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Blue Whale Growth, an investment fund backed by billionaire Peter Hargreaves, has cut its exposure to the ‘Magnificent Seven’ group of big US tech companies over concerns about their huge spending on artificial intelligence.
Stephen Yiu, the fund’s manager, told the Financial Times that he had “aggressively” sold shares in Microsoft to cash in on the gains, pushing the stock out of the fund’s top 10 holdings in the third quarter for the first time since launching in 2017.
He said: “Microsoft’s ROI (is) likely to decrease from here, given the significant investment in AI infrastructure.”
Yiu said he would “consider a full sell-off” of Microsoft if the tech company’s investments in artificial intelligence outpace its money generation.
Shares in the Magnificent Seven — Microsoft, Nvidia, Apple, Alphabet, Meta, Amazon and Tesla — have risen sharply in recent years and represent about a third market capitalization of the S&P 500 index.
But major investors, including Warren Buffett in the US and Terry Smith in the UK, have recently downsized or sold off certain Magnificent Seven companies. Wall Street has become increasingly nervous about when the returns will materialize from the squandering of capital investment in technology that is exceed 200 billion dollars this year.
“A lot of people are talking about Magnificent Seven, and we (support) Nvidia,” Yiu said, referring to the American chip maker. “Outside of Nvidia, we’re less and less positive about (the other) six. The capital intensity of these stocks is growing significantly as they spend heavily on AI infrastructure.”
“I’m not suggesting that six of the shares of the Magnificent Seven will disappear, but… . . we think they could be a brake on the market,” he added.
Blue Whale manages £1.3bn, invests in global equities and has had a significant stake in US technology companies since its inception. He was financially backed by Hargreaves, who co-founded the investment platform Hargreaves Lansdown, and former fund manager Artemis Yiu.
The Hargreaves family stake in the Blue Whale Growth fund is worth more than £200m. This year, the fund achieved a return of 24 percent by the end of November, compared to an average of 15 percent for competing funds.
Yiu’s decision to sell part of Magnificent Seven is the latest sign that investors are worried about the company’s future prospects. He said the fund’s exposure to some of those stocks, excluding Nvidia, now amounts to just 5 percent of its portfolio — far less than MSCI World’s 20 percent.
Yiu reduced the fund’s stake in Microsoft from 8 percent in January to about 2 percent.
The fund manager also recently sold Meta, the parent company of Facebook, to take profits “due to concerns about the further increase of AI” in the company’s spending. He cut his stake from 5 percent of the fund to 3 percent.
“The problem with Meta is that we’re worried (that) next year will be too much spent on AI,” Yiu said. “Ultimately you have to turn your spend into profit, and right now we’re not seeing enough of that.”
It also sold its stake in Amazon in 2021 and Alphabet, Google’s parent company, in 2022.
Other investors have recently dumped major U.S. technology stocks. Smith, who runs the £23bn Fundsmith Equity, said last month that he had sold Apple just two years after investing in it.
Buffett, one of the world’s most famous investors, continued to reduce Berkshire Hathaway’s stake in Apple last month and reduced almost two thirds shares in just over a year.
Yiu said Nvidia represented almost 10 percent of his fund, valuing the stake at about 100 million pounds. He had to sell the stock as Nvidia’s market value rose, which he said made a profit of £100 million.
The fund manager also backs Broadcom, which it said is building AI infrastructure and is a beneficiary along with Nvidia of the money the rest of the Magnificent Seven is spending on AI.
According to Blue Whale’s latest accounts, the fund’s parent company reported a profit of £4.1m in the year to March, up from £3.9m the previous year.
