How to profit from trickle down AI-nomics

The defining characteristic of Hyman Roth, according to Johnny Ola in The Godfather Part II, is that he “always makes money for his partners”.

It’s a sentiment that would translate well to the AI trade.

Schroders Australia QEP Global Core Fund portfolio manager Lukas Kamblevicius points out that the ability to find value from the AI theme over the last few years has been very broad.

“The AI theme tends to be pigeonholed in just a couple names, and Nvidia and TSMC tend to be the dominant names that are being quoted, but there is an incredible supply chain, or a lot of differentiated beneficiaries tied to that theme,” Kamblevicius says.

Indeed, far from Nvidia (NASDAQ: NVDA) being the only beneficiary of the boom in LLM usage, there are a whole host of downstream winners that have seen their valuations explode.

Just last week three companies joined the US$1 trillion market cap club on the back of their AI supply chain position.

Trickle down AI-nomics

The first AI beneficiaries were, of course, in the chip design space - that’s why Nvidia is the most valuable company in the world.

As Kamblevicius explains, it then moved to companies exposed to the production cycle. TSMC (NYSE: TSM) is a prime example, with the world’s largest chip manufacturer riding the wave and becoming the top non-US company on the market cap rankings.

“From there the beneficiaries were, well, who makes the equipment to manufacture those ships? It’s a Dutch company, ASML,” he says.

The manufacturer is the leading supplier of photolithography machines to the semiconductor industry and has enjoyed a similar, if slightly less extreme, uptick in value over the last few years.

“Then somebody needs to power the whole increased energy map,” Kamblevicius adds.

“We had a big portion of electrical companies within the utilities space benefiting significantly, especially those that have exposure to nuclear energy. Now the hottest thing in the market is around memory.”

That’s where the latest companies past US$1 trillion operate - Micron (NASDAQ: MU), Samsung (KRX: 005930) and SK Hynix (KRX: 000660) - with the squeeze on available high bandwidth memory for AI chips driving the surge.

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The next frontier

So, what is the next part of the AI chain that could spark investor interest?

“There is this massive capital expenditure that is coming into the market and it starts benefiting companies further down the supply chain,” Kamblevicius says.

“The companies that do cooling systems for the data centres, the companies that do wiring for the data centres, they're in a very unique place.”

In order to find these names, however, the portfolio manager says a systematic approach to investing is vital.

“There is a certain perception in the market that systematic is a complex black box-type of very little human intervention, and within the QEP team we try to break that misconception,” Kamblevicius says.

“We employ a lot of systematic and highly computational and statistical tools, but the whole process from start to finish bodes around transparency. 

"The way I like to describe us in QEP is we are very much fundamental thinkers, but we are systematic implementers in terms of having that very disciplined way of building and managing the portfolios, but all the building blocks do share their very strong fundamental and economic rationale.”

How this applies to finding opportunities beyond the obvious AI supply chain names is in the ability to have a “breadth of universe evaluation”.

“You can very easily cherry pick the next winner in that supply chain. There are a lot of ways to maximise the benefits of AI capex and excitement in the industry,” he says.

“The key benefit is the breadth, so you have the scope of evaluating all opportunities. If you think about it from the fundamental perspective, there are incredibly strong fundamental fund managers, but they only have an ability to focus on a small portion of the stocks and they will know them inside out, and they will make the right decisions.”

A fundamental manager that focuses on tech investing, for example, will be able to pick the winners within the technology sector, but they could miss out on beneficiaries in related sectors.

“Without having an analyst or fund manager that looks after the industrial sector, you will not pick the cooling names or the wiring names. 

"I guess the way to think about it is that systematic managers have more diversity to play the same theme, because they connect the dots between the beneficiaries that are related to the same theme.”