Ain’t seen nothing yet: The AI revolution is still winding up, says Montaka

Fund manager Montaka Global Investments arrived early at the AI party, having piled into some of the mega-tech firms now known as the Magnificent 7 in early 2022. That decision has now paid off handsomely, underpinning its staggering 55% return for 2023.

And Montaka’s Andrew Macken believes there’s plenty of growth ahead for the thematic that carried the S&P 500 to a record high last year. AI also underpinned the NASDAQ's 45% return in calendar 2023.

In the following Rapid Fire Q&A, Montaka's co-founder and CIO, who relocated to the US from Australia around 18 months ago, shares his outlook for the year ahead. Macken delves into how his team arrived so early at its bullish view on AI and whether he believes US stocks have much upside from here. 

He also reveals the single biggest position in the Montaka Long Only Global Fund (it’s not a tech firm) and explains his investment thesis for the company, while also exploring what he regards as the number one risk for 2024.

Artificial Intelligence was (arguably) the biggest topic in financial markets last year. What’s your base case for AI in 2024?

Our view is that we remain in the very early stages of the AI revolution, despite many AI-related stocks rallying pretty hard last year. In fact, our research shows that, for most large enterprises around the world, while early experimentation is underway, large-scale rollouts of AI-infused applications have not yet even begun.

We continue to see great investment opportunities in AI winners across three basic dimensions:

1. Those that can ‘distribute’ the benefits of AI to customers – typically in the form of software applications.
2. Those that can employ AI successfully in their operations to increase productivity.
3. Those that sell the compute, and related services, that are required to run the AI-infused software applications.

Your big call on AI was a little early – can you talk us through your thought process and how this affected your investing in 2023 up to now?

We have been researching AI for many years now. (Actually, a lesser-known fact about me is that, 20 years ago, I did my electrical engineering honours thesis in machine learning for speech processing).

In more recent years, our objective has been to continue building out our deep understanding of the technology and its applications, and then – more importantly – translate this understanding into investment opportunity.

We think the greatest opportunities for investment in AI will have less to do with the technology itself, and more to do with good old-fashioned ‘competition-insulation’. The winners of the future will almost certainly include many winners of today who employ AI to strengthen their existing advantages.

Montaka’s portfolio has included several of these high-probability long-term winners in AI for many years now, including Microsoft (NASDAQ: MSFT), Amazon (NASDAQ: AMZN), ServiceNow (NYSE: NOW), Meta (NYSE: META) and Spotify (NASDAQ: SPOT).

What’s the biggest position in your portfolio and what’s your investment thesis?

The largest position in Montaka’s portfolio is Blackstone (NYSE: BX), the world’s leading alternative asset (or ‘alts’) manager.

We have been closely analysing this industry for more than five years now – and have always been fascinated by high-quality, reliably-growing earnings streams that require little or no capital investment to achieve.

One of our observations is that, in the alternatives industry, growth disproportionately favours the largest, biggest, most trusted brand names, with the longest track records. This greater scale drives advantages in talent attraction, access to deal flow, geographic and product diversification, and client attraction – which further drives scale, and so there is a ‘flywheel’ dynamic here.

The alternatives space is undergoing a large structural transformation that we believe will result in supernormal asset growth over the coming decade – and will disproportionately favour the leading managers.

The industry is at approximately US$10 trillion aggregate AUM today. While this sounds enormous, it’s actually a tiny fraction of total global stocks, bonds and real estate of more than US$300 trillion.

Growth in alts will continue to be driven by three forces: (i) Insurance partnerships – which represent a US$30 trillion pool of assets; (ii) Retail/private wealth channels – which represent more than US$80 trillion in assets; and (iii) Asian allocations to alts – which are currently running at a penetration that is one-quarter that of North America.

While this structural transformation of the alts space remains in the early innings, it is coming – and we think it is under-appreciated by the market today. Over time, we believe it will continue to drive substantial organic growth in Blackstone’s earnings power.

How do you feel about company valuations at this point – particularly in the US market? Do you see more room for growth?

We think there’s a real mix out there at the moment – some stocks are overvalued and some remain undervalued. We think we own a handful of undervalued businesses that have a lot more upside still to come.

Importantly as well, many of the businesses in Montaka’s portfolio are growing more structurally, than cyclically. This means that, even if we do see some economic weakness this year, the long-term growth prospects of these businesses should remain largely intact.

What are the biggest risks you see ahead in 2024-2025?

We think the biggest risk out there today is the Fed potentially keeping interest rates too high for too long. Inflation in the US has been decelerating pretty consistently of late, and other large economies around the world such as China and the EU are doing it tough. We just see no reason for interest rates to be this high in the current environment.

But the reality is the Fed might be reluctant to cut too soon – and this could actually push the US into a recession.

What’s the most important lesson you’ve learned since relocating to the US?

I think it’s important to see and experience how people live their lives in different places outside of Australia. Certainly, as a global equities investor, it’s helpful to have a good sense of this.

Even little things like how Amazon works in the US (which is different to Australia). Or finding out which seltzer everyone is drinking. Or how the National Football League is consumed. These help us understand the US consumer more deeply than we could if we were exclusively Australian-based.