Scottish American (SAIN ) managers James Dow and Ross Mathison believe Nvidia is headed the way of Cisco as demand for the AI enabler has pushed valuations into bubble territory.

The Baillie Gifford managers, who stand apart from their colleagues with their focus on dividend-paying stocks, said the provider of graphics processing units for AI chips could flounder like its fellow ‘enabler’ Cisco, which crashed at the beginning of the millennium after a fall in demand for its internet routers.

‘Nvidia, it must be said, is a fascinating conundrum. Without a doubt, it’s a special company, with a visionary leader, and a probably-enduring lead in designing AI chips. But the challenge with investing in Nvidia is that in some ways it is reminiscent of Cisco, or Nortel Networks, in the heady days of the early internet,’ they said.

The pair noted that while not holding the company had meant returns lagged the index, which was supercharged by Nvidia’s gains, net asset value hit an all-time high.

Over the half-year to the end of June, the £990m global trust delivered underlying returns of 5.5%, with net asset value per share climbing to 561.7p, while the FTSE All Share index benchmark gained 12.2%. Shareholder returns fell 2.2%.

Dow and Mathison reminded shareholders that the trust known as ‘Saints’ self-identified as a tortoise rather than a hare and had made ‘undoubtedly good progress’ over the period. 

Revenues improved, with a 2.5% year-on-year increase to 7.83p per share to cover the 7p dividend, reflecting dividend growth from the portfolio’s equity investments and changes to company weightings.

‘Your managers have thoroughly scrutinised the holdings in the portfolio, and we firmly believe that all is well: perseverance remains the name of the game. But we owe shareholders an explanation of why the portfolio’s performance has recently looked a little more pedestrian than the market,’ chair Lord Macpherson of Earl’s Court said. 

Bonds, discounts and property

Aside from Nvidia, the performance gap was blamed on cyclical and economically sensitive companies not held in the portfolio, such as JPMorgan and oil company ExxonMobil, which saw a ‘dramatic reassessment of their fortunes’. 

The trust’s property portfolio, which made up 8.8% of assets at period end, delivered useful income, but delivered negative capital returns, while small positions in core infrastructure fund BBGI Global Infrastructure (BBGI ) and renewable infrastructure fund Greencoat UK Wind (UKW ) fell as their discounts widened. 

The portfolio’s allocation to emerging market bonds – largely in Latin America, which makes up 1.2% of the portfolio – was knocked as interest rates remained higher for longer.

Top performers included Citywire Elite Companies AA-rated Schneider Electric, which benefitted from ‘structural trends towards electrification’, while Swedish industrial group Atlas Copco, rated AAA, delivered ‘steady compounding and resilient dividends’ thanks to its ‘light-cyclical’ position.

Danish pharmaceutical company Novo Nordisk was also a major winner given the ongoing demand for its obesity drug Wegovy, which has also been approved in China. With just one million people currently taking the drug out of a potential 800 million global users, there is a ‘long runway for further growth’.

The portfolio didn’t miss the entire AI rally, with positions in Microsoft and TSMC boosting returns. 

Sonic Healthcare, an Australian global network of pathologists’ labs, fell as the temporary boost to profits from Covid testing washed through, but Dow and Mathison said rising testing volumes and more sophisticated testing should see earnings compound.

Brazilian equity and derivatives exchange operator B3 witnessed a cyclical downturn in trading volumes but the managers believe this is temporary and its long-term growth potential remains strong.

Dow and Mathison axed Chinese food company Want Want from the portfolio as its ‘prospects had deteriorated’. Meanwhile, airline IT company Amadeus has also struggled to hit the target but both ‘are convinced that having bottomed in 2021, its future still looks bright’.

The managers cautioned that it was unclear how Saints’ income growth would play out in the remainder of the year given the strengthening of sterling, as most of the portfolio is based outside the UK. 

Over the period, the 2.7%-yielding fund’s discount to net asset value widened from 0.8% to 8.7%. The board has not been buying back shares. 

Over five years, underlying portfolio returns of 58% and shareholder returns of 43% beat the FTSE All Share index’s 31%, according to Deutsche Numis.