Scottish Mortgage, the second largest investment trust in the UK, has warned that though the future for AI is bright, companies like Nvidia might not carry on bringing in the record gains that they have managed over recent months.
While Scottish Mortgage is on board with the vision of an AI future, deputy manager Lawrence Burns said that a mismatch in demand could cause a “bumpy period” in the coming years.
“There may be an ‘air pocket’ in AI demand,” Burns said, arguing that while companies have invested billions in hardware for AI, the number of businesses understanding how to fully utilise them may not have reached that scale.
Burns described this as “a period of digestion” for the AI space, as companies learn how to use these tools to actually improve productivity.
He compared this to the introduction of the iPhone, which while launching 2007, took years before apps such as Uber began to rise to success.
The manager added that the £12bn trust had “been taking a little bit of money out” of Nvidia, which it has held a position in since July 2016, though the chip maker remains the largest holding in the trust.
The cyclicality of the semiconductor industry was also of concern, with Burns stating “there are downturns, there have been in the past and there will be in the future”.
Investing in Tiktok
Scottish Mortgage also has many investments in private companies, such as Bytedance, the owner of Tiktok.
While Burns said he was unsure what the outcome would be for the US attempt to ban the social media app, he argued that Bytedance’s Chinese equivalent, called Douyin, was more than enough to justify an investment even if the US market disappeared.
“If you look at the amount of monetisation of Tiktok in the US, it’s quite low, so it is not hugely contributing to profitability,” he explained.
“The Douyin business is growing very fast and is very profitable. It makes sense even if Bytedance outside of China wasn’t allowed”.
The manager also argued that as companies are staying private for longer, the need to include private companies in a portfolio was becoming more obvious.
Scottish Mortgage is also a large investor in Elon Musk’s businesses, especially private business Space X, but Burns acknowledged the possibility of an “Elon risk premium”.
He said the trust “factors in” issues around management and culture to its valuations of both Tesla and SpaceX, adding that the issue has never been “either short or uncomplicated”.
Scottish Mortgage had a incredibly strong performance during the coronavirus pandemic before plummeting in its aftermath thanks to rising rates, a slowdown in China and growth falling out of favour.
The trust has fallen 27 per cent over the last three years, though is up 26 per cent over the last year as tech has surged back into favour.