“We just stood in a place where we knew a taxi would pass eventually. And one did.”
While it feels like much of the investment world has crowded into these stocks in recent months, Loftus Peak’s world view has been shaped over years. For example, it has held Nvidia for most of the past eight years – but it also suffered through a difficult year in 2022, when the fund was down 31.7 per cent.
Pollak is less sure about AI’s ability to transform any one sector as he is about its potential, over time, to transform the global economy; he quotes Derek Thompson, whoa argued recently in the The Atlantic that AI could prove to be, like the steam engine, a “lever for detaching economic growth from population growth”.
The key downside risk, Pollak says, is from regulation. He’s less concerned about the doomsday scenarios put forward about how AI could eat the world, but he agrees with OpenAI founder Sam Altman, who this week told US Congress that regulation for the sector was vital.
How that regulation rolls out remains to be seen; several cynics have quite rightly pointed out the tech sector has a history of calling for regulation, only to then lobby for weaker rules that entrench its competitive position.
In the meantime, Pollak has a bigger challenge: how to rethink his portfolio in a world gone mad for AI. Two things are making the Loftus Peak team wary.
The first is stretched valuations and the fund has trimmed its positions in Nvidia and Apple since the start of the year as it seeks to balance returns with a preference for lower risk levels than some other growth investors.
The second is avoiding AI lipstick on pigs – companies that attempt to attach themselves to the AI thematic but don’t have the business model, technology or capabilities to back up their claims. Pollak says Loftus Peak has avoided local AI hopefuls including Appen and BrainChip on these grounds.
He says Loftus Peak’s team is keeping the hard lessons of the dotcom bust and last year’s tech sector smashing top of mind, including the importance of profitability and a strong balance sheet.
“We invest in disruptive companies, but the rules of finance have not yet been disrupted.”