The long game: why quality enterprise beats AI hype

Q: Your Global Growth and US Large Cap funds take a very contrarian view on semiconductors. At the end of July, Nvidia was the only chipmaker in your portfolio. At a time when the market is obsessed with hardware, why are you so sceptical of the wider semiconductor sector?

It's very true that Nvidia is the only semiconductor company currently in our portfolio. Just as a way of background, we initiated our portfolio position in Nvidia back in the beginning of 2019 when it was around a three-and-a-half-dollar-per-share stock.

Today, if you look at our benchmark like the Russell 1000 Growth, one-third of the benchmark currently is in semiconductors. And when you look at the semiconductor industry weight from a historical perspective, from 1990 to now, the current weight of an over 30% allocation is a five-standard-deviation move.

A vast majority of the semiconductor industry consists of commodity, undifferentiated products, are "pin-for-pin compatible," as they say in the industry, meaning they will work the same way. Most of these companies' results are determined by supply and demand balances or imbalances, rather than structural differentiation.

What is important is, like any other business, you have to ask yourself: whatever you sell, is it differentiated? Do you have competitive advantages? When you look at a company like Nvidia, again, which we invested in at the beginning of 2019, they have significant competitive advantages. What they sell is truly differentiated. And when a company purchases an Nvidia chip, they are getting actual value-add because of the differentiation in the product. For example, with the new generation of Nvidia chips you're getting a huge value, which is a typical cycle in semiconductors: you get double to ten times more output for a product that from generation to generation improves significantly.

So we believe that the structural dynamics of semiconductors did not change, in that we want to invest in differentiated businesses like Nvidia rather than undifferentiated businesses, where we believe it is more commodity in nature, like a company like Micron.

Q: It is very easy to get swept up in the AI narrative, but there’s a whole universe of non-tech companies out there. How do you maintain diversification in the portfolio, and which non-AI businesses are you most excited about for the next decade?

Undoubtedly, investors, rightly so, because of the significant portion of the market now being impacted by AI, are focusing on AI almost exclusively. However, we believe that in the long term, business driver diversification matters.

If you look at history, in the last 150 years, there have been 23 times that the market corrected 15% or more. In each one of these corrections, unless you had a diversified portfolio of great businesses, you didn't do well.

The way we invest is we look out and say, for the next decade plus, what will consumers and businesses need in terms of products and services? Which companies have a high-quality nature to their business with sustainable growth to address those needs?

When you look at our portfolio, we own companies like Monster Beverage. I think people will drink energy drinks regardless of what happens with AI. We own a company like Vertex, which addresses the cystic fibrosis patient population around the world.

And regardless of what happens with AI, those patients will exist and they will need to be addressed by a company like Vertex. We own a company like Expeditors, which really helps companies move products from one continent to another, and as long as there is trade, there will be a need for Expeditors. So, we are looking through a long-term lens rather than just what everyone is talking about today.

Q: You are famous for being a low-turnover, long-term holder, but you also maintain a very strict sell discipline. What triggers a sell for you, and how do you ensure that you learn from investments that don’t quite go to plan?

Despite being a long-term investor, we have a sell discipline. We believe that you have to have a good sell discipline to be a successful investor.

There are three reasons why we sell. We sell when a company reaches our estimate of intrinsic value. We sell a company when we find a better risk-reward opportunity outside of the portfolio to make room for that—selling the least attractive name in our portfolio. We also sell when we make a mistake.

If you look at our 20-year track record, we sold roughly 60 companies. Out of those 60 companies, around a quarter of them were mistakes to be more exact, I think close to 16 or 17 names were mistakes over 20 years. Not only do we keep track of this, we share this actually with our investors. We share the entire list of our mistakes and we also keep track of how they have done post our sell decision. The last thing you want to do is say, "I made a mistake," sell the company, and then watch it become the best-performing company in your universe.

When we look at our companies that we sold and again, we keep track of this on average, they underperformed cumulatively since our decision to sell by close to 300%.

Each one of these buckets from our sell decision to now materially underperformed our portfolio, meaning we did the right thing by making those sell decisions on average.