Exponentiality of Outcome.
By Saftar Sarwar, Chief Investment Officer, Binary Capital
We focus on positive return generation, at the same time aim for such returns to be consistently in the top quartile or even top decile against the peer group. Whilst we will not always achieve this, it is the focus.
So far in 2024 we have achieved that aim. The first five months of 2024 we have generated very positive and consistent returns.
May was a positive month with strong returns across the various investment strategies we manage. This was driven by a resurgence is growth market returns – continued trends that we have seen for a while around technology and the impact of artificial intelligence (ai) across the investment and economic landscape.
The dominant thread of ai is leading many conversations. This is something we are trying to understand and focus on if necessary, trying to understand everything here much better. Nvidia produced good results (again) in May. Nvidia has a first mover advantage in terms of infrastructure and software and has built substantial credibility that is unlikely to be competed with in the short-term. Others, primarily software houses are also accelerating their focus, witness the recent $6bn funding round for xAi, backed by Elon Musk or the heavy investment in OpenAI by Microsoft. There are also other players in this field from Amazon, META and Alphabet (google) All of this is very much early stage, early adoption will come with positives and negatives. In our view there is a sense of optimism but also underestimation of what is going on.
The opportunities in generative ai seem vast and exponential in outcome, estimates of 50 times the current size of the market by the end of this decade, with overall meaningful impacts on GDP growth and productivity, this seems plausible and a tremendous investment opportunity.
We are typically growth biased investors. We at Binary Capital, have led the way in our thinking in this area for many years. We have strong and compelling allocation to potential winners in this area of generative ai: technology companies specifically, healthcare and biotechnology. We have underlying holdings in Nvidia, Microsoft, Alphabet, ASML, TSMC and so on. We feel that this area of ai and the opportunity set will fit in the category of winners emerging from a very select group of stock clusters. So out of the vast 100,000+ global equity universe, they will emerge a narrow group of ‘winners’ probably in the top 100 corporate entities – they are the ones that will create real shareholder value and returns, these are the ones that will fully take advantage of ai and have the ability to scale. These are the ones we want to be invested in.
There will be volatility and drawdowns as we navigate this space. By having high conviction and being patient should give us an investment edge it itself as well as against our peers. This ‘edge’ is certainly compelling in the ai/technology space, an additional advantage, an opportunity for such asymmetrical returns that we always seek.
As we get close to the 1H of 2024 it is good to take a closer look at the data that really matters and we are judged on primarily, performance. During May our strategies performed around +1% to around +2% depending on the risk profile. For the first five months of 2024 we have performed around +2% to +8%, again dependent on the strategy and risk profile. All very respectful and credible levels of performance, levels of performance that have been consistent and lead the peer group.
Looking ahead for the rest of the year I expect growth to moderate slightly as the higher interest rates continue to impact on the real world, but there is unlikely to be and serious repercussions of this, especially around any recession concerns. Interest rates should begin to ease in the major western economies as we move towards the autumn but there is unlikely to be radical falls. It is very difficult to predict which way inflation will move, it could remain sticky for longer or move sharply down below trend. Whilst we look at the macro data, we are very much fundamental, bottom-up conviction investors, thematic led investors.
Other areas we are monitoring with interest is the UK market, it is finally out of its bear market phase? and our absolute return allocation, and opportunities to add there for further risk and return management.
As always, everything we do we manage through a strategy of conviction, long-termism and determinism. The best of theoretical and practical thought and applications.
