses publicly available information to evaluate companies against 27 criteria covering: management commitment and policy; governance and management; leadership and innovation; and performance reporting and impact.

See also: CCLA’s Dame Sara Thornton: Forced labour is ‘a feature of the system’ in the UK

It found only 12 companies have improved their performance since last year’s assessment. HSBC was the only company ranked in the top tier, followed by Roche Holding, Shell, Toronto-Dominion Bank and TotalEnergies in tier two.

Six of the magnificent seven tech giants ranked in the lowest performance tier. Alphabet, Apple, Meta Platforms, Microsoft, Nvidia and Tesla all scored between zero and 20% in the assessment, while Amazon ranks in tier four.

Although almost all companies in the benchmark are taking some steps to support their employees’ mental health, the average improvement score was 28% this year. The 10 new companies added to the benchmark in 2024 achieved an overall score of 22%. This comes as just 24% of the companies disclose the provision of mental health training to line managers, a 2% increase from 2023. Mental health training is a key intervention recommended in the 2022 WHO guidelines on mental health at work.

Some improvements

However, on a more positive note, the report also revealed that there been some progress among the 99 companies that joined the benchmark over the past three years, with the average score rising from 24% in 2022 to 29% in 2024.

Further, 98% of Global 100+ companies provide some degree of mental health support services to employees, such as access to clinical counselling and therapy sessions, or subscriptions to digital mental health apps. Further, 78% of companies assessed disclose details of awareness-raising initiatives, such as internal communications campaigns and whole-workforce training.

The benchmark is backed by a global investor coalition of 55 investors – including the likes of Schroders, Rathbone Greenbank and Federated Hermes – with a combined $9.8trn (£7.5trn) in assets under management, as at August 2024.

Amy Browne, director of stewardship at CCLA and co-author of the benchmark report, said: “While some employers are improving the support they give to their employees’ mental health, too many are ignoring a critical issue for their workforce, to the detriment of their people’s wellbeing.

See also: CCLA’s Charlotte Ryland and Joseph Hawkes hop on the Trane over Tesla

“It is disappointing we haven’t seen more progress by companies within the benchmark on improving their performance – not least because there is a clear economic case for doing so. Investments in mental health interventions at work yield an average return to employers of £4.70 for every £1 spent.

“Despite the broad lack of progress, we are making headway. A small handful of employers – those in tiers one and two – have demonstrated a very strong approach to mental health management and disclosure, and should be celebrated. Those that have put time and effort into improving their ranking should also be commended.

“We call on CEOs to demonstrate a clear leadership commitment to employee mental health, to implement robust policies, set targets, work to raise awareness and equip managers with the necessary skills and training to support employee mental health.”

Peter Hugh Smith, chief executive of CCLA, added: “We created this benchmark because we recognised the importance of mental health for companies, employees and their investors. Supporting employees’ mental health is not only the right thing to do, it also pays dividends in terms of corporate performance.

“It is therefore disappointing not to have seen greater improvement across the market, but it is also important to recognise where companies have stepped up. We will continue our work to engage on this issue, with the hope and expectation that we will see greater progress in future.”

Remi Fernandez, head of human rights, social & governance issues for the Principles for Responsible Investment (PRI), also commented on the findings: “The Corporate Mental Health Benchmark 2024 reemphasises the importance of workplace mental health. The report highlighted a promising growth in formal commitments and policies linked to mental health. However, there is still more work needed on implementation. As a material issue for investors, the PRI encourages signatories to engage companies on how they are addressing workplace mental health.” 

This story originated on our sister title, PA Future

I don’t think I’m being controversial by saying diversification should be pretty important to investors.

It limits risk and makes the experience of investing far more palatable. You spread your savings across different holdings that are doing different things and it means your future ability to buy stuff is not dependent on just one outcome.

It’s exactly what we aim to do in our Downing Fox Funds. Within our equity portfolio, we hold a mixture of active managers that is genuinely diversified by style, market cap and geography.

Sound sensible? Not according to 2024, who just called and told us we are idiots for having such whacky ideas. Screw being “diversified”, just own a handful of the biggest stocks on the planet, which are all broadly tied to the same theme, and simply ignore everything else.

AI giant Nvidia, for example, has continued its mind-boggling 2023 performance with returns of 152% in the first half of 2024. The AI hype has also meant 20% returns for Microsoft, Amazon, Meta, Alphabet and Broadcom – all of which happen to now be among the 10 biggest stocks on the planet.

I’m not saying those stocks are not deserving of good returns, their growth has been spectacular. The fact they have gone up also isn’t itself an issue, either. No, the problem is (at the risk of massively overgeneralising) all other share prices have been flat or, more often than not, gone down.

This has led to one of the narrowest markets ever. The global index has gone up 12.7% in 2024, but the average stock within it has only made 1.7%. This is because the global index is market cap weighted, so naturally has a higher weighting to the biggest companies. As you can see, the bigger the company, the bigger the return.

Percentage return in 2024

Stranger still, it means equities have just become negatively correlated with equities!

In June, the global index went up 2.8%, but the average stock within it went down 0.8%.  This discrepancy in returns has only happened a handful of times – the last time it was on this level was nearly 27 years ago in December 1997.

The domination of those big stocks has not only made a mockery of the idea of being diversified, but it’s also made active equity managers rather pointless – which is a bitter pill for us, given we are strong advocates of active management.

The principal reason you pay a higher fee for an active manager is in the hope they beat the market by being different to it. Otherwise, you might as well just buy a cheaper passive, which replicates the market. In 2024, the last thing you’ve wanted to be is different.

There is a clear correlation between a fund’s active share and its returns this year. For example, within the IA Global sector, the more you look like the index, the better you have done (there have been long periods where the opposite has been the case, with “closet trackers” being the worst performers and the most active being the best).

IA Global funds returns in 2024 (%) group by active share relative to iShares MSCI ACWI ETF

What does this all mean? Well, we are aware that advisers are increasingly turning to passive options within their portfolios (and why not, they are cheap and have performed well).

The problem is, many of the best-performing multi-asset portfolios of late (particularly passives) are not diversified anymore – and this is where advisers need to be very careful.

That is because indices (and therefore passives) are now the most concentrated they have ever been – and this is where the problem lies. The global index now has 72% in the US and 22% in just six companies (Apple, Microsoft, Nvidia, Amazon, Alphabet and Meta), all of which are tied to broadly similar themes.

History is littered with examples of these one-way bets. Each time they have unravelled, they have caused big problems for indices, given stocks/sectors within them become such a large part of them when the going was good, therefore dragging them down when things changed.

We don’t know how long this period of mega-cap AI domination will continue, but rather than try and call markets, we focus on finding exceptional active managers and make sure we are not betting the farm on one way of investing winning over all others. This means we do hold funds that own Nvidia and co, but alongside them, we have managers who own value stocks or small-caps. Over the longer term, we think this type of strategy will deliver as markets become more rational, even if, over the shorter term, we may look a tad pedestrian.

This article was first seen in our sister publication, PA Adviser

Top allocations to Magnificent Seven stocks such as Nvidia, Microsoft, Alphabet, Apple and Meta helped boost the trust’s shares more than twice as high than the IA Technology & Technology Innovation average return of 22%, yet their high weighting in the portfolio – accounting for 39% of all its assets – leaves it reliant on a handful on just five names.

This concentration is even more apparent when looking at the top ten holdings, which account for more than half (53.3%) of the entire portfolio.

Rogoff is aware of these risks, but highlighted that performance would not have been as strong over the past year if he and fellow managers Fatima lu, Nick Evans, Xuesong Zhao and Alastair Unwin had not taken such large positions in these leading stocks.

“It would be remiss of us not to again remind shareholders about the concentration risk both within the trust and the market-cap weighted index around which we construct the portfolio,” he said. “After another year of large-cap outperformance, this risk remains elevated.

“We continue to believe that this concentration risk is justified because they are unique, non-fungible assets that capture the zeitgeist of this technology cycle and appear well positioned for AI given their significant scale advantages.

“That said, we remain unafraid of the idea of moving to materially underweight positions in the largest index constituents should we become concerned about their growth or return prospects, or should we find more attractive risk-reward profiles elsewhere in the market.”

See also: The tech giants are facing an ‘existential event’

Valuation risks come hand in hand with these concerns around concentration. The share prices of the Magnificent Seven have skyrocketed over the past year, making some investors worried about a potential downturn.

Rogoff said their valuations are “extended, but not unreasonable,” especially if central banks cut rates later this year.

“Equities tend to rally after the Fed begins a cutting cycle, although the returns are (unsurprisingly) better in non-recessionary scenarios,” he added.

Historically, the S&P 500 has returned 18% in the 12 months following central banks’ first rate cut in a normal market environment, but this shrinks to 7% in a recessionary scenario.

It is for this reason that Rogoff sees a recession or ‘hard landing’ as “the most significant risk to the market”.

But even if this does create volatility for tech companies over the short term, Rogoff is confident that companies adopting AI will outperform over the longer term.

“Whether there is a recession or not and what equity markets do over the next six to 12 months perhaps misses the point,” he said. “Astounding new innovations such as AI augur well for a longer-term innovation-led growth and prosperity cycle.

“Markets appear fully valued if we think the timeline to AI’s economic impact is 5+ years away, but much more reasonable if that timeline is sooner. The shortening timeline to Artificial General Intelligence (AGI) – the ability to understand, learn, and apply knowledge across a broad range of tasks and domains at a level comparable to human intelligence- presents a further upside scenario.”

See also: Alliance Trust: There’s more to markets than the Magnificent Seven

If UK consumers aren’t feeling the benefits of the bull run, it might be because global markets are more concentrated than they’ve been in decades. The so-called ‘magnificent seven’ of Microsoft, Apple, Nvidia, Alphabet (Google), Amazon, Tesla and Meta drove the gains for the MSCI ACWI in 2023, and continue to dominate in 2024. The success of a US chipmaker doesn’t trickle down into UK households the way it does when a local company is flying high.

This disconnect between the fortunes of the biggest companies and the realities of day-to-day life is one reason why governments around the world are taking an increasingly interventionist stance in their economies and markets. With the global rise in geopolitical tensions and onshoring in the wake of Covid also contributory factors, economic nationalism is back on the cards – and the UK is no exception.

See also: Dynamic Planner’s Williams: The psychology behind investing and risk

Starting with the post-Brexit Memorandum of Understanding between the Treasury, the Bank of England and the Financial Conduct Authority, and on through the Edinburgh Reforms to the most recent budget, the government has reiterated its commitment to using the second-largest capital market and investment industry in the world to drive growth in the UK economy.

The British ISA, announced in the budget but on hold until after the election, is intended to incentivise consumers to support the domestic market by allowing them to invest up to £5,000 tax-free in UK companies, on top of the existing £20,000 limit for stocks and shares ISAs. Under the Mansion House Compact, the UK’s largest DC pension providers have committed to allocate 5% of assets in their default funds to unlisted UK equities by 2030, supporting high-growth smaller companies and driving investment in infrastructure.

And the proposed Pisces (Private Intermittent Securities and Capital Exchange System) market will facilitate this by enabling the secondary trading of existing shares in private companies, opening up private markets to a wider range of investors.

One way to look at these measures is that a broader definition of good outcomes is emerging: one in which good consumer outcomes don’t only come from individual wealth, but from living in a prosperous society.

Read the rest of this article in the June issue of Portfolio Adviser magazine

Orbis Global Cautious

Fund size: £81m

Despite being one of the smallest players in its category, the Orbis Global Cautious fund has generated the highest return of its peer group over the past three years. The portfolio is up 20.7% over the period, boasting a considerable lead against the 2.4% return made by the average IA Mixed Investment 20-60% Shares fund.

Such outperformance could serve as testament to the asset allocating skills of manager Alec Cutler. Since launching Orbis Global Cautious in 2019, Cutler has driven returns up 29% (a 6.9 percentage point lead against the sector average) by investing in a blend of shares and bonds. US Treasury Inflation-Protected Securities (TIPs) account for much of the fund’s top positions, with TIPs of varying durations making up almost a quarter (23.8%) of the portfolio.

Cutler’s fund may be the best-performing cautious fund of the past three years, but it also has some of the lowest volatility. It is the third-least volatile fund in the 190-strong sector, meaning investors get top returns for less risk. Orbis Global Cautious also has the lowest maximum drawdown of any fund in the IA Mixed Investment 20-60% Shares sector over the period. When the fund did make a loss, it only dropped by a modest 3.5%, which is almost four times lower than the 12.9% maximum drawdown of its peers on average.

Chelsea Managed Monthly Income

Fund size: £60m

Another outperformer investors may have overlooked is the Chelsea Managed Monthly Income fund. This £60m portfolio may be small, but its 13.9% return over the past three years is 11.5 percentage points higher than the average IA Mixed Investment 20-60% Shares fund.

As its name suggests, the fund is aimed at investors who want to use their savings to generate a reliable monthly income stream, which can be used to budget with confidence. It does so by investing in funds and investment trusts across different asset classes. For instance, it has top allocations to alternatives and property specialists such as Greencoat UK Wind (worth 4.2% of all weightings) and Assura (4.1%), as well as equity dedicated portfolios such as Man GLG UK Income Professional (3.9%), Chrysalis (3.8%) and M&G Global Dividend (3.6%).

Chelsea Financial Services describes this combination of different investment vehicles as “a jigsaw puzzle” that culminates as a singular income-generating product.

It claims: “All the pieces have to be in place for the picture to come together. Assets will yield differently at different times, so we will strategically combine diverse sources of income to target a high and resilient yield, year in, year out.”

This mixture of fund and trusts has allowed Chelsea Managed Monthy Income to offer one of the highest yields in the IA Mixed Investment 20-60% Shares sector, at 4.6%.

Canlife Diversified Monthly Income

Fund size: £59m

Another small fund to deliver a return almost six times higher than its larger peers is Canlife Diversified Monthly Income, which is up by 13.8% over the three-year time frame. It has achieved this result by investing across a diversified set of 119 holdings, ranging from equities and bonds to property. By investing in these assets, the two managers, Craig Rippe and Jordan Sriharan, aim to provide investors with a monthly income through the dividends, interest payments and rental income they provide.

Listed international shares make up most of the top holdings (and 27.1% of the portfolio as a whole), with the likes of Microsoft, Broadcom and Amazon among some of the largest positions. Overall, however, Canlife Diversified Monthly Income has an almost equal weighting to equities and fixed income across the portfolio, at 44.4% and 45.9%, respectively. This could appeal to an investor who wants a more balanced exposure across different asset classes.

Invesco Global Income

Fund size: £60m

Also trouncing its larger peers is Invesco Global Income, up 8.6% over the past three years. Lead manager Stephen Anness has built an extensive portfolio of 276 holdings since taking charge in 2019, the bulk of which (65.1%) is made up of bonds. Equities account for just under a quarter (24.6%) of allocations.

Investors who held Invesco Global Income over the past three years would have enjoyed the fourth-highest upside capture of any fund in the sector, climbing 165.3% in rising markets. In contrast, the portfolio was hit harder than most funds when markets were in decline. It has one of the steepest maximum drawdowns of 19.3% over the period, meaning its high gains came with more volatile performance.

This article originally appeared in the June issue of Portfolio Adviser magazine

Unlike the Sharpe ratio, this risk/reward measurement only considers downside volatility, meaning most fluctuations in performance would be on the upside.

But even if an investment does grow savings substantially, some investors may still feel depleted if the route to get there was volatile and filled with prolonged periods where performance was in decline before picking up again.

So, in addition to looking at the sectors with the highest Sortino ratios, we’ll include only ones that delivered positive returns most often, too. By excluding investment trust sectors that were not top-quartile for both of these metrics over the past 10 years, we are left with just three.

IT Technology & Technology Innovation

The sector to deliver the highest average Sortino ratios and positive periods was IT Technology & Technology Innovation. Trusts in this group were up 411.6% on average over the past decade, with an average Sortino ratio of 0.87. To put that into perspective, the average investment company had a Sortino ratio that was five times lower (0.17) than those in this sector.

Investors did not have to suffer many periods of negative returns over the period to get these high returns. Indeed, the average tech trust reported positive returns in 83 of the 120 months over the past 10 years.

Meanwhile, the average investment trust was up in just over half (62 months) of the past decade. From this perspective, most IT Technology & Technology Innovation trusts added almost two years’ worth of positive returns to investors’ portfolios.

Of the trusts in this sector, the one that beat all other investment companies on Sortino and positive periods to make the greatest return was Allianz Technology. This £1.4bn portfolio is up a considerable 634.4% over the 10-year time frame, increasing the value of investors’ capital more than six-fold.

The trust was managed by Walter Price for most of the period before he retired. He handed the reins to current manager Mike Seidenberg in 2022. Under Seidenberg’s leadership, the portfolio has adopted some highly concentrated positions in 42 stocks in the hopes of capturing upside growth from leading tech companies. Its top five holdings alone – Nvidia, Microsoft, Meta, Apple and Broadcom – account for a third (33.4%) of the whole portfolio.

Trailing behind Allianz Technology is Polar Capital Technology, although its 560.6% return over the past decade still beats most investment trusts. Its Sortino ratio of 0.91 over the period is marginally higher than Allianz Technology’s 0.89, and it had only one fewer month of positive returns (74), so the differences are minor in that regard.

IT Global

One of the few other sectors to meet all the requirements is IT Global. Trusts in this sector are up 144.5% over the past decade, with an average Sortino ratio of 0.45. This may seem relatively small compared with the IT Technology & Technology Innovation sector but they remain ahead of the majority of investment trusts.

Indeed, trusts within the IT Global sector also gave investors over a year’s worth (13 months) of positive returns compared with the average investment company, reporting gains in 76 months over the past decade.
Scottish Mortgage is the highest-returning trust in the sector to deliver a top-quartile Sortino ratio and positive periods. It soared 373.1% over the past 10 years, beating its peer group by a substantial 228.6 percentage points.

Shareholders saw the value of their savings grow in more months than any other trust in the sector, or the IT Technology & Technology Innovation for that matter. Returns have been in the black for 79 months of the past 10 years, with the trust amassing a Sortino ratio of 0.56 during that time.

Most of its negative performance occurred in the past three years, when the £11.9bn trust was down by 32.2%. Its share price fell substantially from its 10-year peak of 733.4%, but researchers at RSMR explain that the risk is well worth the reward for investors who have a long-term time horizon.

“The trust’s ability to exercise patience, its long-term approach and engagement with the companies in which it invests have all come together, and its performance reflects all these aspects,” they say. “Its ability to invest in private markets has given the trust a distinct advantage as companies stayed private for longer. The experience of operating in private markets over numerous years has meant access to early-stage companies who see Baillie Gifford as a patient investor.”

So while near-term drawdowns have detracted from its long-term performance, Scottish Mortgage shareholders have seen their savings mostly increase over the past decade and have been ultimately rewarded with a total return much higher than for the majority of investment trusts.

IT Europe

The only other sector that has delivered top-quartile returns, Sortino ratios and positive periods is IT Europe. Trusts in the sector are up 130.1% on average over the past decade, delivering positive returns in 76 of the past 120 months. Between them, the trusts in this sector have an average Sortino ratio of 0.33 for the time period.

The best performer to meet all the requirements is Fidelity European, up 225% over the past decade, flying 94.9 percentage points ahead of the average IT Europe trust.

“The trust provides long-term investors with an attractive exposure to the region, though the strategy may underperform during periods of strong equity market returns when riskier stocks are in favour,” explain the trust managers.

“However, we think it is likely to outperform in weaker, more volatile environments, and so this should improve its risk-reward characteristics over time.”

This article first appeared in the June issue of Portfolio Adviser magazine

The likes of Alphabet, Amazon, Meta, Microsoft and Nvidia have all sworn to be the leaders of the AI revolution, but they can’t all take the crown. If they fail to live up to these hefty assurances – which Cutler expects most of them to – then they will be left with a lot of underwhelmed shareholders.

“They sold investors last year on the fact that they’re going to cut costs and rationalise it and make efficiency gains, but this is an existential event for them,” Cutler said. “They have to win in AI. This is a winner take most space so they’re all going for it, but only around two of them is really going to make it. Yet they’re all spending as if they’re going to be one of those two.”

The necessity for these companies to become leaders in what could be the most profitable technology of the next decade is essential to their survival. Cutler noted how these multi-billion-dollar companies have swelled to such enormous sizes that they need to find new growth drivers to ensure they continue expanding. There is a risk now that these companies not only plateau without AI dominance but decline in relevance.

But their pledges to remain at the forefront on innovation seem to have convinced markets. Cutler said: “We did our work and looked into it, and what we figured out is these companies are completely wrong. There’s a gold rush element to it, and there’s also an existential risk element to it. Right now, the market is seeing this as a positive for the primary players such as Microsoft, Google, Apple, Meta and Amazon because it’s being framed as a new revenue generator for them. But these are companies that need to find something really big in order to grow and sustain their billion-dollar market caps.”

And after investing record-high levels of capital expenditure on AI, these companies will also be at a substantial monetary loss if it doesn’t pay off. Meta, for example, plans to spend up to $40bn this year alone in building up its AI infrastructure, and Microsoft has already splashed out over a quarter of that ($14bn) in just the first three months of 2024.

Cutler said: “I don’t know how it’s going to make everyone so more productive that it’s going to be worth the capital they’ve invested and produce a return on the billions of dollars they’ve spent buying chips that will be obsolete in two years.”

Yet so much of what it takes to stay ahead in the race for AI depends on who can spend the most money, according to Richard de Lisle, manager of the VT De Lisle America fund. He said it is a matter of scale and those who can afford to keep throwing money at AI are the only ones able to stay in the race. We have already witnessed some early AI leaders fall back due to having less spending power than their peers, such as Tesla. After soaring 101.7% in the AI rally of 2023, its share price took a turn this year (dropping 28.3% year-to-date) as investors questioned its ability to keep up with other tech behemoths.

“Elon Musk came out and said Tesla is an AI company now. Well, the problem with that is in order to be one, he would have to spend billions to be as strong as the likes of Meta and he doesn’t have that capital. Mark Zuckerberg does, but Tesla can’t do that,” de Lisle said. “I don’t think Tesla will be a good performing stock going forward just because of the capital requirements. Regardless of what you think about Musk as a person or electric cars, Tesla is undercapitalised and in order to play the game, everyone’s suddenly got to spend more money.”

Upping capital expenditure to all-time highs has been enough to maintain their seats at the table, but it doesn’t ensure they’ll be a leader in future. Many tech giants are more vulnerable to being toppled and replaced by new entrants now than ever before, and their high volumes of spending are an attempt to simply keep pace, according to de Lisle.

“They’re all terrified,” he explained. “These companies wouldn’t be spending all these billions otherwise. It’s because they’re scared. There’s a group of stocks that will win, but it’s not necessarily the group of stocks that we’ve got at the moment. Some will lose and fall off, and then there’s another group that will come in. People aren’t really sure what those are yet – they are looking for them now.”

Investors are keen to hold on to companies that could be the next tech champions, but “people lose sight of how quickly the leading group changes”, according to de Lisle. And as AI develops and businesses fine tune their applications, the rate at which these market leaders switch places is accelerating. Just a couple of years ago, markets were focused on the FAANGs, which were quickly replaced by the magnificent seven, and even those are now shifting. Trying to keep up with the rapid changes is becoming an ever more challenging task for active managers.

“The whole AI revolution is going to increase the speed of change of the top companies,” de Lisle said. “It argues for indexation in a way because you might say, well I can’t keep up with this, so I better buy a tracker for the S&P 500 and that will sort it out for me. Because if a company is getting bigger and more important, it will get a bigger weighting in the index. You don’t have to work out whether Tesla is going to fall or not. It’s an automatic thing and in that way, you get covered from the increasingly rapid change in technology.”

Amid all this uncertainty at the top of the market, there are ways to benefit further down the supply chain. De Lisle said “the only thing that’s pretty clear is that the leading stock in a year’s time will be Nvidia,” so working out what companies it relies on and that it will pull up with it is key. By that logic, he bought shares in Supermicro, which climbed a whopping 922.9% since the start of last year.

Yet there is one thing that all these tech companies – regardless of who wins the AI race – need a lot more of to support their operations, and it is something both de Lisle and Cutler have been allocating to. All the infrastructure needed to support AI at scale requires enormous amounts of energy. “That’s really what it comes down to,” de Lisle said. “It’s all very wonderful, but they need an awful lot of power. That is what’s at the end of the food chain, really.”

Cutler said the composition of the leading tech companies struggling for dominance in AI could swing quickly and often, but businesses addressing this universal need for power will thrive regardless of who is leading in the race. He added: “They’re all spending like crazy, so when you have all these combatants trying to be a winner, do you really want to invest? Do you want to bet on which will be the two winners that are able to monetize to the degree that it’s going to pay off? Or do you bet on the ammo providers?

“These companies will be paying a lot for electricity and will need to build an entirely new grid surrounding their facilities, so it’s been a wonderful shot in the arm for the critical energy infrastructure theme. Not only will they need to rewire a very densely wired server, but you now have to rebuild the entire grid around it to supply the amount of wattage that’s now needed by that facility.”

Stephen Yiu founded Blue Whale in 2016, following a 14-year career in investment. The now-managing partner and CIO first joined the industry running Hargreaves Lansdown’s £300m Multi Manager Income & Growth Portfolio Trust. After then running a UK equity long/short fund for New Star Asset Management (now Janus Henderson), a pan-European hedge fund at Artemis, and a global equity long/short fund at Nevsky Capital, it was his connection with his former employer Peter Hargreaves – co-founder of Hargreaves Lansdown – that led to the launch of Blue Whale Growth fund.

Hargreaves seeded Yiu’s fund with £25m of capital. Today, the fund now has assets under management of almost £1.1bn which includes, of course, a sum still held by the platform giant chair, as well as Yiu himself.

Blue Whale’s performance has been in the top decile since it became available to UK retail investors in September 2017, having returned 143.2% for investors to date (10 June 2023). This places it in seventh place within the 325-strong IA Global sector, and is comfortably double the gains of its average peer.

See also: Fund manager profile: Ian Lance on trusting the process

But of course, there is no such thing as a free lunch. While the fund has achieved top-quartile total returns over one and five years, and second-quartile gains over the last three (the result of a torrid 2022 when the fund fell by 27.6%), it has done so with higher-than-average annualised volatility, and a larger-than-average maximum drawdown.

“If you ask me today what our mission statement is, it’s to compound your investment at the highest return possible. That’s what we want to do over the medium term,” Yiu explains. “Ultimately, a high-conviction approach is very important. I think it is even more important today, because the only way to justify paying active management fees is to do something really, really different.

“If we were running a 100-stock portfolio, you may as well just buy a tracker instead. Or, maybe it would suggest we are not backing our ideas with conviction.”

He adds that while differentiation can lead to significant outperformance, it can lead to significant underperformance at times too.

“If you don’t want any risk, it means you don’t want any differentiation from your average return. Then, you should just buy the passive.”

Stock selection

Blue Whale Growth will hold between 25 and 35 stocks at any one time although, for the manager, 25 to 30 stocks is the sweet spot.

There are currently 28 company names in the fund, with the top 10 largest positions accounting for 57.8% of the overall portfolio.

These companies are chosen adopting a team-based approach, whereby Yiu – as part of a team of five – will debate every existing or potential holding in the portfolio around the board table at the company’s Mayfair offices. The entire company comes into work at least four days per week, although they have the option to work from home on Wednesdays.

“It means we reach a conclusion far quicker than our competitors. This works both ways, whether it’s an opportunity or a mistake,” he explains.

“We spend a lot of time together, the five of us, so everybody is on top of what is going on. We don’t split coverage by sector, because that way, there is a level playing field knowledge-wise when debating companies.

“It also means that we don’t fall in love with companies. Everyone needs to be able to challenge everyone else. If there is no evidence to back up the merits of a company, that company will be sold – or at least reduced.”

But while there are names in the fund that will come as no surprise to investors familiar with Yiu’s fund – such as Microsoft and Nvidia – there are also significant allocations to the likes of US financial services company Charles Schwab, Italian luxury fashion house Moncler, and oil & gas company Canadian Natural Resources.

See also: Fund manager profile: Man GLG’s Mike Scott on riding high in high yield

Yiu and the team first bought into Canadian Natural Resources in 2022, and explains that for several months, a majority of his time spent in client meetings would be justifying his allocation to the company’s shares, because it was “different from what people assumed we were trying to do”.

“Now, people don’t ask about that stock any more. First, because it has performed really well. But second, because people now realise why we did it. We recognised there was a regime change due to geopolitical uncertainties and higher inflation, that interest rates would remain higher for longer,” he reasons.

“Given dynamics in the market, we would not have owned this stock seven years ago. There wasn’t a new regime – there were more opportunities in tech.

“But for us, we don’t set out to find an energy company, for example. We just want to invest in the best individual opportunities. We don’t really care whether is stock is seen as a growth company or a value company. We just want to go where we can make the most money.”

Not a tech fund

In terms of sector weightings, which are a result of the team’s stockpicking, the fund’s largest allocation is still to technology companies at more than 40%.

Contrary to some assumption, however, Yiu insists the fund is not a technology-focused fund.

“The reason we ended up in these tech companies is because that was where we were going to generate the most alpha. We have also exited tech names, which we don’t believe will generate alpha any more,” the manager explains.  

“At one time, we were very heavily exposed to software names like Adobe and Salesforce, as well as a few others which are less well-known. But the big narrative about them at the time was that they were going through digital transformations and had subscription-based models. And once they sell you a subscription, they can increase their pricing. The loyalty is a lot higher because, if you stop paying Microsoft, you no longer have access to your emails.

“Previously, people could still use the old version of a piece of software without having to upgrade – this was where the transformation opportunity was. But that transition was completed by some of these companies in 2022.”

One of the reasons the fund’s technology weighting remains high, according to Yiu, is that many names are simply not yet understood by investors – particularly those based in the UK.

“I was recently speaking to a contact of mine who works in the hedge fund industry, and he told me I am in the wrong market. That I should be selling the fund to US investors, not UK investors. That, based on our performance track record, we would by now be running a few billion rather than £1bn,” he says.

“I thought it was an interesting comment. Of course, we’re not based in the US. But what he was highlighting is that UK investors don’t understand technology companies in the same way.

“People have a very sceptical view on technology because they don’t understand it, and they don’t take the time to try to understand these companies. They will just read a headline about the Magnificent Seven and how expensive the companies are.”

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He references Microsoft as an example of such a stock, having previously been faced with questions from investors as to whether the company was in a bubble.

“When we first started investing in Microsoft in 2017, only seven years ago, it wasn’t even a $1trn company at the time. Apple surpassed it in size a couple of years later,” Yiu says.

“But at the time, lots of UK investors in particular became concerned. The fact its market cap became the same size as the entire UK stockmarket became a whole issue.

“Microsoft has been one of the longest-standing companies in the fund with a very large position and we have spent a lot of time defending it. Now, Microsoft is a $3trn company. And now, nobody questions us.”

He adds that, now Microsoft is the single largest company in the world and accounts for such a large part of the S&P 500 index, “people finally understand it”.

“Do you buy it now or should you have bought it seven years ago? That is the big debate.

“Of course you’d feel very comfortable about buying Microsoft today because it has established itself, but I guarantee you it is not going to achieve the same returns over the next seven years, that it has managed over the previous seven.”

Nvidia

More recently, the portfolio holding in the firing line has been Nvidia, although Yiu says questions have started to tail off once again as the company has gained popularity.

“We are not taking action yet, but we are debating whether to reduce our position, because the return profile from here is lower than when we first bought it,” the fund manager explains.

“But it’s an interesting company because most people don’t do the work on it, they don’t understand how it works. And, if investors had spent the time on researching it like we did when we first bought it in 2021, when its market cap was $500bn, they could have achieved a lot of value from their investment.

“People [in the UK] tend to have a sceptical view on tech to start with. The reason we ended up with more exposure to tech than some of the other more concentrated global equity portfolios, is because we understood it more. A lot of well-loved companies in the consumer space are already well understood. I guess Nvidia is not a well-known brand with a visible, recognisable product.”

Technology misconceptions

On the flipside of the coin, Yiu says the fund also has exposure to names that investors may place into the ‘technology’ bucket, but which are now “normal” companies surviving in a new world.

For instance, the fund has both Visa and Mastercard in its list of top 10 holdings – payment  stocks which were categorised as technology firms right up until 2022

“If you looked at our tech exposure back then, it would have been much higher than 40%,” the manager points out. “At the same time, Amazon, Meta and Google were also categorised as tech companies. To some people, they still are, but over the last few years they have been recategorised.

“Amazon is now consumer discretionary, which makes sense, while Alphabet is now communications and media. These companies are doing exactly these things, just in a different way from how we used to do them. People are now starting to understand this more, but we were early to that realisation. These are not tech companies – they are just powered by tech.

“In terms of the world we live in, the population has increased massively, and we all need to consume things, to live in a certain way. This means that over the last 10 years, and especially since the pandemic, a lot of this has shifted from the physical world to the digital world.

“But it’s the same thing, right? If we had conducted this interview on Microsoft Teams, [Portfolio Adviser] would have still achieved a similar article at the end of it. This is the part that people didn’t understand – that we just are transitioning into a digital world. But we still have the same societal needs.”

The meaning of growth

Alongside common belief that is fund is a technology mandate, Yiu stresses that his fund does not have a growth investment style, either. He explains its name derives from pre-launch discussions with seed investor Peter Hargreaves.

“From Peter’s perspective, there are two types of strategy: income and growth. And of course, this fund does not pay a dividend and its aim is to achieve capital growth. So it was called Blue Whale Growth, rather than Blue Whale Income,” the CIO explains. “But of course, we became known as a ‘growthy’ fund because, during the pandemic, we were holding similar stocks to other well-known, growth-specific strategies.  

“But since 2022, our performance has diverged from these well-known growth names and we have continued to outperform. You can see that we do not invest in the same way, based on our recovery.

“If you asked me what my ‘style’ is today, I would just tell you that I want to grow your investment at the highest rate of return possible. We want to invest in the next Microsoft and the next Nvidia, because that’s how to make the most money. You don’t get rich by getting a dividend from Unilever.”

On 31 May, the FCA’s new anti-greenwashing rule came into force.

The new rule requires FCA-authorised firms to be ‘fair, clear and not misleading’ when making sustainability-related claims about their products and services. In short, any sustainability-related claims must be correct and capable of substantiation, clear, comparable and complete.

The anti-greenwashing rule is the first part of a wider package of sustainability-related regulation rolling out across the financial services industry, known as the Sustainability Disclosure Requirements (SDR). SDR is the FCA’s attempt to catch up to an industry whose development has outpaced the regulator in recent years.

See also: Election provides opportunity to address ‘unresolved tension’ between energy security and net zero

But greenwashing is not a problem confined to financial services. Whether it is what you invest your money in, which car you drive to work, or what company flies you on holiday, history already tells the story of companies warping, inflating and exaggerating environmental claims for financial gain.

When companies get it wrong

Volkswagen – One of the most notable cases of greenwashing in recent history was Volkswagen’s emissions scandal, dubbed ‘Dieselgate’. Having famously pushed a ‘clean diesel’ marketing campaign as part of a strategy to become the world’s largest carmaker, independent investigations uncovered that defeat devices were installed in vehicles to detect when they were being tested and change performance to improve results. Most notably, nitrogen oxide emissions were found to be as much as 40 times higher than allowed by US law.

The global scandal snowballed, leading to a share price drop of more than 40% in the immediate aftermath, a bill of more than $34bn to date, and even a 7-year prison sentence for one VW manager in the US. Further investigations have also found that various VW models underreport carbon emissions by 25%. This seismic event irreversibly damaged VW’s reputation, conned millions of consumers and severely undermined the firm’s environmental targets. 

Airlines – Fast forwarding to 2024, 20 airlines have recently been flagged by EU regulators for “several types of potentially misleading green claims”. The most notable being companies charging a higher price for tickets that “reduce or counterbalance the flight’s emissions” using carbon offsets or ‘sustainable aviation fuels’, which still emit some carbon when they are burnt.

What good looks like to us

Companies need to approach sustainability in a measured way. Any sustainability-related claims must align with the company’s core business values, and sustainability considerations should form part of the overall business strategy, operations and decision-making processes. Any sustainability-related targets should follow the SMART formula – they should be specific, measurable, achievable, relevant and time-bound, and aligned to recognised standards such as the Taskforce on Climate-related Financial Disclosures.

Transparency is incredibly important – companies should produce comprehensive ESG disclosures with detailed information on any targets they’ve set and what progress they’ve made towards them. Those with the most comprehensive approach will engage with stakeholders, such as investors, regulators and others to explain their approach and ensure it’s well understood. Companies should also be mindful of sustainability-related factors in their supply chain, and conduct regular supply chain assessments.

See also: Asset managers still grappling with communications as anti-greenwashing deadline looms

Finally, sustainability considerations should be embedded into companies’ governance and oversight processes to ensure senior leaders are accountable for the delivery of the sustainability strategy. A good way to ensure interests are aligned here is to link executive compensation to sustainability targets.

Case study: Microsoft

Microsoft has made significant commitments to sustainability. The firm plans to remove more carbon from the environment than it emits by 2030. This ambitious goal includes reducing its carbon footprint across its operations and supply chain, investing in renewable energy, and advancing sustainable product design. This commitment extends to water and waste management, with goals to become water positive and achieve zero waste across its direct operations by 2030.

By 2050, it aims to remove all the carbon it’s emitted either directly or through electricity use since its founding in 1975. Microsoft also invests in technology and innovation to help other organisations achieve their own sustainability goals, reflecting its broader commitment to global environmental stewardship.

This commitment to sustainability is underpinned by robust governance structures and high-quality disclosures. Microsoft’s Board of Directors includes a Regulatory and Public Policy Committee that oversees environmental sustainability policies and strategies.

The company provides comprehensive and transparent sustainability reports, aligned with globally recognized frameworks like the Global Reporting Initiative and the Sustainability Accounting Standards Board.

These reports detail Microsoft’s progress on sustainability goals, including metrics and key performance indicators, which are independently verified. This transparency ensures accountability and allows investors to track Microsoft’s sustainability journey, thereby reducing the potential for greenwashing allegations.

This article was originally written for our sister publication, PA Adviser

The co-manager of the £640.6m Aegon Global Equity Income fund is referring to the rising allocation to unlisted assets within pension funds. This steadily increasing allocation, he says, is coming at the expense of unloved listed UK equities.

“Pension funds used to have a 40% allocation to UK equities, now that is down to 3-4%, and money continues to come out,” Scott explains. “A lot of pension funds are trying to diversify by holding assets like private equity. However, that is just less visible, more leveraged equity.

“You can see that this is happening on a regular basis. People move off to these less visible asset classes because they see it as diversification. But, to me, it just means you can’t see what is around the corner. And because the price hasn’t moved on a daily basis, you think the value is there – but it’s not.”

See also: Fund manager profile: Man GLG’s Mike Scott on riding high in high yield

That being said, Scott is hardly the UK’s biggest cheerleader. He explains that Aegon used to run a UK equity income fund boasting strong returns, but it was ultimately closed in 2022 because they were unable to sell it.

“The UK stockmarket, I would say, has no unique companies. The last unique one we had, in my eyes, was ARM, but it’s gone,” he argues. “We have good companies, like Experian and AstraZeneca – global companies that compete well in their fields, but they are not unique.”

The manager adds the UK stockmarket is dominated by oil & gas, mining and banking stocks – companies which are far from fashionable in today’s world. And this is even more the case when investing with an income mandate to fulfil.

As such, Aegon Global Equity currently has a 5.7% allocation to the home market. “We have Rio Tinto, which is UK listed but doesn’t operate in the high street of the UK. It is a mining company and very international,” Scott says.

“In terms of UK domestic-facing companies, we have three and one is the smallest holding in the fund, which holds roughly 40 stocks in total. This is London Metric Company, and we also own Taylor Wimpey and Phoenix. If you stripped out where companies are listed and looked at pure UK exposure, it would probably only be a couple of percent.”

US for income

At the opposite end of the spectrum, the fund’s largest regional weighting is to North America at 58.3%. This allocation – while underweight relative to the MSCI ACWI – may be higher than expected for some investors, given the US is not exactly famed for its attractive dividend yields.

See also: Fund manager profile with Emily Foshag: Infrastructure is ready to build back better

Scott points out that five of the magnificent seven stocks are now paying a dividend, although he caveats this with the fact payouts are “absolutely miniscule” at present. Microsoft is the portfolio’s single biggest holding with an 8.2% weighting as at the end of March 2024.

“The US is not a dividend market. US companies tend to engage more in share buybacks, but they have very, very low pay-out ratios. These low pay-out ratios mean that, even if you do have a bit of a fall in profitability, the dividend is still protected,” the fund manager reasons.

“If you were to ask me the yield on my fund and I tell you it’s just below 3%, you might be underwhelmed. But it’s at a premium to the MSCI – we target a net figure of 130% of MSCI ACWI and we are achieving that, but we are also seeing growth on the other side.

“When you get your dividend, you’ve not taken all the money. You are still invested in that business. If the business is getting a return on equity, you’re still invested in it, they are not giving you all that cash back. They are going to take your money and continue to grow. If they can continue to grow, they can continue to grow that payment stream.”

Trust the process

The fund’s focus on dividend growth has clearly stood the fund in good stead, having found itself in the top quartile for its total returns within the IA Global Equity Income sector over one, three, five and 10 years, as well as over three and six months, according to data from FE Fundinfo.

Scott says compounding is “very, very important” in the fund’s process, so portfolio turnover is therefore “very low”.

“There is very much a buy-and-hold mentality. It is a ‘run your winners’ mentality. We just stick with it,” he explains.

A key trap income investors can fall into, according to the manager, is too much of a focus on the dividend yield itself. “By the time you start to look at a company and think: ‘this is good, the yield has come up a bit’, you wonder whether it will cut its dividend. Then you look again and the yield has gone up even more and you think: ‘oh my goodness it’s going to cut its dividend’. Then, by the time it eventually does cut its dividend, it is too late.”

See also: PA Fund Manager Profile: Baillie Gifford’s Gibson prepares for new era of US growth

Scott believes a key lead indicator for income investors is net debt-to-EBITDA, which he describes as a proxy for how much cash flow a business has relative to its net debt and its return on equity. Essentially, it measures how profitable a business is.

“Applying this to a personal, hypothetical situation: if someone started earning less money and their debts were increasing on a daily basis, everything is heading in the wrong direction. You want to see companies whose profitability is rising and who are able to reduce their debt levels.

“This shows they are generating cash which they can use to pay out a dividend. And that dividend can only compound upwards. That’s the lead indicator. Rising debt within a business, or net debt relative to EBITDA and falling returns is what we look out for.

“Obviously we will never be able to avoid them all. Covid was a time when you couldn’t avoid those cuts – but that was very much a one-off.”

Not-to-magnificent Tesla and sticky inflation

When asked about the prospects for the so-called ‘magnificent seven’ stocks, Scott says Tesla’s days as part of the acronym are numbered.

“In my view, Tesla will not be able to pay a dividend. Tesla will go the wrong way. It has debt, it has cash going out the door and competition is only increasing.”

He points out that, in China alone, there are approximately 100 electric car manufacturers, building cars which are being sold at half the retail price of the average Tesla.

However, the fund manager caveats this with the fact China as a whole could continue to struggle as near-shoring remains in place. And this, he says, is a key reason why he believes inflation will remain stickier than many had hoped at the start of the year.

See also: PA Fund Manager Profile: Polar Capital’s Jorry Nøddekær on emerging market opportunities

“If, for example, you notice that everybody in Edinburgh is wearing a yellow T-shirt, you don’t want to send the order to China and receive them six months later when there’s snow on the ground. So, you bring it closer to home,” Scott argues.

“Also, companies don’t necessarily want to deal with China, because they are concerned about governance issues in relation to its supply chain.

“So, this whole backdrop for me is inflationary. And it will be relatively sticky in the system. China has been exporting deflation to our shores for years and this has broadly ended.

“I think the only area where you will start to see deflation is electric cars.”

Another long-term theme causing stubborn inflation, according to the manager, is the rise of ESG investing.

“If you think that you can shift supply chains and help people to use renewable products that are more expensive, there will be a cost to that. It doesn’t cheapen things and that is not going to go away.”

The importance of dividends

In light of this inflationary backdrop, Scott points out that over the past 80 years, there has been a distinct correlation between the proportion of gains globally deriving from income payouts, relative to inflation in the system.

“Typically, two-thirds [of returns] come from capital and one third come from dividends. And over 80 years, that is normal. There has been a slight aberration more recently, where it was all about capital and not about income.

“Why? Because interest rates were virtually at zero at that point. And if you put a minimum or zero interest rate on something, its capital value increases. And if capital values keep coming up, nobody cares about the income.

“But if you look back to times when we had a more dominant proportion of income, say in the 1970s or the 1940s, they were higher inflationary periods.

“I am not saying we will go back to where inflation was – we think this inflationary boost from Covid was very much a one-off. But I do think inflation is stickier within the system now, for multiple reasons. So I do think, going forwards, that dividends will become much more important.”

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