Schroder AsiaPacific (SDP ) managers Abbas Barkhordar and Richard Sennitt are exercising caution around booming artificial intelligence stocks, which they said are not immune to a cyclical downturn.

The hype around AI has sent shares soaring and while the £794m fund has benefited, the managers warned investors not to get too swept away by the hefty gains.

The portfolio delivered a net asset value (NAV) total return of 5.7% in the six months to 31 March, which kept it just ahead of the 5.3% gain from the MSCI All Countries Asia ex Japan benchmark, interim results show.

The fund has, however, lagged its peers in the Deutsche Numis Asia Pacific Equity sector over one, three, and five years, but beaten the average over 10 years, returning 150% versus the 143% average. 

Although the recent return was positive, the performance significantly lagged global equity markets, which rallied over the six months, fuelled by the likes of AI darling Nvidia, as well as falling inflation and increasing expectations for interest rates in major economies.

In line with global markets, the strongest sector in Asia was information technology, ‘which benefited from the improving cycle, as well as the longer-term benefits to demand of the impact of AI’, said Barkhordar and Sennitt.

Taiwan – which is home to a number of AI-related companies – was a big winner for the fund, particularly ‘fabless’ chip design company MediaTek and leading foundry Taiwan Semiconductor Manufacturing (TSMC).

IT is the second largest sector weight in the fund after financials and in Asia IT typically means ‘technology hardware’, and in particular Korea and Taiwan’s ‘semiconductor manufacturing power houses’.

‘We have been overweight in IT for a long time and we like the structural growth in technology hardware,’ said Barkhordar and Sennitt. ‘AI is just the cherry on top.’

AI has been the latest driver of the sector over the past 12-to-18 months and there are ‘not many companies developing the powerful chips needed, and most are in Asia’.

However, they warned that IT was a cyclical industry, which investors tended to forget. ‘You do get paradigm shifts and the latest is towards AI but these shifts mean items get over-ordered and inventory builds up and then the cycle starts again,’ they said.

As the sector emerges from a down cycle, the managers remain ‘cautious’ about valuations driven up by retail investment and their sustainability.

‘IT is cyclical and what we have with AI is a pocket of demand where people are working out how to monetise AI and if they can justify the cost of AI,’ they said. ‘At the minute they are pricing the bluest of blue skies but history suggests that every upgrade has a cycle.’

China recovery

The pair have added to their China weighting given the cheaper valuations, but maintain a significant 13% underweight to the benchmark.

Investors flocked back to Chinese stocks at the beginning of last year as it unexpectedly removed its Covid restrictions. Barkhordar and Sennitt were not convinced of a recovery given the household savings and rate and weak property sector, but are sitting up and taking notice of valuations now. 

They believe the cyclical prospects have improved, with the government starting to step in cautiously in the property sector and with help for the private sector.

‘Cyclically things are looking better but the structural issues are still there are they are harder to tackle,’ they said.