• Earlier this year, the valuations of US technology companies came under scrutiny as investors began to question the value of AI’s more established players. 

• Nataliya Kofman, fund manager of the equity portfolio of our ActiveLife Climate Aware fund range, has positioned the funds to navigate these changes by focusing on undervalued and resilient stocks. 

• Vanguard’s active multi-asset fund range presents compelling long-term investment opportunities for investors looking to take active risk within a multi-asset fund.

Breakthroughs in disruptive technologies such as artificial intelligence (AI) have helped drive US equity valuations to multi-decade highs in recent years. However, many investors have expressed concerns about the lofty valuations of US technology stocks in particular. 

These concerns were compounded in January after Chinese AI startup DeepSeek released a new AI model that it claimed was as powerful as those of its US rivals - but cost a fraction of the price to build. The news caused US tech shares to tumble as investors began to question the value of the industry’s more established players that have invested heavily in AI infrastructure.

However, while DeepSeeks’s initial reports were impressive, they align with ongoing industry-wide trends of both cost optimisation and improving efficiency of AI models.

Value investing in the age of AI

Wellington fund manager Nataliya Kofman, who manages the equity portfolios of our active multi-asset range, the Vanguard ActiveLife Climate Aware funds, discusses why disruptive technologies like AI have the potential to transform the investment landscape.

For many, the entrance of DeepSeek into the AI market highlighted how sentiment-driven the valuations of many AI-related stocks are. Yet Nataliya is focused on the longer-term impacts of the new entrant. 

Expect the unexpected during tech revolutions 

Nataliya and her team at Wellington take an approach grounded in company fundamentals and are conducting research to determine the long-term impact of AI. They seek to invest in large-cap stocks with a valuation discount, dividend yield premium and market-like earnings growth. 

The investment team benefits from the support of seasoned research teams, including 53¹ global industry analysts and 14 macro strategists¹. The depth and breadth of Wellington’s world-class research platform means they are continuously evaluating the marketplace, engaging with companies and assessing the macroeconomic backdrop – which they do in a highly collaborative way. 

Their analysts, strategists and researchers have explored whether the cost efficiency with which DeepSeek built its public models will dramatically change the behaviour of the largest spenders on AI infrastructure over the intermediate term.

Finding mispriced opportunities

On this basis, Nataliya believes it is still possible to generate long-term returns within the AI space. She believes that focusing on three core areas of the market—the enablers, cloud services and applications—could hold the key to generating long-term value. 

The enablers are the bedrock of the technology industry. These companies create the necessary AI infrastructure hardware such as semiconductor chips as well as foundational large-scale machine models. It is these models that are trained on the vast quantities of unstructured data, the results of which are then assessed so the models can continuously improve. This is where markets are most focused now. 

However, Nataliya believes it’s important to consider other areas of the AI universe as well, such as cloud services. These companies develop the code and create the tools that businesses need to bring AI into their operations. Meanwhile, the applications layer relates to firms that develop the software which helps drive productivity and deliver services such as entertainment.

Concerns over US tech exposure

The dominance of the tech sector in recent years has led to an increase in concentration risk in the US equity market. 

Against this backdrop of historically concentrated exposure in US equity markets, our ActiveLife Climate Aware fund range could be a good option for investors comfortable with taking active risk who might be wary of this high exposure to the mega-cap US technology giants. The fund range has an underweight exposure to the tech sector and to the “Magnificent Seven”  or “Mag 7” stocks, in particular. 

Instead, Nataliya favours undervalued, resilient global stocks. Recently she has found attractive opportunities outside the US, especially in the UK and Japan, and in defensive sectors such as consumer staples and healthcare. While other sectors besides technology, including financials and materials, may also stand to benefit from developments around AI, the team is prepared for more equity market volatility in 2025.

Nataliya combines her team’s insights into the core areas of the AI market with their approach to finding mispriced opportunities more broadly to identify attractively valued stocks than can benefit from these technology trends over time. 

Overall, Nataliya believes her approach of staying disciplined and focusing on out-of-favour stocks that trade at a discount to their full valuations can help her team navigate short-term market uncertainty to deliver long-term added value. This can present compelling long-term investment opportunities for investors looking to take active risk within a multi-asset fund. 

¹As at 14 November 2024.