Alistair Boyle, portfolio manager at Mid Wynd International Investment Trust, sets out how just seven stocks accounted for almost 70 per cent of the S&P 500’s Q3 return — and why specialist “knowledge is power” data companies such as RELX and Wolters Kluwer may be among the most strategically advantaged in an AI world.
Just seven stocks drove nearly 70% of the S&P 500’s return in Q3. Those companies were Apple, Alphabet, NVIDIA, Tesla, Broadcom, Microsoft and Oracle. All are perceived to some degree to be AI winners. Meanwhile, the market has been brutal towards companies it believes to be likely victims of the AI revolution. Could it be wrong?
Market returns are highly concentrated
Let’s look at one area – what I like to call “knowledge is power” stocks. These are companies with valuable proprietary data that they sell to organisations like accountancy firms and insurance companies and to professionals in sectors such as health and law.
The market believes these businesses are heading downhill fast. Platforms like ChatGPT can scrape the internet for data and give people answers in seconds for little or nothing. Okay, they will be wrong 15% of the time, but 85% right is fine, isn’t it?
Tell that to a lawyer who is examining case law for a trial and doesn’t want to be sued for professional negligence – or to a car insurance company wanting accurate guidance on the risk of a 70-year-old driver with a long no-claims history.
These “knowledge is power” companies all own unique data sets that add value to their clients and that the AI platforms cannot scrape or replicate. They also have trusted tools for accessing and processing that data which are embedded deep within their clients’ organisations.
Proprietary data remains strategically valuable
Let’s look at just two, starting with RELX. The UK-listed multinational provides critical technical information and analytics to professionals in fields such as risk management, law and healthcare. Its insights enable better decision-making and improved productivity.
RELX has billing ties with nearly all major US law firms and a global presence in over 180 countries. This deep integration makes upselling new product enhancements easier while making it harder for rivals trying to enter the market.
RELX’s legal services, such as LexisNexis, use AI and machine learning to help lawyers automate workflows, streamline case law searches and simplify complex queries. Access to the LexisNexis platform is priced by our calculations at approximately $150 per lawyer a month. By comparison, early low-quality AI tools were charging $300 per month without the content set that RELX owns. It underlines that RELX customers are willing to spend more than they do today to access productivity tools, leaving RELX in a great position to upsell.
In the past year, while the MSCI ACWI is up just over 19%, RELX is down more than 5%, despite already seeing an acceleration in earnings from AI and analytics tools.
Wolters Kluwer is similar in many ways, but its share price is down nearly a third in a year. The Dutch-based multinational provides often critical information for accountants, doctors, lawyers and other professionals. It has been embedding AI into its solutions for a decade and is continuing to invest. Wolters, while having been a little slower on product roll-out than RELX, is launching several exciting new AI products that we think will support growth, and in some places enhance organic growth from here.
Our analysts have conducted many meetings with not just the management teams but the boards and, importantly, the technology teams at Wolters and RELX, to get a sense of how fast they are moving to integrate technologies. We see these as sticky businesses with high moats of content, embedded customer relationships, trusted reputation, and businesses that have been great at leveraging technology to get more insight out of the data sets they own Now they have AI to do even more of this. All of which means we think it will take a lot to disrupt them.
There are rivals to these data companies which talk up their power to disrupt through the application of AI, but they cannot match what these three businesses have. We do not see them bridging the moats anytime soon.
Valuation gaps suggest opportunity
As investors, we look for what we call “quality companies”. These generate high returns on capital – typically much higher than those of the market on average. These businesses can use that capital to invest in defending and deepening their competitive advantages. The “knowledge is power” companies have incredible data resources built over years, distribution advantage through their existing relationships and reliability. Now they have AI.
They have not been standing still. They have been investing in the new technology themselves. In our meetings with management teams, they are very clear – AI can accelerate growth, helping curate data more effectively for clients. We believe the investments they are making will generate extra revenue to justify the spend. We cannot say that with anything like the same confidence for some of the companies the market is pricing as AI winners.
We think the market has got it wrong about many AI losers, overestimating the threat posed by AI wannabes and creating an opportunity for investors like us.
The big questions is: “When will the market reprice?” We don’t know. But markets can reprice suddenly. Look at ThermoFisher. It has had had a tough first half of the year, but an upgrade to its growth strategy and a change of mood among investors have seen its shares bounce over 22% in just a month.
At a time when the wider market is trading at pretty much a decade-long high in terms of price/earnings valuations, 12% of our portfolio of “quality” stocks has never traded so cheaply. 80% of the portfolio is at just over half its average p/e.
To us this highlights the opportunities now arising from the market’s obsession with AI winners. The AI sun has been shining brightly, on a small section of the market. We think it’s time to look at those companies left out in the shade.
Alistair Boyle is a portfolio manager at the Mid Wynd International Investment Trust.
