Big 12: Move over Mag Seven! Polar Capital says hardware stocks are real AI beneficiaries

Polar Capital Technology (PCT ) is steadily reducing its holdings in US mega-caps following the recent rally, reallocating cash to hardware and power generation stocks that are poised to benefit from the AI boom.

The £4.7bn trust has continued to trim positions in Apple, Google, and Amazon – a decision that manager Ben Rogoff said had been taken because of the dominance of the ‘Magnificent Seven’.

‘Ever since I started in this business, people have called out the US as being expensive — and I think that’s still true,’ Rogoff told Citywire.

‘It’s made my life as an active manager slightly tricky because it’s been a very narrow market in recent years.’

He added that we are ‘two or three years into a much longer AI cycle’ which he hopes will shift market leadership.

‘New technology cycles tend to start as complementary to the old world, and as time passes, they look less complementary and more substitute.

‘We feel there’s the beginning of a two-way debate around many of the Magnificent Seven stories. There’s not really a two-way debate on Nvidia, and why should there be? This is one of the most remarkable corporate stories ever — but there is on Microsoft, Google, and certainly Amazon, which has not been a great stock recently.’

He added: ‘A lot of people hold these names as AI conduits, and we’re beginning to feel this two-way debate could presage a period where, collectively, the Magnificent Seven are less effective in this role.’

PCT’s exposure to the Magnificent Seven now stands at 33% versus 56% in the Dow Jones World Technology Index benchmark. According to the latest factsheet, Nvidia remains the trust’s largest position at 11.6%, followed by Microsoft and Meta.

Time for stock pickers to shine

Given the stellar performance of US mega-caps in recent years, Rogoff acknowledges ‘it has been a very hard place to be.’

Over five years, PCT’s shares have lagged the benchmark with a 93.5% gain versus 128.6% for the Dow Jones World Technology Index. Year-to-date, however, PCT’s shares are up 16.1% versus 8.2% by the index.

Looking ahead, Rogoff believes the future is looking much brighter for stock pickers who are able to deviate from the index. 

‘If you’re going to be tethered to an index, or at least build portfolios around an index, you better be sure that’s an index you want to be tethered to. We’re now letting out the rope, and we’re doing that carefully.’

He explained the trust has owned both Google uninterrupted from its IPO in 2004 and Apple since 2003, but both companies are now at their lowest weighting in the portfolio relative to the index.

‘I think the AI cycle has much greater disruption risk to those companies than really anything I’ve seen before,’ he said.

The trust has also shifted away from software. 

‘The software sector has really been one of the most remarkable places within tech since the cloud period,’ he said.

‘The dotcom period was about building telecom networks, about building servers. It was a very hardware-centric period. We left that in the cloud era and became a sort of software and internet stocks trust.

 ‘I feel very strongly, and have done for quite a while now that we are moving back into a hardware-centric world, where Google is building a server that’s different to the one that Meta wants, with different chips and different configurations.’

For example, the trust has invested in companies that make data centre equipment, like Vertiv and Siemens Energy.

Rogoff is also positive on companies involved in power generation.

‘If you’re going to solve super intelligence, you’re going to need to build a lot of data centres. You’re going to keep building better AI models. And if you’re going to do that, the trajectory of power generation needs to be profoundly different.

‘So, we have invested outside of what people might describe as traditional tech into companies that make power components or chips for power, or materials used in parts of the data centre space that haven’t been in vogue for a very long time,’ he said.

Nevertheless, it isn’t all about what you buy. The manager noted that some of the best decisions he has made in his career have been the sells.

PCT has bought back around a third of its shares during Rogoff’s management and, as of yesterday, traded at an 8% discount to NAV.

This is the latest in our Big 12 interview series with top investment trusts. Read the previous interview with HICL Infrastructure (HICL ) here.