Insights

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

With your focus on large growth companies, please provide your perspective on the market in the first half of 2024.

Market returns in the first two quarters of the year were strong as the S&P 500 Index rose 15%. The Index’s market-weighted returns continue to be narrow, led by the “FAANG” technology companies—Facebook (META), Amazon (AMZN), Apple (AAPL), Netflix (NFLX) and Alphabet (GOOG)—plus NVIDIA (NVDA). By comparison, the S&P Equal Weight Index, where each constituent is equally weighted, increased only 5%.

However, we see many reasons for the bull market to continue:

1. The investment phase in artificial intelligence (AI) may be only in the beginning stages and may last five to 10 years. Based on historical growth cycles in semiconductors, for every capital expenditure dollar invested in semiconductors, there is usually a $2 to $3 investment in software.
2. The U.S. economy continues to be strong and inflation appears to be abating. Consensus calls for only one or two rate cuts this year whereas at the beginning of the year, 5-6 rate cuts were expected.
3. Market valuations appear reasonable, with the exception of the FAANG stocks and NVIDIA. Excluding these higher valuation companies, the 2025 price-to-earnings (P/E) for the S&P 500 was only 16.5x as of 6/30/24. By comparison, the Index’s historical P/E over the past 10 years has been approximately 18x.

As long as earnings continue to grow, there appears to be plenty of room for stock prices to expand through year end and into 2025.

What is the Fund’s exposure to AI?

Over the past several months, our appreciation for this next technology wave driven by AI has grown. For some time, the Fund has held multiple infrastructure and hardware companies, companies that foster the development of AI and generative models, and providers of applications and services companies. In 2024, we further increased the portfolio’s exposure to the advances of AI with the additions of Taiwan Semiconductor Manufacturing, a “picks and shovel” provider to the growing semiconductor industry, and NVIDIA.

As a result, as of the end of the second quarter, about 15% of the Fund had exposure to semiconductors and we believe nearly 50% of our portfolio could benefit from AI-related investments and the development of new AI applications.

We believe the current cycle bodes especially well for NVIDIA. Capital expenditures of technology companies such as Microsoft and Meta have been predominantly directed towards building out data centers capable of training AI models, which require NVIDIA’s semiconductor chips. We expect the supply constraints to persist for the near future as NVIDIA is sold out of its chips through next year. In prior periods where there was a major technological shift, a leader often emerges that dominates the ecosystem. We believe NVIDIA has that opportunity with its combination of leading-edge graphics processing units and its CUDA (Compute Unified Device Architecture) software that enables developers to tap into the power of its chips.

How does the Fund’s growth projections compare to the overall market as we enter the second half of 2024?

With a focus on companies selling at an attractive valuation and providing healthy earnings growth, the Fund is projected to grow faster than the Index as measured on a return on equity, earnings growth and sales growth basis as of the end of the first half of 2024.