Peter Hargreaves’ Blue Whale sells off major tech stocks on AI concerns

Stay informed with free updates

Simply register at Actions myFT Digest – Delivered straight to your inbox.

Blue Whale Growth, the investment fund backed by billionaire Peter Hargreaves, has reduced its exposure to the ‘Magnificent Seven’ group of major US technology companies over concerns about their huge spending on artificial intelligence.

Stephen Yiu, a manager at the fund, told the Financial Times that he had “aggressively” sold Microsoft shares to cash in on profits, knocking the stock out of the fund’s top 10 holdings in the third quarter for the first time since its launch in 2017.

He said: “Microsoft’s return on invested capital is likely to decline from here, given the significant investment made in AI infrastructure.”

Yiu said he would “consider selling” Microsoft entirely if the tech company’s AI investments exceed its cash generation.

The Magnificent Seven stocks (Microsoft, Nvidia, Apple, Alphabet, Meta, Amazon and Tesla) have soared in recent years and account for about a third of the S&P 500’s market capitalization.

But major investors, including Warren Buffett in the United States and Terry Smith in the United Kingdom, have recently reduced or sold certain Magnificent Seven companies. Wall Street has become increasingly nervous about when returns will materialize from a capital spending splurge by Big Tech companies that will surpass $200 billion this year.

“A lot of people talk about the Magnificent Seven and we (back) Nvidia,” Yiu said, referring to the American chipmaker. “Outside of Nvidia, we are increasingly less positive about the (other) six. The capital intensity of these stocks is increasing significantly because they are spending a lot on AI infrastructure.”

“I’m not suggesting that six of the Magnificent Seven stocks disappear, but… . . “We believe they could be a drag on the market,” he added.

Blue Whale manages £1.3bn, invests in global equities and has had a significant stake in US technology companies since its inception. He was financially backed by Hargreaves, who co-founded investment platform Hargreaves Lansdown, and former Artemis fund manager Yiu.

The Hargreaves family’s stake in the Blue Whale Growth fund is worth more than £200m. The fund returned 24 percent this year through the end of November, compared with an average of 15 percent for rival funds.

Yiu’s decision to sell some of the Magnificent Seven is the latest sign that investors are concerned about the companies’ future prospects. He said the fund’s exposure to some of these stocks, excluding Nvidia, now represents just 5 percent of its portfolio, much less than the MSCI World’s 20 percent.

Yiu has reduced the fund’s stake in Microsoft from 8 percent in January to about 2 percent.

The fund manager also recently sold Meta, Facebook’s parent company, for a profit “due to concerns about further AI growth” in the company’s spending. He has reduced his stake from 5 percent of the fund to 3 percent.

“The problem with Meta is that we’re worried it’s spending too much on AI going into next year,” Yiu said. “Ultimately, you need to translate your spending into profits and right now we’re not seeing enough of that.”

It also sold its stake in Amazon in 2021 and in Alphabet, Google’s parent company, in 2022.

Other investors have recently dumped big US tech stocks. Smith, who runs the £23bn Fundsmith Equity, said last month he had sold Apple just two years after investing in it.

Buffett, one of the world’s best-known investors, continued to cut Berkshire Hathaway’s stake in Apple last month and has cut nearly two-thirds of the stake in just over a year.

Yiu said Nvidia accounted for almost 10 per cent of his fund, valuing the stake at around £100m. He has had to sell shares as Nvidia’s market value has grown, which he said has generated a £100m profit.

The fund manager also backs Broadcom, which he says builds AI infrastructure and is a beneficiary, along with Nvidia, of money spent on AI by the rest of the Magnificent Seven.

According to Blue Whale’s latest accounts, the fund’s parent company posted a profit of £4.1m in the year to March, up from £3.9m the year before.