Concerns Over AI Investments Prompt Portfolio Shift
Blue Whale Growth Fund, backed by billionaire Peter Hargreaves, has scaled back its exposure to the Magnificent Seven tech giants, citing concerns over excessive AI spending. Fund manager Stephen Yiu revealed the decision to aggressively sell shares in Microsoft, removing the stock from the fund’s top 10 holdings for the first time since its 2017 launch.
“Microsoft’s return on invested capital is likely to decline given the significant investment in AI infrastructure,” Yiu explained. He also hinted at potentially selling out of Microsoft entirely if its AI spending outweighs cash generation.
Scaling Back on Big Tech
The Magnificent Seven—Microsoft, Nvidia, Apple, Alphabet, Meta, Amazon, and Tesla—represent about one-third of the S&P 500’s market capitalisation. However, growing scepticism around the profitability of their massive AI investments has prompted caution among top investors.
Yiu’s adjustments include:
- Microsoft: Reduced from 8% of the fund in January to just 2%.
- Meta: Holdings trimmed from 5% to 3%, citing concerns about escalating AI expenditure.
- Amazon: Fully sold out in 2021.
- Alphabet: Exited entirely in 2022.
Why Nvidia Remains the Exception
While Yiu expressed concerns over most of the Magnificent Seven, Nvidia remains a key holding:
- Nvidia constitutes 10% of the Blue Whale fund, valued at around £100 million.
- The fund has already realised £100 million in profits from Nvidia as its market value surged.
Additionally, Yiu highlighted Broadcom as a strong investment due to its role in building AI infrastructure, benefiting alongside Nvidia from the broader AI boom.
Broader Investment Trends
Other leading investors are also reassessing their positions in Big Tech:
- Terry Smith, manager of the £23bn Fundsmith Equity fund, recently sold his stake in Apple after just two years.
- Warren Buffett’s Berkshire Hathaway has reduced its Apple holdings by nearly two-thirds in the past year.
Wall Street remains cautious as AI-driven spending by tech giants surpasses $200 billion annually, with questions around when returns on these investments will materialise.
Financial and Investment Implications
- Tech Stock Volatility: With major funds pulling back, high-growth tech stocks may face downward pressure, presenting risks and opportunities for investors.
- AI Infrastructure Players: Companies like Nvidia and Broadcom appear better positioned to benefit from AI-related spending, making them attractive long-term investments.
- High Street Impact: As AI reshapes industries, retail and service sectors may experience knock-on effects from changes in corporate spending and innovation timelines.
What This Means for Investors
Blue Whale’s cautious approach to AI-driven tech giants highlights a growing sentiment: investors are prioritising profitability over speculative growth. For those considering exposure to the tech sector, diversification and a focus on infrastructure players like Nvidia and Broadcom could mitigate risks associated with high-spending firms.
Source: (FT.com)
