Don’t Forget About Growth!

One big theme for ‘’growth’ investing in 2025 is the potential for an ‘Artificial Intelligence’ (AI) Bubble. Taylor, can you touch on our thoughts on this subject?

Taylor Bryan:
That’s a great question. I think when people discuss a ‘bubble’ forming, they are mostly focused on the largest technology companies that continue to be relative winners. To this end, I think it’s important to start by looking at these companies from a bottom-up fundamental perspective. Cutting to the chase, when looking at the largest technology companies through a discounted cash flow, or ‘DCF’ lens (see our DCF analysis Weekly View), we do not currently see the type extreme or widespread overvaluation that would be typical in a bubble. In fact, we see a handful of these companies as being attractively valued, using reasonable future growth estimates. The biggest reason for this is these companies’ ability to generate excess cash.

Cash flow from these companies is being generated from stable profit streams that are mostly unrelated to AI. This fact is key because it allows the company to self-fund AI growth opportunities, without pressure to immediately generate profit. Essentially, you have the consistent profit stream of a staple company attached to the strong organic growth prospects typical within technology.

Importantly, while a lot of the focus on AI is about future demand, we are currently seeing AI-driven demand across the technology sector and widespread adoption from consumers and businesses. Specifically, within semiconductor producers and cloud providers, we are seeing more demand than current supply and capacity can meet. We see this as confirmation of our belief that AI will be a long-term revenue growth driver.

Adam Grossman:
That makes a ton of sense. Moving to you, Diego. One other risk that is on the mind of a lot of investors is anti-trust action. What are your thoughts on this and do you view risk rising with the new presidency?

Diego Marti-Vertiz:
Man, you saved your softball questions for Dan and Kaetlin! Anti-trust is definitely a risk that we consider when looking at our current mega cap growth positions. Piggybacking off Taylor’s comments, the stable and diverse cash flows of large growth companies is core to our thesis, so the forced divestitures that often come with anti-trust litigation would definitely affect our views on the space.

However, we believe any sort of widespread anti-trust action is unlikely for two main reasons. First, legally proving a monopoly is difficult, especially since these industries continue to rapidly evolve. These large growth companies have been in the crosshairs for years and the lack of action so far underscores this difficulty. Second, we believe that the consumer is actually better off due to the network effects created by these companies’ large installed user bases and the integrated nature of these companies. When thinking of historic monopolies, one of the core tenets of antitrust regulation was based on harm to the consumers. Current big tech growth companies have organically created businesses that work together to create a better product.

Tying it all together, we need to keep an eye on anti-trust actions because of our investment’s sensitivity to it, but still view it as an unlikely outcome.

Diego Marti-Vertiz:
Adam, we have discussed over the past two weeks how we like certain things in both growth and value. As the equity CIO, how do you bring this all together, when it comes to portfolio construction?

Adam Grossman:
I think our conversations over the past two weeks make it clear that we think 2025 will be a year where value begins to work, but we also aren’t ready to fully move on from large cap growth quite yet. We incorporate this dichotomy into our portfolios in two ways.

First, from an allocation perspective we are overweight the US relative to our composite benchmarks. This overweight allows for a greater allocation in both the growth and value selection we prefer in the US.

Second, from a selection perspective, we are underweight ‘defensive’ sectors, such as healthcare, REITs, and utilities. Our bottoms-up work leads us to a preference for both ‘growth’ and ‘value’ over these ‘defensives.’ However, we do also acknowledge that this tilt increases the equity risk within our portfolios. To partly offset this, we adjust other portions of our equity selection and our fixed income selection. For instance, within equity we hold positions in alternative equity income strategies. These strategies provide the portfolio with some downside protection, in our view, as well as the type of income that would traditionally come from ‘defensive’ sectors. Within fixed income, we hold long maturity treasuries. This position acts as ‘dry powder’ and a recession hedge for the portfolio, in our view.

Thank you, Taylor and Diego, for sitting down with me! I can’t wait to continue this series in the new year.

By Adam Grossman, CFA, Global Equity CIO; Taylor Bryan, CFA, Associate Portfolio Manager; Diego Marti-Vertiz, CFA, Associate Portfolio Manager

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Definitions:

Discounted cash flow (DCF) refers to a valuation method that estimates the value of an investment using its expected future cash flows. DCF analysis attempts to determine the value of an investment today, based on projections of how much money that investment will generate in the future.

Technology and internet-related stocks, especially of smaller, less-seasoned companies, tend to be more volatile than the overall market.

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Artificial intelligence (AI) refers to the simulation of human intelligence by software-coded heuristics. Nowadays this code is prevalent in everything from cloud-based, enterprise applications to consumer apps and even embedded firmware.

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