Fund managers at Polar Capital Technology (PCT) and Manchester and London (MNL) have dismissed fears that the frenzy over artificial intelligence (AI) is a bubble waiting to burst while acknowledging that tech markets will remain volatile. 

The US Nasdaq technology index slipped 2.5% this week, having rallied strongly since April after big falls in the first quarter, to stand just over 9% higher for the year, a modest gain after last year’s 31% leap.  

Excited or “overexcited”?

OpenAI founder Sam Altman revived concerns about excessive speculative behaviour when he told reporters investors were “overexcited”, comparing the current feverish spending on AI to the Internet mania in the late 1990s leading to the 2000-03 market crash. 

A report from the influential Massachusetts Institute of Technology also unsettled some investors, claiming 95% of corporate AI projects were so far generating a “zero return”. 

Mark Sheppard, manager of the £341m AI-focused Manchester and London investment trust, gave the report, “The GenAI divide: State of AI in Business 2025”, short shrift describing it as a “small sample, subjective, non report”. 

However, commenting in his investor newsletter, he highlighted “two brilliant points” he agreed with. One was that companies had around twice the success (67%) buying AI tools from vendors rather than building them in-house (33%). 

Secondly, spending was misaligned with over half of corporate AI budgets going on sales and marketing tools when the best return on investment came from back-office automation and cutting outsourcing costs.  

Ben Rogoff and Alastair Unwin, managers of the £5bn, FTSE 100 listed Polar Capital Technology investment trust which has made a similar big bet on AI, provided a more positive interpretation in their monthly update.  

They pointed out that the fastest AI adopters were seeing the impact on revenues and costs. For example, Meta’s internal AI spending had driven 5% more ad conversions on Instagram and 3% more on Facebook, while AI-powered recommendations had increased time spent on both platforms by 6% and 5% respectively in the second quarter.  

Last year Microsoft saved more than $500m in call centre costs while improving customer and employee satisfaction, they said. 

AI a “general-purpose technology”

The Polar Capital fund managers were encouraged by another paper from the US Federal Reserve, which last month said generative AI was a general-purpose technology (GPT) capable of widespread adoption and continual improvement that may also qualify as an “invention of methods of invention” (IMI), similar in historic impact to the telescope. 

“Both GPTs and IMIs have historically been linked to broad-based productivity gains, which in turn can support structurally higher GDP growth and lower inflation,” they said. 

“According to the Congressional Budget Office, such productivity-driven growth could also play a critical role in addressing the long-term fiscal challenges facing the US,” the fund managers added. 

Both PCT and MNL highlighted the latest broadly positive second quarter earnings results from US companies, including the Internet sector where spending on AI has ramped up ever higher to meet increasing demand.  

Most tech earnings beat expectations

The PCT managers said Google-owner Alphabet had met “elevated expectations”, while Meta exceeded consensus forecasts with a 22% increase in revenues and Microsoft had posted strong results, although Amazon’s figures had been mixed with lacklustre growth from its web services business fuelling concerns about its AI positioning.  

Sheppard, who saw his trust’s shares rally 21% last month as the US struck tariff deals with Japan and the US, picked out AI-driven, forecast-busting results from Arista, a US cloud software provider; Advanced Micro Devices, a US chip manufacturer; and Robinhood, the commission-free investment trading platform, as evidence of the compelling opportunity in artificial intelligence. 

Growth at reasonable price

The MNL manager, whose eye-watering 41% weighting to $4.3trn AI chip maker Nivida makes PCT’s top 12.5% allocation look tame, claimed his portfolio of stocks was not expensive.  

With sales growing at over 15% a year on average and earnings accelerating at an annual rate of over 18% a year, their enterprise value was 19 times forecast earnings “so we would argue we present growth at a reasonable price”, said Sheppard.  

This was a point that the PCT managers elaborated on, having seen their shares advance over 10% last month, saying AI development and deployment would continue amidst very strong demand. 

Now is like the mid-1990s

“This constructive backdrop continues to feel broadly analogous to the mid-1990s, the last time the infrastructure for general purpose technology was built out in the form of the internet,” they said. 

Rogoff and Unwin cautioned that the 1995-98 period had been volatile, with the Nasdaq suffering seven falls of over 15% while advancing overall.  

“With equity markets back at highs and valuations back at the high end of their post-global financial crisis trading range, there could be turbulence ahead,” they warned. 

However, they immediately qualified that by arguing volatility was part and parcel of investing in the early stages of a technology cycle. While that could be mitigated in the short term through the defensive use of put options to protect the fund from sudden setbacks, it should not blind investors to the fact that “AI represents the next general purpose technology and that the investment opportunity has not been fully reflected by markets.” 

Shares in both trusts have slipped 3%-4% in the past week, a decline that has not upset their ratings with Polar Capital Technology trading around 8% below net asset value and Manchester and London on a discount of around 15%. Figures from the companies show that at the end of July MNL had generated a five-year total return to shareholders of 72.4% total and PCT had provided 106.5%, although the Dow Jones Global Technology index, dominated by the “Magnificent Seven” megacaps, had done better, returning 133.5%.