Nick Train: There may be panic but data companies are not AI losers
Nick Train has spoken out, after many of his biggest holdings were caught up in a recent sell-off of perceived losers in the AI race.
Sage, Experian, London Stock Exchange Group (LSEG), RELX and Rightmove were some of the biggest fallers on the FTSE 100 earlier this week after artificial intelligence (AI) developer Anthropic released a productivity tool seen as threatening the business models of software companies.
Together, these five companies make up over half (56.4%) of Train’s Finsbury Growth and Income (FGT) portfolio, dragging its share price down 4.3% so far this week.
But rather than being spooked by the steep drawdowns, Train, who also runs the £1.4bn Lindsell Train UK Equity fund, said recent developments have actually ‘increased our confidence in their strategic positioning and growth opportunity’.
In his view, amid an ‘indiscriminate sell-off’ of software companies that has been ‘purely speculative’ in most cases, markets have ignored the fact that large language models (LLM) such as Anthropic’s Claude need these businesses’ data to be effective in the first place.
In this sense, data-rich companies such as Sage – Train’s largest holding at 12% of FGT’s £847m portfolio – have the upper hand. The Lindsell Train co-founder went a step further, saying that these companies are likely to rival products produced by Anthropic and ChatgGPT, not be made redundant by them.
‘This is not a fantasy,’ he said. ‘All these companies are innovating and, crucially, growing more quickly as a result of their successful innovations.
‘We must acknowledge with disappointment that the share prices of the companies are saying we are wrong. An indiscriminate sell-off, arguably even a panic, has ensued.’
Markets have eased after recent panic selling, with many of the initial losers bouncing back today. Shares in LSEG were up 6.1% by late afternoon on Thursday, with RELX making a 3% recovery.
Train noted that holdings like LSEG, RELX, Rightmove and Sage also took advantage of elevated volatility to continue share buybacks.
‘They could be wrong to do so, but it is noteworthy that those who understand their businesses best see current developments in AI as making the companies more, rather than less valuable,’ Train added.
Train’s significant bets on this group of data-rich stocks have been built as part of a concerted effort to pivot the portfolio towards ‘digital winners’ in recent yeas.
‘There will be casualties of AI’
Other fund managers are not as convinced that now is an opportune time to buy. Manchester and London (MNL) manager Mark Sheppard, who slashed his Microsoft holding down from 21.8% to 4.8% amid the crash, expects further pain ahead for many software companies.
‘Will they disappear? No they won’t,’ he said. ‘But whenever a stock or a business has to change its business model, it isn’t a quick process. Look at any [turnaround] in history, like Starbucks, or Nike, or Rolls Royce – they took years, and they’re very small turnarounds by comparison.
‘These software companies are right at the beginning here, so anyone suggesting that they’re going to dive in and buy some of these because it’s going to be a quick turnaround, well, I’d be very surprised.’
Train admitted himself that his conviction in his own holdings does not necessarily spread to the wider software sector. Companies with smaller pools of less exclusive data are likely to have their business models disrupted by LLMs.
‘Probably there will be casualties of AI – especially where software is simply summarising or producing basic reports, or building emails, based on publicly available data, for example,’ Train said.
‘But Sage is not offering summaries or basic reports. It operates within the accounting industry, where trust, reliability and accuracy when dealing with complex work-flows are critical. Enterprises simply won’t trust an application that hallucinates and offers different answers each time.’
Sage not only has a wealth of data inaccessible to outside companies, but caters mostly to risk-averse accountants who are unlikely to trust LLMs, Train said. He added that Sage is not ignorant to the rise in AI. It launched its own CoPilot model to meet this rising demand, which has resulted in efficiency savings of 5-10 hours a week.
This has not been reflected in the share price, which is down nearly 35% over the past year. Nor did Sage’s most recent quarterly update last month – which reported recurring revenue growth of 10% and increasing market share in the US – budge the valuation.
‘This was an impressive set of results, yet clearly not enough to allay investors’ fears that AI might disrupt Sage’s business in the future,’ Train said.
