Annual results from technology fund Manchester and London (MNL) highlight the dangers of going all-in on artificial intelligence with the portfolio plunging 25% at the end of its financial year to 31 July.
At 22 June MNL had notched up a 51% investment return but saw this almost evaporate as the near collapse of the Situational Awareness AI hedge fund in the US caused “exceptional volatility” in artificial intelligence stocks.
Despite fund manager Mark Sheppard slashing the trust’s market exposure, its net asset value dropped by a quarter up to the end of July, exceeding the 23.2% decline in the Morgan Stanley Broad AI basket of stocks.
This looks to be a much bigger fall than rivals Polar Capital Technology (PCT) and Allianz Technology (ATT) which reported 13.8% and 11.7% declines in July.
As a result, MNL saw its underlying investment gain dwindle to 13.2% for the full year, though this is the fourth consecutive year the £376m investment trust has delivered double-digit portfolio returns and improves on the 1.4% first-half loss the company reported in March.
Chair Daniel Wright said this took the total portfolio return over four years to 171%. He shared Sheppard’s long-term confidence in the opportunity in AI but cautioned that the geopolitical and economic backdrop was “unusually challenging”.
Inflationary pressure and expectations of rising interest rates were “creating a clear headwind for long-duration growth equities”, he said, warning that further volatility was inevitable.
He urged private investors not to “over concentrate your own holdings in this fund… if you cannot afford to bear potential losses” and to hold MNL as part of a broader diversified portfolio.
Another factor in MNL’s volatile share price is the abandonment last year of share buybacks. These risked diminishing the company’s free float to such an extent that it might have lost its investment trust status, although the main contributor to the lack of stock in public ownership was caused by Sheppard’s exceptionally high 62.6% stake.
As a result, the share price rose just 2.4% in the financial year as its discount to net asset value (NAV) widened to 19.4% from 13.7%. Wright did not expect buybacks to resume meaning the shares will likely continue to trail NAV.
The company declared a 20p per share final dividend as part of its commitment to distribute 40p per share a year to shore up returns of capital, now that buybacks are off the table.
MNL has bounced back since the end of July with with a year-to-date total investment return of 32%.
Sheppard said gigantic AI spending by the five largest US “hyperscalers” Amazon (AWS), Microsoft (Azure), Alphabet (Google), Meta and Oracle was forecast by Morgan Stanley to rise 47% to $1.1trn next year. He said evidence was emerging that this colossal investment was generating attractive returns, in the face of growing scepticism.
The portfolio ended the year with US chip maker Broadcom its largest position at 11.5%, just ahead of TSMC and Nvidia on 11.4% each.
Our view
Richard Williams, senior analyst at QuotedData, said: “There’s a lot to unpack in MNL’s 13.2% NAV return, with the trust up around 51% by late June before a sharp unwind in crowded AI trades knocked about 25% off NAV in the final weeks. That volatility is the flip side of MNL’s high-conviction approach, although the portfolio is now considerably less concentrated than a year ago. This probably explains the persistent discount, which widened to 19.4% at the year end and currently stands at just under 30%. With buybacks constrained by MNL’s free-float issue, the enhanced 40p annual dividend provides another route for returning capital, but has yet to solve the rating problem.”
