Half-year results from Manchester & London (MNL) show the price the £297m technology fund paid for having around a quarter of its assets in Microsoft when the market turned negative on the IT colossus’ approach to artificial intelligence (AI) last year.
A slump in the shares of the US software giant from last October as investors questioned its expenditure on AI, reliance on partner OpenAI and the rate of growth in its cloud computing business, helped pushed MNL to a 1.4% investment loss in the six months to 31 January.
That compared to a 6.5% total sterling return from the Nasdaq 100 technology index with Microsoft’s 20% decline accounting for 4.6 percentage points of the 7.9% underperformance.
The investment trust remains ahead of the Nasdaq over three years having generated a 160% total return on net assets that is almost double the benchmark’s 84% total return and has underpinned a 141% return for shareholders.
As previously reported, fund manager Mark Sheppard slashed his holding in $2.9trn Microsoft, which had accounted for 24.9% of the portfolio at the financial year-end on 31 July, cutting it from 21.8% to 4.8% in early February.
Sheppard has now reduced it further to just 0.5% commenting: “Whilst Microsoft has a sensible roadmap to becoming a key hyperscaler / enterprise platform for AI, the execution by the management team has been too slow and technologically underwhelming compared to competitors like Anthropic,” he said in reference to the $380bn unquoted Claude chatbox operator backed by some Baillie Gifford investment trusts among other institutional investors.
The strength of the pound against a weak dollar was a big headwind, knocking 3.7 percentage points from the performance.
The fund manager also sold a former 5.2% holding in Synopsys as shares in the semiconductor design software specialist struggled following a $35bn acquisition of rival Ansys last summer.
“It is our view that most incumbent software business models face a radical transformation in the agent era, a transition likely to result in structurally lower operating margins,” Sheppard said.
Nvidia the AI winner
Focused on the “picks and shovels’ of AI, Sheppard has increased the trust’s weighting to its biggest holding in Nvidia to 43.6%, reiterating his belief that shares in the $4.4trn AI chip designer could hit $500, 2.7 times higher than their current $180. It accounted for 40.7% of net assets in July.
“While we will continuously recalibrate this target as new data emerges, we currently see no superior risk-adjusted vehicle to capture the value of the AI transition,” he said.
Other top holdings at the end of January were: Nvidia rival Broadcom (10.5%); Taiwan Semi Conductor Company (9.6%); Lumentum Holdings, a US provider of high-speed light connections to data centres; and retail investment platform Robinhood Markets (3.9%).
The company also hiked its interim dividend from 7p to 20p in line with its new 40p per share distribution policy to compensate for the halt to share buybacks after its free share float fell close to the 35% minimum. Sheppard owns over 62% of the shares which stand on a discount of nearly 28% below NAV.
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