Insights

Portfolio Managers Quoc Tran and Michael Im, CFA discuss the equity market in the first quarter of 2024, how the Fund could potentially benefit from the growth of artificial intelligence, and the investment case for high-quality, growth-oriented companies.

Would you please discuss the equity market in the first quarter of 2024?

Broadly speaking, the 2023 market was primarily driven by a few large-cap technology stocks. In the first quarter of 2024, there continued to be strong return contribution from a few leading technology companies, such as NVIDIA’s 82% appreciation, but other companies such as Apple and Tesla have underperformed, falling 10% and 29%, respectively.

We are seeing signs that the market is broadening out, which we believe is a healthy development. Many high-quality growth companies have not yet been recognized, and we are focusing our research efforts to find new opportunities in companies that have yet to re-rate. As these companies continue to execute their growth plans, we believe their intrinsic value will grow to the benefit of long-term shareholders.

There has been a lot of interest in companies with exposure to the recent developments in artificial intelligence. How has the Fund taken advantage of the opportunities in AI?

We believe we may be at the tipping point of computing’s next wave. Advances in semiconductors and software tools have enabled the scaling of large language models (LLMs) at incredible rates, with the amount of compute used to train LLMs doubling every six months.

Approximately 40% of the Fund is positioned to potentially benefit from the growth of AI. We broadly classify our portfolio companies with exposure into 3 categories:

1. Infrastructure & Hardware companies that provide the computational power needed to train LLMs and other generative models, such as diffusion models used to create images, video, and music. Holdings in this category include Microsoft, Alphabet, Amazon, Entegris, Taiwan Semiconductor Manufacturing, and Equinix.
2. Companies that foster the development of AI & Generative Models, such as Meta Platforms and Salesforce.
3. Companies providing new Applications & Services, suchas Intuit, Palo Alto Networks, Accenture and Gitlab.

While AI could power many companies, some businesses could be hindered from the growth of large language models and generative AI. For example, about 56% of Google parent company Alphabet’s revenues come from its search engine and our analysis suggests that Google Search accounts for almost all of the company’s operating profit. If AI continues to progress, there could be a risk in search slowing down.

Given this development, we reduced our portfolios’ weighting of Alphabet and invested in Taiwan Semiconductor Manufacturing. TSMC is a “picks and shovel” provider to the growing semiconductor industry, where advanced products are difficult to manufacture. One of TSMC’s competitive advantages is that it does not compete with customers unlike competitors such as Intel and Samsung, which manufacture semiconductors for customers as well as for themselves, leading to potential conflicts of interests.

With the tremendous demand for semiconductor chips, companies often want a few sources rather than relying solely on one manufacturer. In addition, many large tech companies may develop their own chips and would likely need to partner with a manufacturer such as TSMC to produce them.

What is the growth potential for the companies in the Cromwell Tran Sustainable Fund?

We seek companies with an attractive valuation and healthy earnings growth as we believe these stocks could outperform the overall market. As of March 31, 2024, the Fund’s holdings were selling at a slight premium to the S&P 500 yet were projected to grow faster than the Index.