Morgan Stanley IM: Nvidious position

This is not the easiest environment for an investment philosophy that seeks established winners with resilient earnings in tough times. However, high expectations generally, and increasingly for one company in particular, make us nervous about the market’s prospects. We remain steadfast in following our quality process and focus on absolute, long-term compounding.

The confidence in the U.S. economy is understandable given that there has been no economic recession for 15 years, barring the special case of COVID in 2020, and the GenAI excitement fits with the history of potentially transformative technologies, from railways to the internet. This is not the easiest environment for an investment philosophy that looks to back proven and established winners, with earnings that are resilient in tough economic times. When risk is “on” and the market is fixated on exponential growth curves, rating stocks on their “AI-ness”, a portfolio of businesses designed for long-term compounding at reasonable valuations is not in fashion. But what if the prevailing orthodoxy is wrong or starts to unravel?

While the companies we own generally continue to compound and include good potential second-wave beneficiaries of AI, where they control proprietary data and strong market positions, they are not experiencing the rocketing valuations seen by those first-wave AI “winners”. This narrative is not a surprise to those who invested through the internet bubble of the late 1990s. In recent years quality has become more conflated with growth, and many quality managers are unabashed in claiming current market winners as quality trophies. The disconnect persists long enough to test the steeliest resolve, to force conversations about whether semiconductors still display cyclical characteristics, and for the conversation to turn to one $3 trillion-plus topic: Nvidia's position.

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^{There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market value of securities owned by the portfolio will decline. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in this strategy. Please be aware that this strategy may be subject to certain additional risks. Changes in the worldwide economy, consumer spending, competition, demographics and consumer preferences, government regulation and economic conditions may adversely affect global franchise companies and may negatively impact the strategy to a greater extent than if the strategy’s assets were invested in a wider variety of companies. In general, equity securities’ values also fluctuate in response to activities specific to a company. Investments in foreign markets entail special risks such as currency, political, economic, and market risks. Stocks of small- and mid-capitalisation companies carry special risks, such as limited product lines, markets and financial resources, and greater market volatility than securities of larger, more established companies. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed markets. Derivative instruments may disproportionately increase losses and have a significant impact on performance. They also may be subject to counterparty, liquidity, valuation, correlation and market risks. Illiquid securities may be more difficult to sell and value than publicly traded securities (liquidity risk). Non-diversified portfolios often invest in a more limited number of issuers. As such, changes in the financial condition or market value of a single issuer may cause greater volatility. ESG strategies that incorporate impact investing and/or Environmental, Social and Governance (ESG) factors could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. As a result, there is no assurance ESG strategies could result in more favorable investment performance.}