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Blue Whale Growth, the investment fund backed by billionaire Peter Hargreaves, has reduced its exposure to the ‘Magnificent Seven’ group of major US tech companies due to concerns over their vast expenditure on artificial intelligence.
Stephen Yiu, manager of the fund, told the Financial Times that he had “aggressively” sold shares in Microsoft to cash in profits, pushing the stock out of the fund’s top 10 holdings in the third quarter for the first time since its launch in 2017.
He said: “Microsoft’s return on invested capital [is] likely to decline from here, given the significant investment made in AI infrastructure.”
Yiu said he would “consider selling out” of Microsoft completely if the tech company’s AI investments outweigh its cash generation.
Shares in the Magnificent Seven — Microsoft, Nvidia, Apple, Alphabet, Meta, Amazon, and Tesla — have rocketed in recent years and represent about a third of the S&P 500’s market capitalisation.
But top investors including Warren Buffett in the US and Terry Smith in the UK have recently scaled back or sold out of certain Magnificent Seven companies. Wall Street has grown increasingly nervous about when returns will materialise from a Big Tech capital spending splurge that is set to surpass $200bn this year.
“A lot of people talk about the Magnificent Seven, and we are [backing] Nvidia,” said Yiu, referring to the US chipmaker. “Outside of Nvidia, we are increasingly less positive on the [other] six. The capital intensity of these stocks is going up significantly because they are spending a lot on AI infrastructure.”
“I’m not suggesting that six of the Magnificent Seven stocks will disappear but . . . we think they could be a drag on the market,” he added.
Blue Whale manages £1.3bn, invests in global stocks and has had a sizeable holding in US tech companies since inception. It was financially backed by Hargreaves, who co-founded the investment platform Hargreaves Lansdown, and former Artemis fund manager Yiu.
Hargreaves’ family holding in the Blue Whale Growth fund is worth more than £200mn. The fund returned 24 per cent this year to the end of November, compared with rival funds’ 15 per cent on average.
Yiu’s decision to sell down some of the Magnificent Seven is the latest sign that investors have concerns over the companies’ future prospects. He said the fund’s exposure to some of these stocks, excluding Nvidia, now amounts to only 5 per cent of his portfolio — far less than the MSCI World’s 20 per cent.
Yiu has reduced the fund’s holding in Microsoft from 8 per cent in January to about 2 per cent.
The fund manager also recently sold down Meta, the parent company of Facebook, to take profits “due to concerns about further AI ramp-up” in company spending. He has cut his holding from 5 per cent of the fund to 3 per cent.
“The problem with Meta is we are concerned [it] is overspending on AI going into next year,” Yiu said. “Ultimately you need to translate your spend into profit and at the moment we are not seeing enough of that.”
He also sold his stake in Amazon in 2021 and Alphabet, Google’s parent company, in 2022.
Other investors have dumped large US tech stocks recently. Smith, who runs the £23bn Fundsmith Equity, said last month that he had sold out of Apple just two years after investing in it.
Buffett, one of the world’s best-known investors, continued to slash Berkshire Hathaway’s holding in Apple last month and has cut almost two-thirds of the stake in just over a year.
Yiu said Nvidia represented nearly 10 per cent of his fund, valuing the stake at around £100mn. He has had to sell shares as Nvidia’s market value has grown, which he said has netted a profit of £100mn.
The fund manager is also backing Broadcom, which he said builds AI infrastructure and is a beneficiary along with Nvidia of the money being spent on AI by the rest of the Magnificent Seven.
According to Blue Whale’s latest accounts, the fund’s parent company reported a profit of £4.1mn in the year to March, up from £3.9mn the previous year.