In this interview conducted by the Fund calibre team with Dave Dudding, manager of the CT Global Focus fund, discussion points are the S&P 500 reaching 5,000 for the first time along with various aspects of the current economic landscape, such as supply chain dynamics, inflation, and the impact of artificial intelligence (AI) on the market.
Dave shares insights into specific holdings in the portfolio, including Nvidia and Microsoft. The conversation also covers the growth potential of Asian consumers, and the fund’s stance on China and India.
Why you should listen to the interview: Dave has always had a very clear philosophy and process which he has executed very successfully throughout his career and you hear this experience coming through when he discusses why Microsoft is “on a more palatable valuation” than Nvidia. He also offers his thoughts on upcoming themes that he believes hold great investment potential.
This interview was recorded on 14 February, a week before Nvidia posted its financial results on 21 February 2024. Please note, answers are edited and condensed for clarity. To gain a fuller understanding and clearer context, tune in to the ‘Investing on the go’ podcast.
What to look out for in this interview:
Time out of the market is very expensive
“We focus on finding the highest-quality, best companies from the bottom-up and then own them for a good amount of time, letting them compound over the long term. To be honest, we’re not very good at market timing. So, a year ago I think we all felt that 2023 was probably going to be a bad year for the stock market and that the US economy was going to flirt with recession, and actually, GDP growth was tremendously strong and stock markets did incredibly well. So, our track record at sort of macro-forecasting isn’t great, and I always think it’s best just to try and focus on the things that we as investors know about – or at least think we know about – which is the prospects for individual companies.
“It’s very, very difficult to try and time the market and it can be very expensive for investors as well, if they think that markets are expensive and then they miss out on significant rallies, then time out of the market is very expensive. So, irrespective of the market moves at the moment, we still think that there are some great opportunities in the medium to long-term.”
Backing the AI theme early on
“We’re quite lucky in that we were believers in AI as a theme relatively early so we’ve had a position in Nvidia – which is obviously the biggest beneficiary – for quite some time. We’ve had big positions in Microsoft and Alphabet as well, so, we are believers in AI although in some ways we see it really as a continuation of an existing sort of trend. But much now depends on the success of ChatGPT amongst other products. There’s been a lot of initial enthusiasm and now we’re in a phase where we really need to start to see that coming through in the company numbers.
“The easiest way to invest at the moment in AI has been in the semiconductor supply chain and Nvidia is by far and away the biggest beneficiary. But you’ve also seen sort of some other companies like Advanced Micro Devices, Marvell Technology, and then the semiconductor capital equipment manufacturers ASML, LAM Research Corporation, Applied Materials, and Tokyo Electron to name a few. All these companies are certainly the big cloud companies and are certainly ordering large amounts of chips, so that has been the easiest way to play the theme.
Nvidia or Microsoft?
“One of the reasons we were so bullish on Nvidia was that the stock went up 250% last year, but the earnings forecast went up by more than that, so actually the stock de-rated, which is fairly hard to fathom of a company that size, but they beat all the forecasts that were around this time last year and then they had a succession of earnings forecasts which they kept beating very, very significantly. And again, the stock was up well over 200% last year. It’s now up another 50% in the early days of this year, so these are fairly extraordinary moves.
“For the last few quarters, Nvidia has had great results and the stock has actually probably gone down or drifted sideways for a while as people take profits. So, you know, it’ll be interesting to see what the reaction is. I think people are not worried – we know that 2024 is going to be a great year for Nvidia, I think the debate is more about 2025 and also about increasing – or the potential for – increasing competition as well from other companies. So, we’re big believers in the story, but you know, we have to temper that with a degree of realism, I think it’s fair to say, and over the next five or six years, we do believe that this will be a powerful theme.
“We do have Microsoft which is our biggest holding, and I think is on a more palatable valuation than Nvidia, for example. It’s very well positioned I think for the rest of the decade, largely because of the cloud: as one of the big three cloud providers, it’s basically gaining market share. And because of its relationships with corporates, it’s in a very, very strong position to benefit from that continued move to the cloud as well as spending on AI. So, we think it’s well-positioned, even within things like security for example, they will be beneficiaries of increased spending on that as well. And this is an industry with relatively high barriers to entry as well so Microsoft is doing very, very well.”
More than just AI names
“Some of the other things that people are interested in are always GLP-1s which are the weight-loss drugs developed by Novo Nordisk and Eli Lilly – we’re holders of Lilly. We were holders of Novo as well but we decided just to have one name in the space. But we are quite big believers there as well. It’s important to highlight that these stocks have done incredibly well as well. I suppose you could call them the Nvidia equivalent of the pharma industry. Again, there’s quite a lot priced in, but we do think that these drugs are going to take off. The barriers to entry are fairly significant in terms of the manufacturing which is very, very difficult and capital intensive. We think there is set to be good growth in this field for a number of years to come.
“We’re also big believers in stocks that can help with energy transition, and in particular with electrification, companies like Schneider Electric, which is a French multinational with big positions in the US and also China, we see that as being a big beneficiary of those sorts of themes. And again, they’re supplying data centres, for example, so a lot of that comes back to Microsoft, Alphabet, Amazon and spending patterns there. But it is a bit broader as well because Schneider are also benefiting from investment in the grid in particular around the world really, as you need to spend more money on the grid to store and distribute electricity, particularly as more and more is derived from renewable sources.
“So, there’s quite a lot of sort of exciting places to be.”
Conclusion
Dave offers interesting insights into the fund’s successful performance using a number of notable examples across a range of themes. He illustrates clearly how this high conviction portfolio is truly a fund of best ideas from around the globe.
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