Despite a challenging quarter amid AI-led market concentration, the managers remain positive. While underweight pure-play AI names, several holdings continue to benefit from AI investment, and recent additions strengthen exposure to themes such as digital security.
Chris Foster: The Sustainable Future US Growth Fund returned 2.9% in US dollar terms in Q3. This was compared with 8% for the MSCI USA index. It was a difficult quarter for the Fund, and there really seems to be one topic dominating markets currently, this is artificial intelligence. Given our overweight to smaller mid-caps, our Fund is typically underweight many of those deemed to be AI winners, and so the portfolio struggled to keep pace with the index. Given the broader market's AI-fuelled gains, it's no surprise that several of the Fund's leading contributors this quarter were closely aligned with this theme. Positions such as Alphabet which raised 41%, KLA which raised 21% and Cadence Designs which raised 13%, all delivered strong returns, benefiting from the continued investor enthusiasm and robust earnings updates tied to their ongoing AI adoption and development.
While we don't own any companies that would be considered pure play AI winners, we thought it would be helpful to provide an update as to our exposure overall. We estimate that around 25% of the portfolio is currently invested in businesses that are likely to do well should the growth of AI capital expenditures continue. These include the companies already mentioned, but also those such as Trane Technologies, who provide the cooling systems for data centres, Microsoft, a major investor in OpenAI, and Broadcom, a company leading the charge on something called custom silicon. These are semiconductors that are much more energy efficient than typical GPUs but designed for very specific use cases.
In contrast, the MSCI US index has around 30% exposed to what we would consider AI beneficiaries in the top 10 holdings alone. And we estimate close to 40% overall for the index. Artificial intelligence is not one of our sustainable investment themes, and so our exposure will always be through companies that make products driving energy efficiencies or reducing waste in the process. Given the concentration of the index to this area of growth, and indeed the broader economy, with estimates suggesting that up to half of US GDP growth this year is stemming from the build out of data centres, our portfolio will continue to lag the index whilst this trend continues.
We should stress however, that should we reach a point where the AI narrative turns negative, not only are we likely to benefit from our reduced exposure, but none of the companies that we invest in are solely reliant on AI for their success. The companies that we own that we consider to be beneficiaries typically have less than 20% of their overall revenues exposed to this theme.
During the quarter, we added two new names to the portfolio. Service Titan, a US software company that provides the operating system for tradespeople such as plumbers and electricians. Helping them operate more efficiently, scale faster, and build resilience. This business is growing revenues north of 20%, and we took advantage of the negative sentiment around the impact of AI on software to start a position at what we think is a very attractive valuation. Another addition to the portfolio came in the form of Zscaler. This is a company exposed to our theme of 'enhancing digital security'. As hybrid working has become commonplace and more information and data has moved to the cloud, the attack area in which hackers can target our devices has become much broader and much more difficult to protect. This has created the need for the next evolution in cybersecurity, which is a much more sophisticated approach in how each person can access a company's network. Zscaler is the global leader in this evolution and continues to grow its market share in the cybersecurity space. To make room for these additions, we sold our holdings in ServiceNow, Globant and Winmark.
Looking forward, we are particularly excited about our exposure to our healthcare themes. With around 20% of the Fund invested across the healthcare sector, we have significantly more exposure than the benchmark. After a tough period following the pandemic, we believe investors are starting to thaw to the sector once again, and this following a string of improving results. Not only are these companies responsible for some of the most positive sustainability solutions that we have in the portfolio, many are quite literally saving lives, but should this trend continue your Fund is very well positioned to benefit.
KEY RISKS
Past performance does not predict future returns. You may get back less than you originally invested.
We recommend this fund is held long term (minimum period of 5 years). We recommend that you hold this fund as part of a diversified portfolio of investments.
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