Nvidia has been one of the stand-out success stories of the past 18 months. And while some question whether the chipmaker can continue its stellar run after a six-fold increase, Manchester & London (MNL ) fund manager Mark Sheppard is all-in on the $2.2tn titan, holding 26% of his investment trust in the shares.

Sheppard, a controlling shareholder of MNL who owns 57% of the trust’s shares through M&M Investment Company, believes there is substantial upside still to come from Nvidia and predicts a 10-year bull market for AI-related stocks.

He disagrees that AI stocks have entered bubble territory. On the contrary, he says investors are failing to recognise the scale of growth that is likely to come from so-called AI enablers like Nvidia and Advanced Micro Devices (AMD), which both produce chips that power AI software. 

Sheppard runs the £324m tech-focused portfolio with Richard Morgan and has seen its shares rally 22% in the first quarter, taking its one-year advance to 68.5% – the best of any UK investment company.

‘The great thing is that Nvidia is less expensive on a valuation model than it was last year,’ he said. 

‘The problem is, as [economist] John Maynard Keynes said, people tend to just stare at share price charts and don’t dig any further.’

He points to Nvidia’s EV/Ebitda ratio of 28, which is half that of Arm’s. This ratio compares the company’s enterprise value to earnings before interest, taxes, depreciation and amortisation, and is typically used to compare companies within the same sector.

‘Nvidia’s EV/Ebitda forecast chart is lower than it has been for quite some time. This is because earnings have kept ahead of the share price.

‘People have this view that we are going to see a “coyote off the cliff” moment, where Nvidia’s earnings are going to be very strong in 2024 and then fall off a cliff afterwards,’ explained Sheppard.

The fund manager doesn’t agree. He is not expecting new orders to decline significantly in 2025 and points to Nvidia’s estimated growth of $1tn from the installation of chips and networking equipment in data centres around the world, which will need updating over the next four years.

He says the valuations of some AI-related stocks do not fully reflect the growth ahead. If AI vaguely follows the trajectory of software, he anticipates at least another three to four years of rapid growth.

‘I think some of the valuations are very reasonable considering where we are and the potential for growth ahead. People can get a bit confused because a fair valuation has to consider growth, and I think they are under-appreciating the growth to come.’

The new AI era

There will be four stages to the AI bull market, according to Sheppard. Phase one involves the development of hardware and infrastructure to support AI. The second stage will see even more companies move their data to the cloud because they realise it needs to be managed more effectively, fitting with a broader drive towards digitalisation.

‘This is where we see the second wave of material monetisation from the era of AI, which will benefit the data managers and cloud computing players,’ Sheppard explained.

The third wave will see the monetisation of AI applications and co-pilots, which are conversational interfaces that use large language models. Finally, in the fourth stage, new AI applications and services will emerge.

Where are we now?

Sheppard says it is still early days. ‘I think we are in the building-out-of-infrastructure stage, and I think the monetisation will come through from the applications later,’ he said.

‘It is all good to get ahead of the curve, but it is not good to be two years ahead of the curve. We are much keener on hard technology, the “picks and shovels”. Historically, you get better value for your buck.’

These include semiconductors and cloud computing companies.

The manager was keen to point out they only invest in companies that make money, which means they are less interested in speculative AI stocks. ‘In Manchester & London’s portfolio every stock makes a profit,’ he said.

Looking ahead, Sheppard and Morgan would consider moving into companies that are linked to stage three of the bull market, but he said this is still some way off.

‘I think Microsoft is our earliest trial on that because they have gone first with Copilot.

‘I am expecting that to be a bit of a rocky road to start with. I view it as the iPhone 1 versus now. It was kind of good then, but it is not the same thing as the iPhone now,’ he explained.

Sheppard expects the co-pilots of 2026 to be a quantum leap ahead of the current crop. ‘Let’s be clear, the toothpaste is now out of the tube and this progression is now inevitable,’ he said.

Run your winners

The fund managers take a high conviction approach, with a little over 50% in top two holdings Nvidia and Microsoft. While some may feel nervous about the potential concentration risk in the portfolio, Sheppard says these high weightings fit with their philosophy of backing winners and cutting losers.

‘We bought Nvidia and Microsoft because we think they are elite. Just because they have now proved they are elite doesn’t mean we should cut them. Are they elite and do they still represent good value? I think so,’ he said.

Elsewhere in the portfolio, the team sold out of Super Micro, the AI server maker, as they felt it was starting to look overvalued. Instead they bought Dell, which operates in a similar space and trades on a quarter of Super Micro’s valuation.

‘Are they as good as Super Micro? No, they are not. Are they as entrepreneurial, adaptable, fast-moving? No, they are not. But I think Michael Dell is going to see what Super Micro have done and realise they need to up their game,’ he said.

Performance drivers

It has been a stellar year for Manchester & London’s shares, which are comfortably ahead of the 41.8% rise in the Dow Jones World Technology index.

Since the start of last year, the trust has doubled from a five-and-half-year low of 324p. Despite that hitting 652p yesterday, the trust trades on a 19% discount to net asset value, reducing its market capitalisation to £262m.

By comparison, shares in well-known competitors Allianz Technology (ATT ) and Polar Capital Technology (PCT ) are up 52.6% and 49.9% respectively over 12 months.

Sheppard said Nvidia, Microsoft, Synopsys and Arista Networks were among the trust’s top performers.

It hasn’t all been plain sailing though: like other technology trusts, Manchester & London had a challenging 2022 and 2023 as investors turned their attentions away from ‘growth’ stocks in favour of cyclicals. Over three years, the trust’s shares are up 29.8% versus 52.2% by the Dow Jones global tech benchmark.

Sheppard says investors should try to look through the volatility and focus on the annualised eight-year performance track record, which amounts to 16.4% per annum. Eight years ago, the team decided to transition the portfolio into an out-and-out technology fund.

‘Technology is such a volatile asset class, but it can’t be avoided as it is where the real gains are. If you are an investor, I would suggest taking a five-year view if you are buying a tech fund. If you get that 15% per annum or something better over time, the ups and downs all work out,’ he said.