JEFF PRESTRIDGE: Why one prime fund supervisor has ditched all huge tech shares… apart from one he thinks will beat a meltdown

It is that time of the year when investment managers look forward and give their predictions for where stock markets are heading. Although views differ as to which markets will deliver the best returns, these experts are united in their concern about the current artificial intelligence (AI) boom and its distorting impact on the US market.

The valuations of some US tech stocks, they say, are unsustainable and they urge investors to ensure their investment portfolios are sufficiently diversified to withstand any pricking or deflation of the AI bubble in the months ahead.

Yet it seems many investors do not share these concerns. According to the results of a survey of retail investors (both UK-based and overseas) by investment platform eToro, optimism prevails.

Some 53 per cent of investors expect the equity bull market to continue into next year, with the US market leading the charge.

By contrast, only 12 per cent of investors think AI shares will fall, with more than four in five expecting the ‘Magnificent Seven’ (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) to outperform or at least keep pace with the wider US market.

As Dan Moczulski, boss of eToro’s UK business, says: ‘Retail investors clearly aren’t buying the AI bubble narrative.’

While I am no investment soothsayer, and a cautious investor by nature – I love dividends – I find this divergence between the views of professional and retail investors rather concerning.

A few days ago I sat down with Stephen Yiu, manager of the £1.7 billion investment fund Blue Whale Growth, to find out what he thinks about the possibility of the AI bubble bursting.

His global fund was launched just over eight years ago and has been backed all the way by billionaire Peter Hargreaves, co-founder of the investment platform Hargreaves Lansdown.

It has been an investment success story, delivering launch investors returns to date in excess of 240 per cent. To put this figure into perspective, the average global investment fund has generated a return of a tickle above 100 per cent over the same period.

Part of the reason why Yiu’s investors have done so well is that the manager has made money for them by including some of the Magnificent Seven in the fund’s portfolio. To get into the fund, a company must demonstrate to Yiu that they have the capacity to grow their business – and in the process boost their profits. They must also be sensibly valued.

At the beginning of this year, Blue Whale had 8 per cent of assets in Nvidia (its third largest position) and smaller stakes in Meta and Microsoft. Previously, it had also held shares in Alphabet and Amazon.

Yet, today, the only Magnificent Seven company remaining is Nvidia (9.6 per cent).

Shares in Microsoft, a business held since the fund’s launch in 2017, were disposed of in the spring of this year.

Why? ‘Concerns about its stock market valuation and the return on its enormous investment in AI,’ says Yiu. In other words, he doesn’t believe Microsoft can continue to earn the high margins it enjoyed in the past. He thinks the same about the other Magnificent Seven, bar Nvidia.

Yiu doesn’t sit in the camp that believes the AI bubble will burst. But neither does he think it is wise for investors to slavishly ride the AI wave by holding shares in all the Magnificent Seven companies – or having shares in a fund which tracks either the S&P500 or the MSCI World indices.

More than 35 per cent of the S&P500 – the main US stock market index – is accounted for by the seven AI orientated stocks. The equivalent figure for the MSCI World is 25 per cent. So, when their share prices fall, both these major indices follow suit.

Yiu’s view is far more nuanced. For a start, he believes the valuations being put on AI companies likely to list on the US stock market sooner rather than later – the likes of Anthropic, OpenAI (owner of ChatGPT) and xAI – are in crazy territory.

He says the revenues these companies are generating – and the losses they are making – do not warrant the valuations being bandied about.

They are in bubble territory although, thankfully, UK investors will have little or no exposure to them through most mainstream US or global investment funds because they are private, not limited, companies.

When it comes to stock market-­listed companies, Yiu says investors need to divide the businesses into two camps: those that are spending money on AI as if it were confetti, and those which are benefiting from this shopping spree.

Into the first bucket fall Alphabet, Amazon, Apple, Meta, Microsoft and Tesla. In the second one sits Nvidia.

Yiu says: ‘Nvidia is expected to deliver $200 billion (£150 billion) of revenue this year, half of which will cover its operating expenses. That leaves $100 billion of cash sitting on its balance sheet.’

To put this into perspective, the equivalent figures for Tesla are $100 billion and $5.5 billion.

Yiu’s conclusion is that Nvidia’s shares represent better value than Tesla’s and all the other Magnificent Seven businesses. ‘Follow where the AI spending is going,’ he says, ‘not AI per se.’

Apart from Nvidia, other beneficiaries of AI spending which form part of Blue Whale Growth’s portfolio include US businesses Broadcom and Vertiv and South Korean chip manufacturer Hynix.

It’s an approach – follow the spending – which Yiu has used successfully in other areas: for example, buying defence stocks ahead of a ramp-up in military spending across Europe triggered by the threat from Russia.

In recent days, investment groups Fidelity and Invesco have both warned about the risks to investors of becoming overly dependent on the AI theme.

Echoing Yiu’s words, Fidelity says some AI companies will not generate the earnings to justify their market valuation (resulting in their shares falling). It urges investors to diversify their portfolios, pointing out that Europe, Japan and China all offer investment potential.

Invesco says investors should consider US funds which diversify risk away from the big tech stocks. Its S&P500 Equal Weight Index fund (available via mainstream investment platforms) does this by investing an equal amount in the companies included in the index and then rebalancing on a quarterly basis. In doing this, it is not so dependent on AI stocks.

Like Fidelity, Invesco also likes Europe as well as income-oriented equities.

Readers, don’t shy away from the AI investment theme altogether. Equally, don’t rely upon it.

Blue Whale, Fidelity, and Invesco are all singing from the same hymn sheet: take a diversified portfolio into 2026.