Shannan

Hi everyone, I'm Shannan Simmons, PineBridge’s Global Head of Consultant Relations. And I'm delighted to be joined by Rob Hinchcliffe, Equity Portfolio Manager, and Head of Global Sector Cluster Research, and John Song, Equities Research Analyst focused on the tech sector.

We're thrilled to have you both here for this first episode in our series to talk about the remarkable run of the big tech companies, and the implications for investors, and your team's style neutral approach that focuses specifically on a company's lifecycle. Welcome to both of you. Thank you so much for being here today.

First, let’s talk about the remarkable run of the ‘Magnificent Seven’. After accounting for 15% of the market cap weight and 41% of the year’s gains for the ACWI index in 2023, a tiny cohort of tech related US mega caps has continued to contribute most of the market gains thus far in 2024. John, can you explain what's driving the rise of the ‘Magnificent Seven’?

John

Yeah, sure. Thanks for having us. So, in general, there's been three main drivers to this. The first one is the huge generative AI wave we're seeing right now. On one side, you have the providers of these models and services, who should be most successful just given the scale that they have in R&D and data center infrastructure. And that's on top of their huge customer bases that they could sell that into. And then on the other side, you essentially have their suppliers who provide them with semiconductors, like GPUs, and other hardware that go into powering their AI infrastructure.

So the other two drivers that could be overlooked, but are just as important are around end-market recovery, as demand was bottoming throughout the year like in PCs and smartphones, servers, IT spending, ad spending.

And then the more company specific drivers like the big one being cost rationalization. A lot of these tech companies have primarily focused on growth for years. So that was a big lever that they pulled.

So going back to the other part of your question, while these aren't the only companies benefiting from these trends, a lot of investors are complaining about the lack of breadth in the market. The 'Mag Seven' contributed to around like 40% of the ACWI gains in 2023, and 70% at one point in 2024. And that's simply just because of their size at about like 17% of the index. But this goes the way as these companies led the downturn in 2022.

Shannan

Thanks, John. Super helpful color. Rob, let's introduce your team's classification of stocks, Lifecycle Categorization. Your team uses this proprietary classification framework versus traditional methods of stock classification by sector. Can you please explain how it works and why the traditional approach of examining companies by sector and industry may be a flawed way to identify mispricing?

Rob

Hi, Shannan, thanks for having us. As a bottom-up relative strategy, we want to outperform the market from stock selection. And specifically, we expect to do this by investing in stocks where we think the company will be better in the future than the market currently expects. So, the traditional way of thinking of stocks by grouping them by sector doesn't, at least in our opinion, offer a consistent way of evaluating companies.

There's such a wide range of different types of companies in each sector, you simply can't evaluate all consumer discretionary companies, for example, the same. Think of the automakers, for instance, you have a range of different types of companies, from traditional automakers, all the way to the newer EV companies, very different companies, all consumer discretionary, but you simply can't evaluate them all the same way.

Shannan

Thanks, Rob. Correct me if I'm wrong, but some of the biggest gains in your strategy are realized when companies move left in the LCR framework. John, can you explore where you're seeing opportunities right now across the tech sector? And maybe this is over to you, Rob. How is your broader team positioning the portfolio?

Rob

Maybe I'll jump on that one first. And that's right. So when we're evaluating which lifecycle company a category is in, I mentioned just before we think about where it is today, and which category we think it will be in the future too. Now certainly not all companies will shift categories over the course of our investment horizon. And typically, we have a three-to five-year time frame. But that said, you’re right, some of the best alpha opportunities can occur when we identify a company that we think will shift from, let’s say, a mature state of growth to a faster pace, before the market identifies that opportunity.

These investments have the potential to offer attractive returns as the market will likely reward both the earnings increase, and also the faster future growth rate with a higher valuation multiple. When it comes to portfolio positioning, we have a portfolio that looks really similar to the benchmark from a style and risk perspective. Recall that we want our returns to come from stock selection. So, things like investment style, market cap, other risk factors, our exposures here all are all quite small.

That said, we do have some prominent themes in the portfolio. John mentioned AI before. To this, I'd also add companies that benefit from the energy transition and nearshoring. While there are obvious beneficiaries from the energy transition, think solar companies, things like that, you know, these can be pretty well picked through by now. But we're still finding opportunities to find companies where the market doesn't yet appreciate that potential.

John

Yeah, and in tech, a lot of the AI, semiconductor and hardware stocks that have already shifted to the left or further into the left, into the high cyclical growth category over the last year. We do see some opportunity for a few of those companies to slowly push into the high stable growth category as they add more software and services to their revenue mix. But that's going to take some time, probably a long time.

We believe software can also shift further to the left as AI gives new pricing and product opportunities. The hype has kind of faded recently as the markets are realizing adoption will take a bit longer than initially expected. But we're still confident in the longer-term opportunity there.

So, on the other side, it's just as important to avoid the companies that are actually moving to the right of the curve. And this, by the way, is always relative to the valuations. But this is especially important because of the AI disruption we're seeing right now. It has the potential to make a lot of businesses irrelevant in the future.

Shannan

Great, thank you both for your time today and for a really intriguing informative discussion.

Rob

Thanks, Shannan for having us.

John

Yeah, great to be here. Thank you Shannan.

Shannan

And thanks to our listeners. We hope you enjoyed and learned something from today's podcast. Please stay tuned for our next episode for more on this conversation. In the meantime, for more of our market and investment insights, please visit our website at www.pinebridge.com.