With the largest and lengthiest World Cup in history at last behind us, it is tempting to reflect on the nature of winning and losing. Even in football, regardless of what the scoreline might say, the distinction between victory and defeat need not be crystal-clear.
Cape Verde’s headline-stealing feats immediately spring to mind. Strictly speaking, the team that entered the tournament ranked as the 13th-best in Africa lost – falling to Argentina in an epic last-32 clash that was settled in extra time.
Yet in many ways the Blue Sharks were the biggest winners of all. Their odds-defying deeds are likely to be recalled by countless fans long after the rest of the championship has faded from memory.
Lines can be similarly blurred in the investment arena. The conspicuously black-and-white judgements handed down amid the ongoing frenzy of the artificial intelligence boom provide a striking illustration.
Some companies have been loudly trumpeted as ‘AI winners’, while others have been brusquely dismissed as ‘AI losers’. Such a binary carve-up is agreeably neat but it may risk overlooking a number of significant points.
First, AI represents only one component of a business’s competitive position. Even at a time when it might seem as if nothing else matters, it is rarely wise to treat a single consideration as the be-all and end-all.
Second, both the true potential and the possible inadequacies of AI solutions are unknown at present. This is a story that is still being written, and no one can predict with confidence how it will unfold over the longer term.
Finally, beyond those companies that are perceived to be AI winners or AI losers, there is a third group of businesses which continues to demand attention. It consists of those that are neither – and there are, lest we forget, still quite a lot of them.
One-trick ponies or would-be thoroughbreds?
Our fund invests mainly in European smaller companies. This corner of the investment universe, where research by fund managers and analysts remains limited, demonstrates the importance of fully appreciating each business’s unique characteristics in the face of AI’s spread.
Take Baikowski. Based in France, it produces high-purity mineral oxides that can be used during the ‘cleaning’ stage of semiconductor manufacture. Since it now faces a rise in demand, the company can be seen as an AI winner.
Logically, this augments Baikowski’s investment appeal. Yet it is worth noting that the business also plays a ‘picks-and-shovels’ role beyond the domain of AI – for instance, in LED phosphors and battery technologies. There is more than one string to its bow.
In much the same vein, Lu-Ve, an Italian supplier of cooling equipment, recently secured a deal with a data-centre hyperscaler. Thus, this company too can be viewed as an AI winner whose investment attractions have been enhanced.
Again, though, it would be wrong to draw the line at AI. Lu-Ve’s products – among them ventilated units, condensers and even glass doors for refrigerated cabinets – are used in multiple settings, including supermarkets and industrial facilities. This is not a one-trick pony exclusively reliant on the sustainability of the AI revolution.
Our fund holds both Baikowski and Lu-Ve, yet we do not invest in these companies solely because of their involvement in the AI story. We invest in them because our analysis suggests they are good-quality, undervalued businesses that have proven policies and practices, sound management and excellent prospects.
There are many companies that boast an AI ‘angle’ yet do not possess any of these attributes. As such, in our opinion, they are anything but winners.
Equally, there are many companies that are commonly reckoned to be severely impacted by AI but which have much else in their favour. As such, in our opinion, they are anything but losers.
Broad-brush judgements versus a granular approach
This brings us to those companies that are neither AI winners nor AI losers. As remarked earlier, there are many more than the prevailing narrative would have investors believe.
They include Fope, an Italian maker of luxury jewellery. Its bracelets, which retail for several thousand euros, stay in vogue not because they are cutting-edge but because their design is regarded as timeless.
France’s Thermador, which supplies plumbing products, is another of our holdings. Its consolidated sales and net income totalled €231m and €20m respectively in 2016, when we first invested, and have since more than doubled – in part thanks to the success of strategic acquisitions.
Power-tool manufacturer Einhell, which is headquartered in Bavaria, is another example. We originally took a stake in 2017, since when sales have increased by around 10% a year. The business is driven by innovation – including the development of a single battery that fits all tools – but is by no means a slave to the AI saga.
Rather than toppling into the broad-brush ‘AI winner or AI loser’ trap, we aim to judge each of these companies on its own merits. This requires in-depth research and direct engagement with businesses’ management teams.
In our experience, a genuinely granular approach of this kind is essential. It can be particularly useful when searching for opportunities at the lower end of the market-capitalisation spectrum.
In tandem, we are conscious of the tech sector’s history of sharp cycles. This alone is sufficient encouragement for us to cast our net more widely in seeking companies capable of growing consistently over the long run.
Investors could certainly be forgiven for thinking AI is all that counts right now, not least amid such relentless noise, but they really ought to think again. As a wise man once said of football: It’s a funny old game.
David Walton is manager of the IFSL Marlborough European Special Situations Fund. The views expressed above should not be taken as investment advice.