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Blue Whale Growth, the investment fund backed by billionaire Peter Hargreaves, has reduced its exposure to the “Magnificent Seven” group of major US technology companies due to concerns about their huge spending on artificial intelligence.
Steven Yu, the fund's manager, told the Financial Times that he “aggressively” sold shares in Microsoft to book profits, pushing the stock out of the fund's 10 largest holdings in the third quarter for the first time since its launch in 2017. .
“Microsoft's return on invested capital will likely decline from here, given the significant investments made in AI infrastructure,” he said.
Yu said he would “consider selling” Microsoft entirely if the technology company's investments in AI outpace its cash generation.
Shares in the Big Seven companies — Microsoft, Nvidia, Apple, Alphabet, Meta, Amazon, and Tesla — have skyrocketed in recent years and represent… About a third of the market capitalization of the S&P 500 index.
But major investors, including Warren Buffett in the US and Terry Smith in the UK, have recently downsized or sold some of the Magnificent Seven companies. Wall Street is becoming increasingly nervous about when returns will be realized from big tech companies' capital spending It is expected to exceed $200 billion this year.
“A lot of people talk about Magnificent Seven, and we (back) Nvidia,” Yu said, referring to the US chipmaker. “Outside of NVIDIA, we are increasingly less positive on the (other) six. The capital intensity of these stocks is very high because they are spending a lot on AI infrastructure.
“I'm not suggesting that Magnificent Seven shares will disappear, but…we think they could be a drag on the market,” he added.
Blue Whale manages £1.3bn, invests in global stocks, and has a significant stake in US technology companies since its inception. It has financial backing from Hargreaves, who co-founded the investment platform Hargreaves Lansdowne, and former Artemis fund manager Yu.
The Hargreaves family's holding in the Blue Whale Growth Fund is worth more than £200 million. The fund achieved returns of 24 percent this year until the end of November, compared with 15 percent for competing funds on average.
Yiu's decision to sell some of the Magnificent Seven is the latest sign that investors have concerns about the companies' future prospects. The fund's exposure to some of these stocks, excluding Nvidia, now amounts to just 5 percent of its portfolio — far less than the 20 percent for the MSCI World Index, he said.
Yu reduced the fund's stake in Microsoft from 8 percent in January to about 2 percent.
The fund manager also recently sold Meta, Facebook's parent company, to take profits “due to concerns about artificial intelligence increasing” the company's spending. He reduced his stake from 5 percent of the fund to 3 percent.
“The problem with Meta is that we are worried about overspending on AI next year,” Yu said. “Ultimately, you need to translate your spending into profit, and right now we're not seeing enough of that.”
He also sold his stake in Amazon in 2021 and in Alphabet, Google's parent company, in 2022.
Other investors have dumped large US technology stocks recently. Smith, who runs £23bn Fundsmith Equity, said last month that he had sold Apple after just two years of investing in it.
Buffett, one of the most famous investors in the world, continued to reduce Berkshire Hathaway's stake in Apple last month, and reduced his shares. Nearly two-thirds of the quota in just over a year.
Yeo said Nvidia represented roughly 10 percent of his fund, and valued the stake at around £100 million. He was forced to sell shares as the market value of Nvidia, which he said made a profit of £100m, grew.
The fund manager also backs Broadcom, which he said is building AI infrastructure and is a beneficiary along with Nvidia of money being spent on AI by the rest of the Magnificent Seven companies.
According to Blue Whale's latest accounts, the fund's parent company reported profits of £4.1m in the year to March, up from £3.9m the previous year.
