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The biggest tech companies in one cycle haven’t always been the ones that win out in the end. We all know this. That is bound to generate nerves.

From a valuation perspective, if you look at the US and long-term earnings expectations and sentiment, as well as whatever gauge of frothiness you want to pick, all now seem elevated. Whether it is AI or US exceptionalism taking hold again, the market feels risky. Concentration is an issue and that is clearly just another leg of the AI narrative.

All of that speaks pretty strongly to a spot it’s worth hitting as an investor: the delivery of strong risk-adjusted returns. If you can avoid the drawdown that a big sell-off of the assets you’re holding entails, then that builds strength over time and, regardless of whether at any point you’ve seen stellar gains, the overall return will be strong. Dividends help here, but the heart of the game in frothy markets is identifying the businesses that are not overvalued, or better still, undervalued by the market.

European and international companies that have strong businesses in the US are trading at a discount while US-domiciled companies, by contrast, trade at a premium despite having similar earnings exposures.

The best proxy for long-term value is free cash flow and growth in free cash flow, and there are niches of such value within the AI subset. One of the European electrification winners we’ve identified has a strong AI leg to its story, and it’s been well managed outside the spotlight of all the market hype.

A handful of professional services companies have also been discounted on the idea that their businesses will suffer in the coming revolution. On examination, they look more durable: their solutions are sufficiently embedded into the workflow of their customers that it’s harder than one would think to extract them.

They are all trends worth thinking about. Investors in the past 18 months have grown more interested in the idea of diversifying. In the next year it may well prove advantageous to have at least some of your money outside of the anointed set of companies that every fund manager owns.

Aditya Shivram

Aditya Shivram

Portfolio Manager

Fred Sykes

Fred Sykes

Portfolio Manager