How is AI mega-spend hitting global small-mid caps?

So historically, global small and mid-cap has actually outperformed global large. That was the case right up till around five years ago in the post - COVID world with passive flows. It's really been the large cap US tech companies, the Mag seven, if you will, that's captured a lot of those flows, driven outperformance on the large cap side, although both categories have done well on an absolute basis.

Q: How are global small and mid caps positioned?

We've seen that change year to date. Global small and mid is actually outperforming large. We tend to think that will continue. A big part of what's driving that is capital flowing back out of the US and out of those larger companies to domestic markets. And when that capital is then put back into those equity markets, it can have an outsized impact on these small and mid-cap companies. So we feel like global small and mid's really well positioned for the next several years.

Q: Is the massive AI investment impacting smaller companies?

What's interesting is, the big spending's coming from the hyperscalers. Massive amounts of money. But a lot of that spend is flowing to the small and mid-cap companies who are supplying the equipment and infrastructure needed to run data centres to actually run the LLM models to use AI, right?

So it's actually had outsized impact where in many cases the small and mid-cap companies are outperforming those, you know, big spenders or even like Nvidia over the last 12-18 months it's a really outsize impact due to the magnitude of the money flowing to the space.

So we found a lot of opportunities really across the spectrum, anything from, optical equipment makers, the actual semiconductor producers themselves, one that makes power management chips, for example, that goes with Nvidia's product, not Nvidia, but they still benefit from that spend, materials companies that make semiconductor materials or, or other related products, even products that go into the infrastructure needed to power the grid to then supply the data centers, right?

So there's a broad spectrum of ideas that have benefitted from that and a lot of the best companies in those spaces are within our universe.

Q: How important is valuation in the market right now?

I think it's always important. I think what happens is in a time like this, specifically with names that are benefitting from the AI theme, you can kind of pick your own adventure, if you will. What do you think on valuation? Well, it really depends what you think that terminal growth rate is.

You know, we use a three-stage DCF model. We value companies based on cash flows. So you really have to be open-minded as to, you know, what are the real opportunities with these companies and how far am I willing to kind of stretch, stretch the imagination in terms of what they can do?

You don't want to sell too quick but we're always very valuation centric. So there's always that backdrop of, what is just kind of the froth on top that's making this stock continue to move higher? Typically, we're selling a little bit early due to our valuation focus. But there's certainly, you know, a lot of room for those companies to continue to move higher as long as the spending keeps going.

And on the other side of that, if you're not an AI beneficiary, there's a lot of really cheap stocks out there that are good quality companies. They're not in the momentum trade. They've been a bit left behind and we're finding really good opportunities there. You have an off day or an off week, those names do really well. Over time, you know, they're going to be fine investments as well.

Q: What is your opinion on the software sector?

As a sector, it's interesting just due to the price action, right? When you see stocks that are down that much, you obviously are spending some time there trying to look at them. We don't really take a sector view per se, but as we look at individual companies, there are some that are starting to get interesting. There's a few things we're looking for.

• One, we would want that company to have some sort of proprietary data that gives it a bit of a moat to prevent them from being, you know, obsolesced by AI.
• We want to see that they have actually rolled AI into their product, so it's not a complement that someone has to find somewhere else or a potential threat to their product. It's actually integrated into the product.
• And we also want to see that they've adjusted their revenue model accordingly to be AI proof, if you will. So if you're seat-based and a company can use AI to leverage the seats that they have, you might not be getting your full value out of it anymore. We want to make sure they've adjusted that model accordingly, whether it's token-based or some other some other metric so they're really creating value for the company, but also, you know, benefitting themselves and, and increasing their own intrinsic value with their offering.

There's some interesting ideas we're looking at. We don't own any software at the moment, but I'm sure there's going to be some pretty, pretty good winners in that space as well.