Liontrust Global Technology Fund

The Liontrust Global Technology Fund continues to invest in global leaders and disruptors within the technology sector that are well positioned to benefit from the new AI-driven technology cycle.

The Liontrust Global Technology Fund returned 0.6% in August, compared with the IA Technology & Telecommunications sector average of -0.3% and the MSCI World IT Index return of -0.9% (both comparator benchmarks).

• A high bar for investor expectations led to some post-earnings share price declines
• Sentiment and earnings-related volatility present buying opportunities for the Fund
• We remain confident in the long-term growth potential of innovative technology companies

July’s volatility spilled into August, with the VIX index, a key measure of market uncertainty, spiking early in the month following the unwind of the now infamous Yen carry trade. This event sent ripples through global markets, exacerbated by declining investor confidence and increased recessionary fears, particularly in the US where the economy appears to have finally run out of steam. Weakening economic data saw a broad de-risking of portfolios early in the month, leading to a sell-down in many companies that had been winners year-to-date, notably within the technology sector.

Market sentiment improved throughout the month, with VIX settling down to more normalised levels and high-quality companies with structural growth opportunities returning to the fore. The MSCI World index ended the month up 2.5% (in USD), having fallen as much as 6.4%, while the tech-heavy NASDAQ 100 index ended August up 1.1%, having fallen as much as 7.7%. The smaller-cap oriented Russell 2000 index, meanwhile, ended August down 1.6%.

With inflation falling and economic data slowing, investors increasingly looked to Fed policy for relief against fears of a hard landing scenario. These concerns were abated later in the month at the Jackson Hole Economic Symposium where chair Jerome Powell indicated that “the time has come for policy to adjust”, signalling imminent interest rate cuts on the horizon.

Meanwhile peak earnings season forged ahead, with companies reporting against the backdrop of heightened investor scrutiny on AI, particularly regarding the timing of returns given ongoing sizeable investments. Alongside broader market uncertainty, this meant many companies faced a high bar for investor expectations coming in to reporting, leading to some significant – often excessive – post-earnings share price declines in cases where companies were deemed to have disappointed on earnings or guidance, particularly relating to all things AI.

We continue to buy cyclically depressed companies

Sentiment and earnings-related volatility present buying opportunities for the Fund, with the team maintaining our valuation discipline and continuing to take opportunities to buy high-quality innovative companies during periods of share price weakness. In August we capitalised on market fluctuations to build a new position in Klaviyo after revising up our price target. Conversely, we exited our position in Upstart as it achieved our price target. These actions reflect our commitment to actively managing the portfolio, seeking out innovative companies investing for growth in strong structural markets while also maintaining discipline in recognising gains when our investment theses are realised.

What companies are telling us

Innovative global leaders on the right side of AI disruption

Despite recent market scepticism around potential AI hype, we continue to see strong signals that we are entering a new AI-driven technology cycle, which requires a whole new technology stack. From an investment perspective this poses both opportunity and risk: winners will be companies that can capture value in enabling or effectively harnessing AI, while losers will be those on the wrong side of AI-facilitated disruption. We continue to invest in innovative companies on the right side of AI, keeping a close eye on fast-moving company- and technology-level developments. Company updates throughout August reinforced several key trends that we are seeing within the AI space:

1. Compute scale matters for AI: Compute scale is paramount: increasing compute enables better models, broadening AI applications and unlocking revenue opportunities across the economy. This trend has been in place since 2017, and is expected to continue for at least five more years, bolstering companies supplying AI-related hardware and equipment.

Recent results of top innovators driving this scale forward underscore this trend. Nvidia reported a 122% year-on-year increase in second-quarter revenues driven by AI-focused chip demand, which looks set to continue as CEO Jensen Huang noted that next generation of large language models will require 10-20 times more compute power. Meta, already generating strong AI-related revenues through enhanced recommender-AI driven advertising, revealed similar scaling plans for its upcoming Llama 4 model which will require ten times more compute than Llama 3. Ramping compute is driving demand for interconnect equipment, bolstering the likes of Amphenol who coming into August reported c$300 million year-on-year revenue growth almost entirely driven by AI, it’s high-speed solutions in strong demand.

2. Shift from chips to systems: As AI workloads become more complex, we are seeing a significant shift from individual chips towards larger integrated systems. This transition is altering value capture across the semiconductor value chain, introducing more process steps and requiring new supply chain innovations in materials engineering and advanced packaging.

This was echoed in updates from several key innovators operating in this space. Applied Materials has previously highlighted that the number of process steps for leading-edge chips has increased from 750 in 2010 to over 1900 today, and in August reported it expects revenue from its advanced packaging portfolio to grow by $1.7 billion this year as it leads the way in a rapidly expanding market. Lam Research emphasised the growing importance of materials engineering and advanced packaging for AI applications, highlighting $1+ billion growth opportunities in areas like gate-all-round, backside power delivery, and advanced packaging. Camtek reported strong demand for its inspection equipment for high-bandwidth memory, helping Q2 revenues reported in August triple from the prior year. Onto Innovation saw increased demand for its metrology and inspection solutions, vital for the advanced packaging processes in AI chip production, which management announced they expect to grow over 70% this year

3. Major upgrade cycle at the edge: after a tough couple of years for edge computing, we are now expecting a significant major upgrade cycle to occur at the edge – smartphones, PCs, and laptops. The scale of this is still underappreciated: for example, only 8% of iPhones today enable consumers to use AI on-device. Seven billion smartphones and four billion PCs will need to be replaced by 2027 (as part of a $3trillion spend on AI infrastructure in total, including data centres). These compute devices need more memory to utilise new operating systems like iOS 18, which launches later this year, and Windows 12, which launches in 2025.

Well positioned innovators in the fund that we heard from in the quarter include Apple, which reported promising signs of smartphone recovery ahead of its hotly anticipated next-gen iPhone launch in September; and SK Hynix, which, with over 70% market share in high-bandwidth memory, remains well-positioned to meet the growing demand for advanced memory in both mobiles and PCs. Further, Arm, whose architecture underpins 99% of mobile application processors, reported strong licensing revenue growth (+72% year-over-year) driven by demand for custom CPUs for AI applications. Arm's management reiterated its expectation of ARM-based PCs reaching 50% market share within five years – its highly energy-efficient architecture positioning it to take significant share from incumbent Intel in this market.

4. Power is the key bottleneck: AI servers consume approximately 10 times more power than traditional CPU servers. We expect AI server penetration to grow from 10% to 30% between 2023 and 2027, and data centre power consumption to reach 10% of global energy consumption by 2030. This surge in power demand creates both challenges and opportunities across a range of sectors beyond technology, including industrials, utilities, and energy.

Hardware manufacturers have received the message: Applied Materials stressed the importance of power needs in its August earnings call, noting that for AI customers, "reducing power per operation is now more important than increasing operations per second." It reported that leading AI companies are targeting a 10,000 times improvement in performance per watt over the next 15 years. Nvidia, in its earnings call, once again emphasised the importance of power efficiency in its next-generation AI chips, with the upcoming Blackwell architecture designed to significantly improve performance per watt.

5. AI diffusion across sectors: AI is a general purpose technology with the potential to transform every sector – this is a once in a generation opportunity for investors of all industries, not just technology. We continue to see the diffusion of AI across all sectors, with early adopters benefitting from enhanced productivity and product innovation, which will likely lead to share gains from slow movers as benefits compound over time. Helping facilitate this AI propagation, Palantir Technologies reported strong results in August, with revenues +13% year-over-year driven by increasing demand for its AI-powered data analytics platforms across various industries. The company highlighted significant traction in both government and commercial sectors, demonstrating the broad applicability of AI solutions. Meanwhile in healthcare, Recursion Pharmaceuticals is leveraging AI to accelerate drug discovery. The company reported progress in its clinical pipeline and continued expansion of its proprietary biological and chemical datasets, which power its AI-driven drug discovery platform.

As we move forward, we remain confident in the long-term growth potential of innovative companies within the technology sector. Many of these businesses, both established leaders and earlier-stage disruptors, have emerged from challenges in recent years with leaner operations and improved strategic focus. This positions them well to capitalise on the new AI-driven technology cycle, of which we are still in the early stages. Our focus remains on identifying and investing in companies at the forefront of technological advancements and also well-positioned to be winners in this next cycle, ensuring we capture the outsized growth potential these companies offer. We believe that active management remains crucial in this sector, given the rapid pace of innovation and the potential for significant value creation by select companies.

We will continue to engage with companies during upcoming research trips to innovation hubs of Silicon Valley and New York. These interactions allow us to stay at the forefront of technological advancements and identify emerging leaders in the AI space and beyond. Additionally, the potential for interest rate cuts suggests further tailwinds for growth, supporting the technology companies best placed to lead the next wave of innovation.

Discrete years' performance (%) to previous quarter-end:

*Source: FE Analytics, as at 30.06.24, primary share class, total return, net of fees and income reinvested. Fund inception 15.12.15; current fund managers’ inception date is 08.02.23.

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