How top tech fund managers reacted to the AI sell-off

Technology fund managers are unperturbed by the aggressive AI-related sell-off which swept across markets of late, arguing that the turmoil has created opportunities, even if it exposed genuine risks.

Global stock markets suffered a big downturn on 5 November, when the tech-heavy Nasdaq 100 fell more than 6%.

The sell-off followed the Democratic sweep of the US midterm elections and concerns about what this could mean for the rapid roll-out of AI infrastructure.

New governors in several key states campaigned on pausing or conditioning approvals for data centres and Goldman Sachs estimates that states holding around 45% of planned US data centre capacity may be exposed to policy changes, putting speed bumps on what has been a rocket pace trend in stock markets.

Ben Rognoff, manager of the £6.5 billion Polar Capital Technology Trust, says “the election result has added a further layer of uncertainty to existing concerns about the ability to deliver and energise data centre capacity, as AI became a political issue, with rising energy prices blamed on data centre growth”.

All this piled on top of months of concerns about the sustainability of the AI infrastructure investment cycle and Kristofer Barrett, head of global equities at Carmignac, previously said concerns had already started to ramp up as previously rumoured figures and valuations around Anthropic appeared inflated.

Hyun Ho Sohn, manager of the Fidelity International Global Technology fund, says the latest developments and fears “are consistent with some of the concerns I have previously highlighted”.

“Since the emergence of ChatGPT in late 2022, I have maintained a cautious view on the sustainability of elevated AI capital expenditure and the associated returns on investment.”

Fundamentals or fear?

While the sell-off has been intense, many of the managers didn’t feel that the whole sector could be tarred with the same brush.

“We believe the recent weakness in AI-related equities does not reflect the sector’s fundamentals,” says Polar Capital’s Rognoff.

“In our view, financing conditions have contributed most to the repricing, alongside concerns about capital intensity and execution.”

Rognoff has taken an active approach to the big tech themes of recent decades, moving away from a blanket Magnificent Seven hold some years ago and taking a selective view on AI.

He said “beneath the noise, large cloud providers continue to report that customer demand exceeds available supply as cloud revenue growth accelerates. AI usage and compute pricing data point firmly in the right direction, while model progress also appears to be accelerating.”

“Our conviction in the AI opportunity is unchanged,” he adds.

“Material volatility is a feature of new technology cycles, not an exception to them. We believe investors who stay the course will be rewarded as AI delivers on its promise.”

Mark Ellis, CIO and CEO of Nutshell Asset Management and manager of the Nutshell Growth fund, also believes the sell-off has been driven more by changing sentiment than deteriorating fundamentals plus the magnitude itself has been amplified by the leveraged participants in the market, including hedge funds, pods and retail investors, as well as institutions with narrow risk mandates.

“When panic sets in, the exit becomes crowded,” he says.

Fears of an AI bubble have dominated the headlines, Ellis said, but argued that bubbles are normally characterised by exponential price gains and extreme, unjustifiable valuations, conditions he does not believe apply today.

“What the sell-off has done is make technology cheap,” Ellis said. Indeed, markets have already seen retail investor flows into some of the most sold off tech stocks.

Ellis acknowledged there were legitimate questions over whether hyperscalers will generate sufficient returns from their huge capital expenditure programmes, particularly given the pressure this spending can put on free cash flow. But he warmed against “second-guessing some of the world’s best management teams”.

“Sentiment and narratives have turned this market quickly. The best opportunities often emerge when sentiment and fundamentals diverge, and in technology today they have diverged sharply,” he says.

Still room for caution

The previous AI-related concerns are still present for many tech fund managers though, and Fidelity’s Ho Sohn said that this recent AI correction and the current earnings season have reinforced his view that momentum across the AI capital expenditure cycle may be slowing.

He said investors are increasingly focused on free cash flow generation and returns on investment and emerging signs of tighter financing conditions and weakening investor sentiment towards AI infrastructure could make it increasingly challenging for companies to secure the capital required to sustain the buildout.

“As such, I have maintained a selective approach towards AI infrastructure beneficiaries, with the strategy remaining significantly underweight AI hardware/semiconductor companies,” Ho Sohn says.

This position has at times hurt the fund’s performance, but speaks to the approach many active managers are taking. Realising that the tech-AI story demands a diversified, valuation-conscious approach and disciplined portfolio construction that can deliver returns through market ups and downs.