Ignoring a couple of oddities, the best-performing investment company last year in terms of underlying growth in net asset value (NAV) was Manchester & London (MNL ), which generated a return of 57%. A narrowing discount meant that shareholders got a return of 70% (placing it second behind 3i Group (III ) which generated an 85% return).

Manchester & London is unusual in that its lead fund manager Mark Sheppard is by far the largest shareholder, controlling over 57% of the shares in issue or about £125m worth. He is passionate about what he does and invests the £215m investment trust with conviction.

The rest of the M&L Capital Management team is comprised of co-manager Richard Morgan and Brett Miller, who is head of governance and risk oversight. You may have seen Miller’s name crop up as a director of trusts that need knocking into shape – he just went onto the board of Digital 9 Infrastructure, for example.

MNL has long been focused on growing companies but from about a decade ago, the emphasis has been increasingly on technology, which has gone from about 45% of the portfolio in July 2015 to almost all of it at the end of December 2023.

Currently, the emphasis is overwhelmingly on North American stocks, accounting for 96% of the portfolio’s exposure at the end of 2023.

By far the largest holding at the year-end was a 30.9% net exposure to Microsoft (MSFT.O). With Nvidia (NVDA.O) accounting for 19.7%, Advanced Micro Devices (AMD.O) 9.1%, ASML (AMS.NL) 7.9% and Cadence Design Systems (CDNS.O) 7.3%. That is about three-quarters of the fund in five stocks, all of which stand to benefit from advances in artificial intelligence (AI).

Concentrated portfolios can be volatile, and even with 2023’s impressive gain, MNL’s shares have yet to make up all the ground that they lost in the growth stock selloff of 2022.

It is also worth bearing in mind that the team is not afraid to make radical changes to the portfolio when it feels warranted. Just looking at past reports and accounts, back in 2022 the second-largest position at 26% of the portfolio was Google owner Alphabet (AAPL.O). In 2021, 17% of the portfolio was in Amazon (AMZN.O) and in 2020, the fund had sizeable exposure to the Chinese technology giants – Alibaba (BABA.N) and Tencent (0700 HKG). These last three have all been sold.

The good news is that the team is very happy to explain its thinking in detail, with regular updates via the trust’s website and social media accounts on X, formerly Twitter, and LinkedIn.

Recent news includes talk of MNL’s sixth-largest position Synopsys (SNPS.O) bidding $35bn for its eighth-largest Ansys (ANSS.O). The Ansys share price is already up more than 20% over the last month, but if the bid is confirmed there will be further upside. There is also a bullish outlook for Nvidia from Bank of America.

Skewed to AI

MNL’s portfolio is heavily biased to AI. This is an area that the team has been excited about for some time – well before March 2023 when ChatGPT-4 caught the imagination of investors. This was also the driver of the excellent returns generated by Polar Capital Technology (PCT ) and Allianz Technology (ATT ), which with NAV returns of 46% each and share price returns of 50% and 44% respectively, were also among the best-performing trusts in 2023.

Polar Capital fund manager Ben Rogoff is a believer in the transformational power of AI, with around 80% of the trust’s portfolio exposed to the theme. He sees the advance of generative AI as significant as the internet or the smartphone.

Again, Microsoft is PCT’s largest holding but at a rather more modest 12% level (as at end November 2023).

PCT has a considerably more diversified portfolio than MNL, with 100 holdings and around half the trust in the top 10. At the end of October, PCT had exposure to all of the Magnificent Seven (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) stocks that drove markets higher last year, largely on the back of the perceived benefit of advances in AI to their businesses.

In reality, not all of these will benefit to the same extent. For example, the MNL team is not a fan of Apple currently as demand for new models of the iPhone disappoints. PCT only has a small position in Tesla which is probably good news given the run of negative headlines surrounding the stock.

We may be a long way from artificial general intelligence – a computer that can think like a human and learn by itself – but the applications of generative AI are manifold and are already starting to impact many industries. There is a debate about whether that will make us more productive or simply replace us, but Rogoff thinks that the adoption of AI will be fast – faster than the take-up of many previous game-changing technologies.

AI picks and shovels

AI requires significant computing power. This is something I highlighted in November regarding Pantheon Infrastructure, which discussed the impact of AI on demand for data centres. As with earlier technological advances, often the best returns come from those providing the ‘picks and shovels’ – hence MNL’s heavy focus on the hardware side of AI.

Interestingly, Rogoff also highlights a need to spend more on cybersecurity as AI makes attacks more sophisticated. One winner here could be Deep Instinct, which is in the Chrysalis (CHRY ) portfolio and is itself using machine learning to try to counter threats.

Inevitably, after such a strong run, there will be questions about how much further the AI theme will continue to drive indices. The MNL team is cautious in the short term as markets fret about the timing of interest rate cuts. As it notes, we may see an uptick in inflation that unnerves investors. The trust has some downside protection in place with a short position on the Nasdaq technology benchmark.

Nevertheless, when interest rate cuts do materialise, the team’s thinking is that this could trigger a ‘tsunami’ of money flowing out of money market funds and into equities. In the meantime, forecast-smashing results, such as those delivered by Nvidia in November, can drive individual stocks higher.

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