(Bloomberg) -- A top Asia fund manager who has outperformed 98% of her peers this year largely with AI-related tech stocks is taking a breather on the hyped sector.
Faye Gao, who co-manages Lombard Odier Investment Managers’ $268.7 million Asia High Conviction Fund, said in an interview that her fund has “trimmed back” its exposure to information technology “due to uncertainties surrounding global geopolitical tensions and macroeconomic demand.” The fund has generated returns of about 27% this year and 5.7% in the last five years.
Meanwhile, the fund is ramping up bets on India’s robust domestic-driven economy and China’s platform tech companies with steady growth, said Gao, who joined the firm in early 2021 and started to co-manage the fund a year ago.
Gao’s positioning underscores the difficult choices facing fund managers who have won big with AI bets but increasingly face questions over how long to ride the wave. China’s aggressive stimulus announcements last week, and the stock market boom that followed, have only increased the complexity of those decisions.
Cooling on AI
Her fund’s performance is heavily owed to Asian tech companies. As of the end of June, 31% of the fund was allocated to IT, which remains its largest sector exposure. But current valuations are concerning given “cyclical headwinds,” such as oversupply, she said.
“We are long-term positive, but we think in the near term, they could be bad,” she said. “It’s getting a bit more expensive there.”
SK Hynix Inc. and Micron Technology Inc. were recently downgraded by analysts on oversupply concerns.
Other signs belie those concerns. South Korea’s semiconductor stockpiles dwindled at the fastest clip since 2009 in August. The market for AI products is predicted by Bain & Co. to balloon to as much as $990 billion in 2027.
Lombard Odier Investment Managers’ investment process and views are independent from Lombard Odier’s private banking business, which has eliminated all China assets.
READ: Lombard Odier Dumped Entire China Allocation, Won’t Buy Rebound
Gao emphasized she’s not in a long-term retreat, and the AI sector will innovate for five to seven more years. “If there is a significant correction, we’re looking to buy. We’re actively seeking bottom-fishing opportunities.”
One chip name Gao remains bullish on is Taiwan Semiconductor Manufacturing Co., which is about 10% of her fund’s holdings. It’s an example of stocks that “exhibit absolute leadership and long-term growth visibility, while trading at reasonable valuations,” she said.
Valuation considerations play into her bullishness for Chinese platform tech companies, such as Tencent Holdings Ltd. and Alibaba Group Holding Ltd. “These companies are generating strong free cash flows and investors will get companies for free in eight to 12 years.”
Still, her fund is not optimistic on China’s overall economy, even as the country makes up 29% of its weight. She plans to remain “very selective” on China. But the authorities’ comprehensive stimulus delivered “a positive signal” that they’re willing to do more for the economy, she said.
India also poses unique promises, given its rapid growth and less dependence on developed market growth. “India is one of our key overweight markets with a strong domestic structural driver,” she said.
--With assistance from Kevin Dharmawan.
©2024 Bloomberg L.P.
