Why Magellan still backs Microsoft and Amazon for growth

Alan Pullen, Co-Portfolio Manager at Magellan's $8 billion Magellan Global Fund, and Portfolio Manager of the Magellan Global Opportunities Fund, says the recent dip in the valuations of Microsoft and Amazon means they now offer reasonable value to investors, given they still look attractive long-term winners.

According to Pullen, both businesses' data centres and cloud units will benefit from growing demand for artificial intelligence (AI) services, although the pace of adoption remains uncertain. 

Pullen added that the Fund’s defensive bias means it’s well positioned to navigate the risk of a downturn fuelled by US President Trump’s erratic decision-making and trade policies.

High-quality European shares could also offer investors an opportunity as the continent embarks on a debt-fuelled investment boom. However, Pullen says investors need to be cautious around Europe, given the continent's still number of problems, including excess government debt. 

Read the Q&A below for more of Pullen’s view and to see how he’s watching the pace of AI adoption as a guide to what businesses may outperform. 

How are you navigating the current trends and volatility in markets?

In terms of overall risk appetite the portfolio is built with a structural defensive bias which leaves it well suited in periods of elevated volatility. 

While current economic uncertainty derived from Trump’s erratic policy making has increased the risks of an economic slowdown, we judge the inherent defensiveness of the portfolio as largely sufficient at this point and have not materially increased the defensiveness or cash levels in the portfolio.

Aside from Trump and tariffs, what other key trends are you playing at the moment?

We're strong believers in the long-term potential of Generative AI to transform industries and create new opportunities for societies and investors. However, the pace of that adoption remains uncertain and depends on technological progress, both on the usefulness of new AI applications, such as AI Agents who are able to act on our behalf, and on the technology underpinning generative AI, such as lower cost inferencing as demonstrated by Deep Seek. 

The hyperscale cloud providers (Amazon, Microsoft, and Alphabet) and other large AI users such as Meta have announced plans for further large increases in capital expenditure focused on Gen AI. 

However, given potential headwinds to economic growth that may limit businesses' IT budgets and the trend towards lower costs of compute that we expect to continue, there is a possibility that the pace of AI adoption is not sufficient to utilise expected capacity expansion. 

This will be a headwind for the hyperscalers in the short term, though they can slow spending on chips quickly and remain well diversified. 

Importantly, as large users of Gen AI, they will benefit from lower pricing of compute power over the longer-term. Upstream suppliers, such as AI chip designers, may face a more significant headwind under this scenario.

What do you think the market is overestimating that you don’t think will have a significant impact?

While increased deficit spending may provide a short-term benefit, the level of indebtedness across many European nations limits the potential for government spending to increase significantly without negative consequences, such as higher interest rates.

In addition, the EU framework remains unwieldy, demographics are a long-term headwind with the population aging rapidly in some countries, and some key industries - such as the auto sector - are facing competitive threats from China. 

Consequently, the market may be overestimating the long-term impact of the change in fiscal regime. 

This does not mean European companies cannot be attractive investment opportunities, there are many high-quality, European listed, companies that we invest in, but we would be wary of lower-quality European companies purely reliant on higher European growth.

What was the most recent addition to the portfolio?

Consequently they typically perform relatively well during periods of market turmoil. The Global Fund always maintains a solid exposure to companies with these characteristics, reducing the risk of permanent capital loss.

What was the most recent exit from the portfolio and why?

With volatility comes opportunity – if your view of the world plays out, where are you likely to be placing outsized bets to take advantage?

While valuations are certainly not at bargain basement levels, reasonable value is starting to emerge in select high-quality companies. We remain confident of the long-term attractiveness of the hyperscale cloud companies, such as Microsoft and Amazon. 

While further short-term volatility cannot be ruled out, including potential uncertainty in the pace of AI adoption, the long-term outlook remains positive underpinned from the continued shift from on-premise to the cloud and the long-term adoption of Gen AI tools. 

We will continue to look through any potential short-term weakness for opportunities to add to these quality compounders. In addition, defensive parts of the market such as consumer staples and healthcare remain reasonably valued and offer downside protection if the economic outlook were to deteriorate significantly.

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