The Trump administration only started work on Jan. 20, but it’s clear that artificial intelligence is a key priority, with plans to invest USD 100 billion (£80 billion) into a joint venture with OpenAI, Oracle and SoftBank.
After a multi-year bull run for tech stocks, driven by the AI boom, the path ahead may not be so linear. China’s launch of DeepSeek has already upset valuations in western tech firms, with the Asian superpower already casting doubt on the narrative of US dominance in this space.
How are UK fund managers approaching the increasingly complex tech landscape?
UK’s Biggest Investment Trust Sells Tesla and Nvidia
Scottish Mortgage SMT is the largest investment trust in the UK and one with a reputation for picking tech success stocks early, with notable wins in Tesla TSLA and Nvidia NVDA before their share prices exploded.
At a recent Scottish Mortgage investment trust summit in London, co-manager Tom Slater noted that political influence can move the needle on Big Tech valuations as much as fundamentals.
Tesla’s share price has increased by 75% in the last six months. According to Slater, the market cap increased in the absence of fundamental news beyond some anticipation around new cheaper models of cars. He said it is likely that “a proportion of the value gain is driven by speculators who are impressed with Musk’s proximity to the (new) administration”.
A lighter-touch regulatory environment under Trump has its upsides for investors but could also lead to inflated valuations as external factors come into play, he argued.
Scottish Mortgage was a backer of Tesla before the shares rose 700% in 2020, propelling the investment trust share price 100% higher in the same year. This made the trust the best performer under Morningstar analyst coverage in 2020, a banner year before the tech story went into reverse in 2021 and 2022.
So it’s significant that the Scottish Mortgage team sold just over £650 million of Tesla stock in 2024, mainly weighted to last quarter of the year. Still, Slater said the team remained “excited about the company’s prospects” and will be looking to reinvest in the future based on a broadening out from autonomous vehicles to AI more broadly.
The trust also sold over £1 billion worth of Nvidia NVDA shares in 2024, because its managers expect emerging chip companies with their own training models to take up market share in the future.
“We were, though, keen to ensure that we didn’t dilute our exposure to the AI revolution,” Slater said, highlighting that nearly £400 million of the funds from the Nvidia reduction were reinvested into Meta META, with additional investments into Shopify SHOP, Roblox RBLX and Cloudflare NET.
UK’s Best Performing Fund Keeps Faith With Tech
Another fund manager watching the new Trump administration is Ankur Crawford, manager of Alger Focus Equity and Alger American Asset Growth, the two best performing rated funds available to UK investors in 2024, both returning over 50% last year. Both have a Morningstar Medalist Rating of Neutral. She’s cautious about calling the next move for AI stocks, but insists we are only at the beginning of the AI journey.
Both funds have Amazon, Microsoft MSFT, Nvidia, Meta and Apple AAPL as top holdings, with the first three with a weighting of nearly 10% in the portfolios.
On the one hand, she notes that the US government is increasing its focus on artificial intelligence, by appointing its first AI czar, David Sacks.
On the other hand, recently bond markets have flashed warning signs over the US debt burden, which could force the new government to reduce spending. This is going to impact the market, investor confidence and the strength of the US dollar, she says. She adds that there’s still uncertainty over the new Department of Government Efficiency, how it’s going to be implemented and whether it will have any real power.
She does not however, see the Magnificent Seven as overvalued, noting that Nvidia is trading at a sub-market multiple, and that Microsoft underperformed the market last year ahead of its upcoming co-pilot and AI agent launches.
And Terry Smith Expects a Tech Correction
One top manager expecting a technology selloff is Terry Smith, manager of Silver-rated Fundsmith Equity, as highlighted in his recent letter to investors where he took aim at passive tracker funds’ contribution to the AI growth, funds that inevitably end up with high exposure to the concentrated top of indexes like the S&P 500 – and therefore, the Magnificent Seven. The fund’s top three holdings are Microsoft, with a near 10% weighting, Novo Nordisk Novo B and Meta Platforms.
Morningstar analyst Daniel Haydon praises the manager’s “sound investment philosophy”, saying Smith is an “outspoken investor who has often demonstrated his willingness to bet against the crowd”. The fund is one of the most popular retail investment products, with assets under management of more than £22 billion. There has been scrutiny of the fund’s performance in recent years.
Smith does not, however, predict when this tech correction could happen and what the catalyst would be.
“This is a self-reinforcing feedback loop which will operate until it doesn’t. For example, were there to be an economic downturn which led to a reduction in tech spending, which is now so large a proportion of overall spending that it cannot be non-cyclical, one area of vulnerability might be spending on AI as it is not currently generating much revenue.
“Were the largest companies then to produce disappointing results, their share prices are likely to react badly which will drag down the index performance more than that of those active managers who are underweight in these stocks. But even if some scenario like this awaits us in the future, what exactly will cause this and when it may occur is difficult or impossible to predict,” Smith wrote in his letter.
With DeepSeek potentially threatening the long bull run in US tech stocks, the upcoming earnings season will be more closely watched than usual.
Is the AI Story Still in The Early Stages?
Investors therefore will need to keep their eye on the long-term opportunities, Matt Cioppa, portfolio manager at Franklin Equity Group, says.
“We remain quite optimistic that generative AI will drive strong returns for the technology sector over the long-term, and encourage investors to view AI as a multi-year trend.
“Volatility in the early stages of a foundational technology shift is quite normal, and could arise for a number of reasons, but current AI adoption data points suggest the broader theme is intact.
“The Trump administration can potentially provide a boost, as he has already highlighted private partnerships for domestic AI investment on his first full day in office.”
The author or authors do own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
