Kevin Hebner

Investors need to look beyond traditional asset classes and approaches as shifts across global markets create new opportunities and challenges for portfolio construction, according to leading investment managers speaking at the GSFM Investment Symposium this month.

The Symposium brought together investment experts to examine the forces reshaping markets, from changing equity and bond correlations and valuation opportunities in Australian small and mid-caps, to the evolution of artificial intelligence, the growth potential across Asian markets and the increasing importance of infrastructure and private markets. 

AI – the one trade that matters?

The growth and potential of AI has dominated markets since 2023 but Nick Griffin, CIO at Munro Partners, said the world is still only at the start of the AI story.

“There’s a lot of talk about whether we’re in an AI bubble and our view is this is a boom, not a bubble. AI is the next big platform shift, and it’s only just beginning so we believe this is a very good time to be in investing,” he said.

“The shift to agentic AI is now taking off, and at a scale that we’ve never seen before in human history. But it’s still in its early stages – nothing grows like this at the end of its life only at the start of its life.

“Investors who are concerned about whether current valuations are sustainable or when AI companies will start delivering on their promises, should ask themselves this: Are people using a lot of AI? The answer is unequivocally yes. The next question is: are they going to use more AI? Again we believe the answer is unequivocally yes, because AI is a general purpose technology that’s applicable to every industry in the world. Currently we’re probably using less than five per cent of all the AI we are going to use in the next decade, so there is enormous upside still ahead.”

Kevin Hebner, global investment strategist at TD Epoch, agrees that AI is a long-term story but said investors should also prepare for ongoing market volatility.

“Our view is that AI is the third industrial revolution and that brings opportunities, but investors should keep in mind there will be booms and busts along the way so they need to construct resilient portfolios.

“Comparable examples from the past, such as the growth of railways, electricity, and autos, show there are multiple booms and busts during these kinds of cycle, so it’s important to create portfolios that are resilient, which means diversification – across the entire AI stack, geographies, and market cap.

 “It’s also important to de-hype portfolios. There’s a lot of hype and concentration in portfolios, for example towards tech momentum. So portfolio construction, risk management analysis, and constructing resilient portfolios, are critical and it’s more difficult than it’s ever been before,” he added.

Kristin Ceva, senior portfolio manager at Payden & Rygel, said the growth of AI is also playing out in fixed income markets around the world. 

“In fixed income markets, government issuance is expected to hold relatively flat over the next couple of years. But the area of fixed income that is really growing is AI financing which is becoming more of a credit and fixed income story. In 2027 AI financing is expected to be around $600 billion as focus shifts from being equity-led towards credit becoming a larger percentage of the overall pie,” she said.

“As this plays out, it will have implications for yields which will move higher, and credit spreads will potentially move higher as well. This makes it a longer-term positive story for savers and fixed-income investors.

“Fixed income also has an important role to play as a diversifier away from the AI trade. With the US equity market so dominated by AI assets, emerging market debt looks increasingly attractive. Many emerging markets are looking strong at the moment, having moved quickly to control inflation and supported by very resilient growth as well as improving external financing, better current-account balances and stronger foreign-reserve buffers.”

Alec Small, portfolio manager at Payden & Rygel, says the outlook for fixed income is very favourable. 

“There’s an adage in investing: do you want to eat well, or do you want to sleep well? The point being that a portfolio needs both, and bonds are the sleep-well side of it.” 

“What has changed is that investors are now being compensated properly for sleeping well, in a way they haven’t been for a number of years. Everyone wants your money right now, and when capital is scarce it has a price. That price is the yield. It’s a long way from the years after the financial crisis, when there was too much capital and not enough compelling places to put it, and lending to governments earned you very little after inflation.”

“The AI build-out needs to raise more than a trillion dollars next year, and those estimates have only moved one way in 2026: up. The hyperscalers get most of the attention, and deservedly so. They stepped up materially this year, to around $300 billion of bond issuance, and we expect that elevated pace to continue. But the incremental growth is coming from everyone else: data centres, neoclouds, the AI labs, plus new equity and IPOs. That is a lot of supply for the market to absorb, and it is one of the bigger reasons investors are being paid more to lend today.”

“And it’s not just a US story. We look at real yields, which is simply what you’re paid after inflation, and we compare each market against its own ten-year history rather than against each other. On that basis yields are elevated right across the market, in the US, in other developed markets and in emerging markets. For a stretch of the last decade, investors in some of those markets were effectively paying for the privilege of lending. That has reversed everywhere.”

Spreading risk across a portfolio

Investors may need to rethink the role of traditional portfolio diversifiers as the relationship between equities and bonds changes, and consider alternative strategies, private markets, and trend-following as increasingly important strategies.

According to Tarek Abou Zeid, head of client portfolio management at Man Group, the traditional role of bonds as a counter to equities has become less reliable, particularly in an environment where inflation remains elevated.

He highlighted that trend-following strategies are a potential source of alpha, particularly during a financial crisis. The innovation in these strategies could help address the traditional trade-off between performing well in crises and participating in markets during more benign periods.

“Investors have traditionally relied upon the 60/40 split, but they must now consider where portfolio protection and diversification will come from in the next market cycle.

“The performance of trend-following during market crises, whether the bear market in the early 2000s, the credit crisis in 2008, or COVID, shows that remaining invested, rather than attempting to time such events, allows investors to benefit as the models adapt to changing market cycles,” he added.

Marc-Andre Lewis, president and CIO of CI Global Asset Management, argued that effective portfolio construction requires an understanding of how investors are likely to behave during periods of market stress, amongst other things.

“Investors looking to private markets through evergreen fund-of-funds structures need to look beyond just selecting their underlying managers. A FOF portfolio needs to be built for investors, not just a mechanism to distribute funds.”

He also highlighted the importance of modelling the interaction between market movements, liquidity calls and distributions.

William Briggs, managing director at Ardian, said infrastructure gives investors exposure to assets that are increasingly essential to economic activity, while also providing potential protection against some of the forces driving market volatility.

 “Heathrow airport is an example of systemic infrastructure with cash-flow visibility, and inflation protection while also providing opportunities for industrial asset management and transformation.”

Valuation gaps visible as investors look beyond Australia’s mega caps

A widening valuation divide between large-cap stocks and the wider market is creating opportunities for active investors, with overlooked Australian SMID-cap companies and Asian technology emerging as opportunities for investors. 

Tim Carleton, CIO at Auscap Asset Management, said the Australian market had experienced a meaningful valuation dislocation over the last six months, with large-cap stocks becoming increasingly expensive.

“The valuation gap has emerged despite considerable difference in underlying earnings growth, creating opportunities for investors willing to look beyond the largest companies in the Australian market,” he said.

Carleton said the dynamic was evident in the retail sector, where since 2002, JB Hi-Fi has generated compound EPS growth of 11 per cent per annum compared with a decline in Woolworths’ EPS, yet Woolworths has historically traded at a premium valuation to JB Hi-Fi.

Andrew Swan, head of Asia (ex-Japan) equities at Man Group, said investors should also look beyond the established beneficiaries of the artificial intelligence boom as the technology enters a new phase.

“The AI opportunity is becoming much broader than the semiconductor companies that initially captured investors’ attention. As AI moves from training towards inference and agentic applications, the infrastructure required to support it is expanding across power, networking, cloud and applications,” he said.

Swan described Asia’s industrial production as being at a four-year high, while non-AI-related export strength has also been accelerating. Selected Asian economies account for approximately 76 per cent of the region’s exports, providing a significant opportunity set beyond the AI theme.

Qiao Ma, portfolio manager at Munro Partners, said small and mid-cap companies globally were being overlooked by investors despite the potential for significant earnings growth in areas benefiting from long-term structural trends.

“The opportunity in SMID-caps is not simply about buying cheaper companies. It is about finding businesses with the earnings growth and structural tailwinds that can allow them to grow into, and potentially beyond, the valuations the market is currently assigning them,” she said.

Qiao highlighted the aviation industry as one example of the structural opportunities emerging outside the better-known AI names, with rising travel demand meeting a constrained supply chain and shortages of aircraft, components and skilled labour.

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Qiao Ma

Munro Partners portfolio manager Qiao Ma predicts 2025 will be a pivotal year for artificial intelligence (AI), and the role it plays in companies of all sizes, particularly those outside the traditional technology sector.

Qiao Ma’s comments follow her recent research trip to Chicago which focused on identifying fast-growth companies within many of their key Areas of Interest such Climate, Security and Innovative Health.

“While AI has been a dominant investment theme recently, its benefits are broadening beyond large tech companies,” Qiao Ma says.

“We’re seeing smaller, innovative companies leverage AI in transformative ways, creating significant growth potential.”

Qiao Ma met with numerous companies at the forefront of AI innovation. She cites AeroVironment, a small defence company that focuses on unmanned surveillance and ammunitioned vehicles and says: “AeroVironment’s equipment does not require extensive training for human operators; its software solutions, enabled by AI, are very intuitive and easy to use.

She also met with RadNet, a leading diagnostic imaging service provider, which uses AI to improve cancer detection accuracy.

“These are just two examples of how AI is revolutionising diverse industries,” she explains. “We believe this trend will accelerate in the coming years, creating compelling investment opportunities across a range of sectors.”

Qiao Ma also observed growing momentum behind the “Made in America” theme.  She says there is an industrial renaissance in the US, and believes that robotics and automation will play a crucial role in revitalising American manufacturing by mitigating labour cost concerns.

“Robotics is key to enabling companies to compete globally while maintaining production in the US,” she says.

She emphasises the opportunities of investing in companies focused on grid capability and energy transition. “The world is facing an escalating energy challenge,” she says. “Companies that are developing solutions to modernise our energy infrastructure and accelerate the transition to clean power will be critical to meeting this demand.”

Qiao Ma says her research trip reinforces her conviction that diligent analysis of small and mid-cap companies can uncover exceptional investment opportunities.

“Many of these companies are overlooked or misunderstood by the broader market,” she says. “By identifying those with robust earnings growth potential and innovative business models, investors can potentially achieve significant returns.”

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Qiao Ma

Nvidia’s dominance in the artificial intelligence (AI) processing unit (GPU) market isn’t a solo act. While Nvidia has grabbed the headlines with its powerful H100 chip, a network of suppliers is silently reaping the rewards according to Qiao Ma, partner & lead portfolio manager of the Munro Global Growth Small & Mid Cap Fund, Munro Partners.

Nvidia’s H100 GPU is the most powerful GPU chip on the market and is designed specifically for AI applications. The H100 contains 80 billion transistors, which is six times faster than its predecessor, Nvidia’s A100 chip.^[1]

According to Ms Ma, Nvidia’s H100 GPU is like a multi-lane highway, boasting thousands of ‘lanes’ called cores. This translates to lightning-fast AI tasks like image recognition, language translation, video editing, etc. This phenomenal performance has created a surge in demand, benefitting not just Nvidia, but the entire supply chain.

“The H100 features specialised lanes dedicated to specific types of data, like images or text. This specialised approach boosts efficiency, allowing the H100 to handle complex AI tasks such as self-driving cars, medical diagnosis systems and other AI-powered applications.”

While Nvidia has grabbed the spotlight, numerous other companies are key to their production and are benefitting from the GPU maker’s strong sales. From specialised power delivery systems being made by Monolithic Power, to intricate cooling solutions inside the data centres made by Vertiv, each element contributes to the functionality of Nvidia’s chips. Most of these suppliers have seen the AI-related portion of their revenues and profits soar over the past few quarters, and Ma thinks it is just the start.

“It can help to think of Nvidia’s GPU as a dedicated express lane for data, enabling faster information flow compared to traditional memory architecture. This speed boost is crucial for handling the massive data demands of AI tasks. These memory chips are made by SK Hynix,” said Ms Ma.

“Importantly, the H100 features innovative chip stacking. Imagine multiple microprocessors layered on top of each other, working together. This miniaturisation allows for more computer processing power within a compact space, which is crucial for maximising performance and efficiency of GPUs. The continued development of advanced chip manufacturing will rely heavily on specialised technologies like BESI’s hybrid bonding and ASMI’s atomic layer deposition,” she said.

Nvidia’s H100 also requires intricate connections between hundreds of components, demanding microscopic precision. “Companies like Onto Innovation and Camtek play a crucial role in this stage, using specialised metrology techniques to ensure everything is perfectly aligned and free of defects. These companies might not be household names, but their contributions are vital to the H100’s success,” she said.

“Munro anticipates the aggressive pace of interest rises will subside in 2024, and in which case, we believe it will be a good environment for growth companies such as these semiconductor suppliers, as well as Nvidia. In such an environment, companies will go back to following their earnings, which is what the Munro team spend most of our time researching and investigating.”

Munro Partners is capturing growth in the artificial intelligence hardware and semiconductor supply chain investment opportunity through its Munro Global Growth Small & Mid Cap Fund, with ASM International and Onto Innovation as two of the Fund’s top five holdings as at 31 March 2024.

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Notes:
[1] https://www.weforum.org/videos/what-is-h100-gpu-chip-ai-nvidia/#:~:text=The%20H100%20is%20a%20graphics,its%20predecessor%2C%20the%20A100%20chip.

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Qiao Ma

Munro Partners has launched a global growth small and mid cap fund. The fund will be managed by Lead Portfolio Manager Qiao Ma.

The Munro Partners Global Growth Small and Mid Cap Fund invests in global growth oriented small and medium companies, with a market capitalisation between USD 250 million and USD 30 billion. The fund will typically hold 20 to 40 listed equities, and aims to achieve a return, after fees, exceeding the MSCI ACWI SMID CAP Index (Net) in $A over a rolling 5 to 7 year period.

Ms Ma says that the fund seeks to invest in today’s most innovative and fastest growing small and medium capitalisation companies in the world and will apply Munro’s proprietary investment philosophy and process.

“The fund is designed for investors seeking long term exposure to a concentrated portfolio of high quality global growth oriented small and medium capitalisation equities with the potential for capital growth.   The recent underperformance of small and mid-cap indexes also provide attractive opportunities to invest in a portfolio of high quality and fast growing companies.” Ms. Ma said

“The Munro Global Growth Small and Mid Cap Fund represents a natural progression for Munro, building upon our established expertise. Many of the stocks we are targeting in this fund are already part of the Munro universe. However, they often remain underappreciated due to their smaller size or lower liquidity, making them less suitable for our other investment strategies. With this fund, we are introducing a dedicated portfolio to harness the potential of these smaller yet equally promising opportunities.

“Our team follows the processes of identifying sustainable growth trends and structural themes within the global market that are frequently undervalued or overlooked by the broader market. Leveraging this expertise, the fund will implement the same rigorous risk management processes and utilize the same network that has been the hallmark of success for our existing funds.”

GSFM is the responsible entity and distributor of the Munro Global Growth Small and Mid Cap Fund in the Australian and New Zealand markets.

GSFM chief executive officer, Damien McIntyre said the launch of the Global Growth Small and Mid Cap Fund complements the range of funds currently distributed by GSFM.

“There is definitely demand in the Australian market for accessibility to the global small and mid cap asset class.

“Having an experienced and talented fund manager, like Qiao, manage the strategy and investment team, will be a real advantage.

“For Australian investors and advisers, being able to access a global equities fund that is managed entirely by a successful Australian-based team with a positive track record will appeal to many looking to further diversify their portfolios,” says Mr McIntyre.

The minimum initial investment in the fund is $10,000.

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Andrew Swan

While investment opportunities in global share markets hinge on a number of factors, such as artificial intelligence and resilience in corporate earnings, the Australian market continues to be a source of high dividend yields and has the potential to be a strong relative economic outperformer, according to GSFM fund manager partners Munro Partners, Man GLG and Tribeca Investment Partners.

Factors including developments in artificial intelligence (AI), relatively robust consumer spending, and companies being able to maintain discipline on their cost structures, will be key for investors in global equities.

Munro Partners portfolio manager, Qiao Ma, says that the long term interest rates have peaked in October 2022, and the Munro team is observing encouraging signs of the start of corporate earnings re-acceleration.

“Clearly we are not completely out of the woods yet with sticky inflation and further rate hikes expected over the next few months, so we stay very vigilant with risk management,” she says.

“However, we have seen the earnings growth trajectory picking back up over the past few months.  Consumers have been more resilient than expected, especially around the trends such as health and wellness. The start of AI super-cycle will likely accelerate the rate of innovation across many industries for years to come. In the second half, we also expect good performance from the industrial companies driven by spending plans in the US, including the Inflation Reduction Act and the CHIPS Act.

“It is heartening to see that the market has been returning to a more normalised environment, where share prices follow earnings. This bodes well for our process of looking for earnings growth opportunities backed by a structural tailwind.

“Our portfolio is exposed to the many different idiosyncratic growth drivers, such as AI, resilient consumers, as well as industrial companies benefiting from de-carbonisation.  We are well positioned for the second half of 2023 and beyond,” Ma says.

Man GLG’s head of Asia (ex-Japan) equities, Andrew Swan, says he is also watching developments within generative AI closely, on the expectation that they may kick off a new investment cycle, with associated productivity gains driving better than expected economic growth.

“The equity market has been quick to revalue the entire tech hardware supply chain in Asia in hopes of a new tech cycle as evidenced by strong price performance of the sector. 

“We recognise that the use cases for AI are evolving rapidly and believe this may potentially act as a catalyst to start another tech hardware cycle.

 “We expect South Korea and Taiwan to be the main beneficiaries of this shift – both markets play a vital role in the tech hardware supply chain and are home to some the world’s largest electronics and semiconductor manufacturers.

“Semiconductors have been our preferred means to access the AI value chain so far. 

 “Opportunities in China appear less clear at present, however, and that may have earnings implications for both companies developing AI capabilities and those supplying AI hardware globally,” Swan says.

Locally, Tribeca Investment Partners lead portfolio manager, Jun Bei Liu, says while the Australian market might take comfort from an expected end to rate hikes, investors will have to deal with a slowdown in economic and earnings growth as tightening liquidity conditions finally take their toll on household spending and on business activity and hiring.

“It is usual for equity markets to weaken into recessionary conditions, but while the near-term risk-reward outlook suggests some caution, we do not expect to see a deep or prolonged downturn.

“The good news is that a lot of the valuation de-rating as a response to rising rates has already taken place with many areas heavily discounted since the start of interest rate hikes back in the second quarter of 2022. Provided bond yields don’t have a lot more upside and the growth slowdown is relative short and shallow, then the need for further valuation de-rating at a broad market level is not necessary.

“In addition, Australian corporates are well capitalised having refinanced or issued debt during the COVID-19 pandemic period at rock bottom rates which should provide some protection should financial conditions materially change.

“More importantly, uncertain, and volatile markets are about seeking out the most attractive relative value opportunities and we are less focused on the direction of the market than we are on stocks that have been overly discounted because of macroeconomic uncertainty.

“Longer term we think the broader market can recover from any near-term cyclical weakness as solid economic supports cushion against downside risks such as strong population growth and elevated commodity revenue, and corporates manage costs into a weakening demand backdrop.

“Australia still has one of the highest dividend yields on offer and, downturn or not, Australia has the potential to be a strong relative economic outperformer. We think market dislocations will be short lived and that any weakness over coming months will be an opportune time for active managers to pick over stocks and position for the start of the next upswing,” Liu says.

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Ms Ma has 15 years experience in finance and investing, with a focus on global long/short equities. Prior to joining Munro she was a portfolio manager at the Melbourne-based Cooper Investors. Prior to that, she spent nearly a decade with well-known hedge funds in New York City, including Coatue Management and Jerico Capital.

Ms Ma joins Munro’s nine-person investment team and will be responsible for contributing research and stock ideas to all three of Munro’s global strategies – the Munro Global Growth Fund, the Munro Concentrated Global Growth Fund and the Munro Climate Change Leaders Fund.

Mr Griffin said Ms Ma’s experience as a high performing portfolio manager, covering a wide range of geographies and sectors, makes her a good fit for the business. 

Mr Griffin said: “We are delighted to have Qiao’s extensive experience and unique perspective to help bolster our global equities team. Her long track record in identifying underappreciated, long-term, founder led stock opportunities, will be invaluable in helping Munro sustain fund performance and help grow our business in the months and years ahead. We look forward to welcoming Qiao into the Munro partnership and are excited that she has chosen to join us for the journey.

Ms Ma said: “I have admired Munro from afar for years and I am deeply humbled by the opportunity to join the firm. I look forward to hunting for best long term investment ideas in global growth companies for our investors.’

Ms Ma has a dual degree of Bachelor of Science, Commerce (B.Sc) and Economics from University of Virginia, and a Masters in Business Administration (MBA) from Harvard Business School.

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