The billionaire cofounder of Hargreaves Lansdown is overseeing a massive selloff of Magnificent Seven stocks, as concerns grow over the potential fallout from vast spending on AI capabilities in 2024.
Peter Hargreaves, worth an estimated £2 billion, set up Blue Whale Growth Fund in 2017 and has watched the fund’s returns more than double since its inception. However, the group is now the latest to warn of the potential for a stock market crunch owing to AI overhype.
Stephen Yiu, the lead manager of Blue Whale, with about £1.3 billion in assets under management, told the Financial Timesthe group was decoupling itself from overweight tech stocks, adding that it had “aggressively” cut its holdings in Microsoft. The fund’s holding in Microsoft as a share of its total fund has dropped from 8% to 2% since January.
“Microsoft’s return on invested capital [is] likely to decline from here, given the significant investment made in AI infrastructure.”
Microsoft isn’t the exception here. Only Nvidia has been spared by Blue Whale as the group senses a market correction on AI stocks.
“A lot of people talk about the Magnificent Seven, and we are [backing] Nvidia,” said Yiu. “Outside of Nvidia, we are increasingly less positive on the [other] six. The capital intensity of these stocks is going up significantly because they are spending a lot on AI infrastructure.”
Big tech has spent a massive amount on AI this year. Amazon, Microsoft, and Alphabet spent a combined $133 billion on building their AI capacity in the first nine months of 2024, up 57% from 2023.
But there are fears that the next phase of the AI revolution—demonstrable returns on investment—is further away than first anticipated. With the Magnificent Seven accounting for more than a third of the S&P 500, there are fears of an inevitable slump in the stock market.
Yiu also singled out Meta, expected to allocate up to $40 billion in capital expenditures this year, mostly linked to AI. Yiu said he wasn’t seeing that investment translating into enough profit.
The fund manager told the FT: “I’m not suggesting that six of the Magnificent Seven stocks will disappear but … we think they could be a drag on the market.”
The Blue Whale Growth Fund, in which the Hargreaves family owns more than £200 million, has registered impressive growth since its launch in 2017. The fund has grown more than 23% this year and rose more than 30% in 2023. Alongside Nvidia, its top investments include TSMC, Visa, and the sports-betting group Flutter.
Investors turning on AI
Amid clamoring AI hype that has helped propel the S&P 500 to a 25% increase this year, a cohort of investors have consistently warned about the potential for the stock market bubble to burst as AI expectations fail to match reality.
Terry Smith, founder and manager of the U.K.’s biggest investment fund, Fundsmith, has avoided backing the Magnificent Seven, opting for value investing akin to Warren Buffett’s strategy.
Smith’s fund has accordingly underperformed its benchmark MSCI World Index, which holds around 20% of its funds in Magnificent Seven stocks.
Not to be swayed, though, Smith has continued to warn of a correction for tech stocks, earlier this year comparing AI hype to the atmosphere in a football stadium.
“As the game becomes exciting, and the striker runs into the penalty area with the ball, the second row of spectators stands up to get a better view,” Smith wrote.
“This blocks the view of those in the third row who follow suit. Pretty soon all the spectators are standing, but no one has a better view than before, but they are all less comfortable.”
