The Australian: Economic uncertainty driven by

a Trump guessing game

JCB Jamieson Coote Bonds

November 2024

Funds operated by this manager:

CC Jamieson Coote Bonds Active Bond Fund (Class A), CC Jamieson Coote Bonds Dynamic Alpha Fund, CC Jamieson Coote Bonds Global Bond Fund (Class A - Hedged)

2024 In Review & 2025 Outlook

Alphinity Investment Management 

January 2025

If 2024 was the year of Elections, Economics, Evolutions and Earnings, what is in store for Australian equities in 2025?

The year 2024 proved to be a remarkable one, both in absolute terms and relative to expectations. As the year unfolded, it brought numerous surprises and developments that shaped the global economic and political landscape. From election outcomes (and associated geopolitics), diverging economic growth (and interest rate changes), to the AI evolution (and associated ripple effects) and finally the return of earnings revisions as a key relative individual stock performance driver.

Elections, economics, evolutions and earnings - a fitting summary of some of the primary forces behind the global equity rally as 2024 draws to a close.

Below we explore these themes in more detail, share our outlook for 2025 and how the Alphinity Australian Funds are positioned going into the New Year.

2024 in review:

As we entered 2024 a year ago, there were widespread expectations of significant rate cuts in the United States. However, as the year progressed, only a handful materialised, accompanied by a soft landing for the economy. In Australia, the Reserve Bank maintained a resolute stance against rate cuts, though some cracks in this position began to appear towards the year's end.

The U.S. presidential election was a focal point of 2024, filled with twists and turns. The outcome, with Donald Trump's victory, is likely to usher in policies and a political and regulatory environment perceived as pro-business and pro-market. Meanwhile, China's

attempts at economic stimulus, while showing some much-needed strong intent, fell short of expectations in the detail, failing to provide the anticipated boost to global growth just yet.

In the financial markets, the U.S. stock indices continued their upward trajectory, propelled by the "Magnificent Seven" tech giants and artificial intelligence advancements. This momentum had a positive spillover effect on the Australian market, with the technology sector the highest contributor to returns despite the pullback in December (+49% YTD). Outside of the tech sector, the strong performance in the US had a broader positive impact in the Australian market through the year, despite quite different economic and earnings outcomes.

For Australian investors, the strength of major banks, particularly Commonwealth Bank and Westpac, was also noteworthy, driven by small but persistent earnings upgrades. With earnings upgrades few and far between elsewhere (the market in total having net downgrades), financials continued to be well supported, almost regardless of valuations.

From a portfolio and process perspective, it was encouraging to see the re-emergence of earnings revisions as a key individual stock driver and alpha generator over the last 12 months, something that went temporarily missing for much of 2022 and 2023 as large top down thematics and swings took precedence. This trend allowed for consistent momentum to be a key driver, which assisted all the Alphinity funds to capture positive alpha for our clients this year.

The outlook for 2025:

Looking ahead to 2025, the outlook appears more nuanced. A repeat of the robust absolute returns seen in 2024 seems less likely, given the high valuations and elevated expectations that now form a more challenging starting point. Unlike 12 months ago, everyone appears positioned for a "no-landing" or at worst a "soft-landing" already, with very little wall-of-worry to climb. However, a precipitous decline is not anticipated either. Several positive factors remain that could continue to drive the market forward.

The U.S. economy continues to show resilience, and the new Trump administration is expected to implement pro-business, growth-oriented policies and a market friendly environment, at least initially. There's potential for more rate cuts in international markets (even though less than hoped for initially) including, but perhaps toto a lesser extent, in Australia. China, while still facing challenges, has demonstrated strong intent and retains some levers to stabilise its economy, potentially becoming less of a drag on global growth and sentiment. We have our own election here in Australia that is likely to lead to more fiscal stimulus promises from the major parties, and a focus on 'cost-of-living' pressures.

Nevertheless, earnings expectations in the U.S. are already quite high, (less so here in Australia), making further PE expansion as the main market driver less likely unless we have a material change in interest rate view. The focus will need to shift to actual earnings outcomes. Uncertainties surrounding U.S. trade policies, inflation trajectories, interest rate movements, and geopolitical tensions add complexity to the outlook.

While material growth in market indices may be harder to achieve in 2025, there is enough positive momentum to sustain current levels for some time. A period of market consolidation wouldn't be surprising however after the strong run in 2024, though a more significant correction would likely require catalysts beyond just high valuations (such as an economic, earnings or interest rate policy surprise).

It is likely that rather than the level of the market, the key question for 2025 will revolve around potential sector and stock rotation. Will the current market leaders maintain their dominance, or will we see new market leadership emerge? For example, changes in monetary policy, such as rate cuts in Australia, could benefit domestic and consumer cyclical stocks. A recovery in China or more forceful policy might boost commodities, as would improved US and global economic growth. In a flatter or weaker market environment, defensive stocks might get their time in the sun yet again. Ultimately, whatever the market environment it is likely to be earnings driven. Market leadership will be driven by those companies that can produce better earnings outcomes than expected, which is what we saw eventuate in 2024. The key will be the flexibility to move to where earnings leadership is as the year unfolds.

How are we positioned?

Given these considerations, a relatively balanced portfolio approach seems prudent to start 2025, focusing on likely earnings outcomes in individual stocks rather than trying to second guess broader macro drivers. Some increased defensive positioning is likely advisable due to high market valuations, but maintaining some exposure to domestic interest rate-sensitive sectors could be beneficial for example if rates decrease.

Our portfolios continue to be positioned in stocks with better earnings outlooks than the market expects, as per our investment process. While we do focus on earnings momentum and the quality of those earnings primarily, we also care about valuation. Valuation rarely tells you when a stock or market is going to turn, but it does tell you when risk is increasing. As such, without a better earnings outlook for the market overall, risks in the market have by definition increased alongside those higher valuations. So, the portfolio needs to be very vigilant around investing in stocks that are showing earnings leadership and delivering earnings upgrades.

As the year unfolds and new earnings trends become clearer, we will continue to adjust our portfolios to align with new earnings leaders.

Funds operated by this manager:

Alphinity Australian Share Fund, Alphinity Concentrated Australian Share Fund, Alphinity Global Equity Fund, Alphinity Global Sustainable Equity Fund, Alphinity Sustainable Share Fund

10k Words

Equitable Investors

January 2025

Funds operated by this manager:

Equitable Investors Dragonfly Fund

Disclaimer

Past performance is not a reliable indicator of future performance. Fund returns are quoted net of all fees, expenses and accrued performance fees. Delivery of this report to a recipient should not be relied on as a representation that there has been no change since the preparation date in the affairs or financial condition of the Fund or the Trustee; or that the information contained in this report remains accurate or complete at any time after the preparation date. Equitable Investors Pty Ltd (EI) does not guarantee or make any representation or warranty as to the accuracy or completeness of the information in this report. To the extent permitted by law, EI disclaims all liability that may otherwise arise due to any information in this report being inaccurate or information being omitted. This report does not take into account the particular investment objectives, financial situation and needs of potential investors. Before making a decision to invest in the Fund the recipient should obtain professional advice. This report does not purport to contain all the information that the recipient may require to evaluate a possible investment in the Fund. The recipient should conduct their own independent analysis of the Fund and refer to the current Information Memorandum, which is available from EI.

2024 In Review & 2025 Outlook

Alphinity Investment Management 

January 2025

If 2024 was the year of Elections, Economics, Evolutions and Earnings, what is in store for Australian equities in 2025?

The year 2024 proved to be a remarkable one, both in absolute terms and relative to expectations. As the year unfolded, it brought numerous surprises and developments that shaped the global economic and political landscape. From election outcomes (and associated geopolitics), diverging economic growth (and interest rate changes), to the AI evolution (and associated ripple effects) and finally the return of earnings revisions as a key relative individual stock performance driver.

Elections, economics, evolutions and earnings - a fitting summary of some of the primary forces behind the global equity rally as 2024 draws to a close.

Below we explore these themes in more detail, share our outlook for 2025 and how the Alphinity Australian Funds are positioned going into the New Year.

2024 in review:

As we entered 2024 a year ago, there were widespread expectations of significant rate cuts in the United States. However, as the year progressed, only a handful materialised, accompanied by a soft landing for the economy. In Australia, the Reserve Bank maintained a resolute stance against rate cuts, though some cracks in this position began to appear towards the year's end.

The U.S. presidential election was a focal point of 2024, filled with twists and turns. The outcome, with Donald Trump's victory, is likely to usher in policies and a political and regulatory environment perceived as pro-business and pro-market. Meanwhile, China's

attempts at economic stimulus, while showing some much-needed strong intent, fell short of expectations in the detail, failing to provide the anticipated boost to global growth just yet.

In the financial markets, the U.S. stock indices continued their upward trajectory, propelled by the "Magnificent Seven" tech giants and artificial intelligence advancements. This momentum had a positive spillover effect on the Australian market, with the technology sector the highest contributor to returns despite the pullback in December (+49% YTD). Outside of the tech sector, the strong performance in the US had a broader positive impact in the Australian market through the year, despite quite different economic and earnings outcomes.

For Australian investors, the strength of major banks, particularly Commonwealth Bank and Westpac, was also noteworthy, driven by small but persistent earnings upgrades. With earnings upgrades few and far between elsewhere (the market in total having net downgrades), financials continued to be well supported, almost regardless of valuations.

From a portfolio and process perspective, it was encouraging to see the re-emergence of earnings revisions as a key individual stock driver and alpha generator over the last 12 months, something that went temporarily missing for much of 2022 and 2023 as large top down thematics and swings took precedence. This trend allowed for consistent momentum to be a key driver, which assisted all the Alphinity funds to capture positive alpha for our clients this year.

The outlook for 2025:

Looking ahead to 2025, the outlook appears more nuanced. A repeat of the robust absolute returns seen in 2024 seems less likely, given the high valuations and elevated expectations that now form a more challenging starting point. Unlike 12 months ago, everyone appears positioned for a "no-landing" or at worst a "soft-landing" already, with very little wall-of-worry to climb. However, a precipitous decline is not anticipated either. Several positive factors remain that could continue to drive the market forward.

The U.S. economy continues to show resilience, and the new Trump administration is expected to implement pro-business, growth-oriented policies and a market friendly environment, at least initially. There's potential for more rate cuts in international markets (even though less than hoped for initially) including, but perhaps toto a lesser extent, in Australia. China, while still facing challenges, has demonstrated strong intent and retains some levers to stabilise its economy, potentially becoming less of a drag on global growth and sentiment. We have our own election here in Australia that is likely to lead to more fiscal stimulus promises from the major parties, and a focus on 'cost-of-living' pressures.

Nevertheless, earnings expectations in the U.S. are already quite high, (less so here in Australia), making further PE expansion as the main market driver less likely unless we have a material change in interest rate view. The focus will need to shift to actual earnings outcomes. Uncertainties surrounding U.S. trade policies, inflation trajectories, interest rate movements, and geopolitical tensions add complexity to the outlook.

While material growth in market indices may be harder to achieve in 2025, there is enough positive momentum to sustain current levels for some time. A period of market consolidation wouldn't be surprising however after the strong run in 2024, though a more significant correction would likely require catalysts beyond just high valuations (such as an economic, earnings or interest rate policy surprise).

It is likely that rather than the level of the market, the key question for 2025 will revolve around potential sector and stock rotation. Will the current market leaders maintain their dominance, or will we see new market leadership emerge? For example, changes in monetary policy, such as rate cuts in Australia, could benefit domestic and consumer cyclical stocks. A recovery in China or more forceful policy might boost commodities, as would improved US and global economic growth. In a flatter or weaker market environment, defensive stocks might get their time in the sun yet again. Ultimately, whatever the market environment it is likely to be earnings driven. Market leadership will be driven by those companies that can produce better earnings outcomes than expected, which is what we saw eventuate in 2024. The key will be the flexibility to move to where earnings leadership is as the year unfolds.

How are we positioned?

Given these considerations, a relatively balanced portfolio approach seems prudent to start 2025, focusing on likely earnings outcomes in individual stocks rather than trying to second guess broader macro drivers. Some increased defensive positioning is likely advisable due to high market valuations, but maintaining some exposure to domestic interest rate-sensitive sectors could be beneficial for example if rates decrease.

Our portfolios continue to be positioned in stocks with better earnings outlooks than the market expects, as per our investment process. While we do focus on earnings momentum and the quality of those earnings primarily, we also care about valuation. Valuation rarely tells you when a stock or market is going to turn, but it does tell you when risk is increasing. As such, without a better earnings outlook for the market overall, risks in the market have by definition increased alongside those higher valuations. So, the portfolio needs to be very vigilant around investing in stocks that are showing earnings leadership and delivering earnings upgrades.

As the year unfolds and new earnings trends become clearer, we will continue to adjust our portfolios to align with new earnings leaders.

Funds operated by this manager:

Alphinity Australian Share Fund, Alphinity Concentrated Australian Share Fund, Alphinity Global Equity Fund, Alphinity Global Sustainable Equity Fund, Alphinity Sustainable Share Fund

"A is for Ambition": Apple and Amazon Bet Big on the Future

Alphinity Investment Management 

December 2024

The recent Apple and Amazon third quarter 2024 results revealed further details around the critical leg of their strategies, with these tech giants continuing to lay down markers for how they see the next stage of tech evolution unfolding and staking out positions to profit from it. Looming large in this evolution is AI, with Apple looking to leverage capabilities across what is an enormous ecosystem of 2.2bn active devices while Amazon is focusing on pushing AI applications across their Cloud and consumer business. The recent results also provided key insights into shorter term business performance.

Key takeaway from the result?

The key takeaway from the Apple result is that while the gains from the release of "Apple Intelligence" will be significant, they will take time. This was evidenced by the fact that despite this recent result coming in ahead of expectations, it was coupled with a guide for the coming quarter that was mildly below what the market was looking for (Apple guided to revenue growth of low to mid-single digits vs a market that was expecting +7%).

This makes sense as "Apple Intelligence" has only just rolled out in the US in recent weeks, and will not become available in the UK, Australia, Canada, and New Zealand until December 2024. Other geographies will follow over the course of 2025. Most importantly, it is also December 2024 before we see a meaningful expansion of the AI features including the long-awaited Chat GPT integration. As such, the powerful iPhone upgrade cycle that we expect to come with "Apple Intelligence" is likely to be a slow burn, with momentum building through 2025 and into 2026.

What impressed?

The ability of Apple to turn a benign demand environment into double digit EPS growth is impressive. Products growth has been tepid but the higher growth Services business, margin expansion and a buy-back continues to drive EPS growth above 10%.

What disappointed?

While we appreciate that Apple Intelligence will take time, the pace of the roll-out driving the weaker than expected outlook for 4Q (which is their biggest quarter of the year) was mildly disappointing. However, Apple tend to focus on quality rather than speed, so we do think that their ability to monetise AI across an installed base of 2.2bn active devices is a compelling, multi-year opportunity.

Interesting chart?

The next phase for Apple is all about an iPhone replacement cycle coupled with an expansion of associated Services revenue. The chart below shows what happened the last time a compelling technology shift occurred, with 5G driving a compression in this replacement cycle. Since the most recent trough in FY21, replacement cycles have shifted out by more than 12 months. A compression of this replacement cycle back towards 4yrs will drive circa 10% EPS upgrades.

What are the key risks?

There are a few key risks facing Apple in the coming years. Key among these are:

• What if "Apple Intelligence" is a flop? This would undercut the investment thesis of a compelling technology shift driving customers to upgrade their phone, as well as reduce the ability of Apple to further monetise AI capabilities through their Services business.
• What about if Apple lose Search payments from Google? The current DOJ case against Google has the potential to eliminate the $20-$25bn of high margin revenue that Google pays Apple to be the default search engine through Safari. While Apple will find a structure to replace at least some of this revenue, it is a potential drag in the short term.
• Will the phone lose primacy as the key device state? Over the longer term, there is a risk that a different form factor supplants the phone as the dominate device. Meta is pushing down the glasses route and seem to be well ahead currently, but Apple also appear to be on the "visual" path, with the "Vision Pro" potentially just the first step towards a glasses device for Apple.

In summary, Apple's ability to monetise their enormous consumer ecosystem is almost unrivalled. They will find a structure through which to monetise Ai, both through device sales but more importantly through an expansion of Ai related Services offerings. There is no company better placed to be the window into Ai for the average consumer.

Key takeaway from the result?

Margins, margins, margins. Given the scale of the Amazon business, a mild shift in margin outcomes can drive enormous gains in operating income and EPS. Amazon spooked the market during their 2Q24 results which showed margins for their core retail business to be weaker than expected, which was blamed on everything from mix (lower priced "everyday essentials" in baskets) to building extra satellites for their broadband business. However, come the 3Q24 result last week, all was forgotten as Amazon blew those margin expectations (that they ironically had guided to themselves) out of the water. So, the question becomes, will this margin expansion continue?

What impressed?

The margin outcome in the core retail business was impressive, particularly in the international segment. Despite pressures from mix and what appears to be heightened competition from legacy retailers (eg Walmart) and Chinese players (Temu, Shein), Amazon generated solid topline growth and exceptional margins. The Amazon cloud business AWS also showed a continuing reacceleration driven in part by AI.

A combination of the "law of large numbers" plus optimisations had driven compression in cloud growth rates across Amazon (AWS), Microsoft (Azure) and Google (GCP). However, the advent of AI has driven a reacceleration in cloud growth, which is impressive given the base of business is significantly larger.

What disappointed?

While it may seem unusual to have any source of disappointment in an exceptionally strong result, the variability of the margin outcomes compared to what management expected could indicate a lack of visibility. While a "miss vs expectations" is very happily received when it is an upside surprise, it does raise some concerns that perhaps next time the "surprise" could be the other way. 

Interesting chart?

Given the scale of the retail business, a shift in margin expectations has a material impact on earnings. A circa 100bps improvement in Retail margins vs current expectations for CY25 would drive a 7% beat in Amazon operating income.

What are the key risks?

For Amazon, risks are on a couple of key fronts:

• E-commerce competition: Amazon used to be almost the only game in town when it came to e-commerce, however Covid saw several retailers reshape and improve their e-commerce offerings (facing an existential threat to your survival will do that). Now traditional retailers such as Walmart (who can combine grocery with general merchandise) are making some inroads, while platforms like Shopify can offer alternate paths to market. This is coupled by an increase in competitive intensity from Chinese platforms Temu and Shein.
• Cloud growth: While AWS has been performing well in recent quarters, they had initially slipped behind Azure in terms of AI functionality. Given the sheer scale of the capex required to build out data centre capacity, continued success in cloud is critical to generate returns on this investment.

In summary, Amazon's 3Q24 earnings report highlighted the significant earnings potential of the business and underscored the company's strong market position and attractive consumer offerings. However, it is crucial to closely monitor Amazon's ability to sustain margin improvements and effectively navigate ongoing consumer pressures in the future.

Funds operated by this manager:

Alphinity Australian Share Fund, Alphinity Concentrated Australian Share Fund, Alphinity Global Equity Fund, Alphinity Global Sustainable Equity Fund, Alphinity Sustainable Share Fund

How Trump will impact equity markets

Magellan Asset Management

November 2024

The United States has spoken. President Trump will return to the White House in the new year. But how can we cut through the noise to reveal the investment, economic and geopolitical ramifications?

Magellan's Head of Global Equities and Portfolio Manager, Arvid Streimann, has over 25 years' experience of following markets and politics, and over this time has built up a network of trusted contacts, he can offer a measured, independent view of the situation, including his expectations on Donald Trump's policy initiatives and decision making.

He's joined by Investment Director Elisa Di Marco for an exploration of the implications of a Republican clean sweep, including the impact on standards of living and consumer sentiment, as well as the potential for deregulation, and President Trump's promise to adopt protectionist policies in an effort to develop self-sufficiency. They share insights into geopolitical dynamics, including U.S.-China relations, Iran and Ukraine, and discuss the risks and opportunities for investors.

Funds operated by this manager:

Magellan Global Fund (Hedged), Magellan Global Fund (Open Class Units) ASX:MGOC, Magellan High Conviction Fund, Magellan Infrastructure Fund, Magellan Infrastructure Fund (Unhedged)

Important Information: 

Important Information: This material has been delivered to you by Magellan Asset Management Limited ABN 31 120 593 946 AFS Licence No. 304 301 ('Magellan') and has been prepared for general information purposes only and must not be construed as investment advice or as an investment recommendation.  This material does not take into account your investment objectives, financial situation or particular needs. This material does not constitute an offer or inducement to engage in an investment activity nor does it form part of any offer documentation, offer or invitation to purchase, sell or subscribe for interests in any type of investment product or service. You should obtain and consider the relevant Product Disclosure Statement ('PDS') and Target Market Determination ('TMD') and consider obtaining professional investment advice tailored to your specific circumstances before making a decision about whether to acquire, or continue to hold, the relevant financial product. A copy of the relevant PDS and TMD relating to a Magellan financial product may be obtained by calling +61 2 9235 4888 or by visiting www.magellangroup.com.au.

Past performance is not necessarily indicative of future results and no person guarantees the future performance of any financial product or service, the amount or timing of any return from it, that asset allocations will be met, that it will be able to implement its investment strategy or that its investment objectives will be achieved. This material may contain 'forward-looking statements'. Actual events or results or the actual performance of a Magellan financial product or service may differ materially from those reflected or contemplated in such forward-looking statements.

This material may include data, research and other information from third party sources. Magellan makes no guarantee that such information is accurate, complete or timely and does not provide any warranties regarding results obtained from its use. This information is subject to change at any time and no person has any responsibility to update any of the information provided in this material.  Statements contained in this material that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of Magellan. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. No representation or warranty is made with respect to the accuracy or completeness of any of the information contained in this material. Magellan will not be responsible or liable for any losses arising from your use or reliance upon any part of the information contained in this material.

Any third party trademarks contained herein are the property of their respective owners and Magellan claims no ownership in, nor any affiliation with, such trademarks.   Any third party trademarks that appear in this material are used for information purposes and only to identify the company names or brands of their respective owners. No affiliation, sponsorship or endorsement should be inferred from the use of these trademarks. This material and the information contained within it may not be reproduced, or disclosed, in whole or in part, without the prior written consent of Magellan.

Chris Gosselin, CEO of FundMonitors.com, speaks with Richard Brennan, Strategy Ambassador at East Coast Capital Management.

The ECCM Systematic Trend Fund has a track record of 4 years and 10 months. The fund has outperformed the SG Trend benchmark since inception in January 2020, providing investors with an annualised return of 15.09% compared with the benchmark's return of 6.97% over the same period.

Key to its success were high commodity market allocations and a systematic, risk-managed approach, offering strong diversification benefits with low correlation to traditional asset classes like the ASX 200.

Funds operated by this manager: ECCM Systematic Trend Fund

Chris Gosselin, CEO of FundMonitors.com, speaks with Richard Brennan, Strategy Ambassador at East Coast Capital Management.

The ECCM Systematic Trend Fund has a track record of 4 years and 10 months. The fund has outperformed the SG Trend benchmark since inception in January 2020, providing investors with an annualised return of 15.09% compared with the benchmark's return of 6.97% over the same period.

Topics discussed include: the success of ECCM's trend-following strategy, which recently earned an award for the company's flagship fund; and how global diversification and a focus on trending opportunities can enable consistent performance even in uncertain economic conditions.

Funds operated by this manager: ECCM Systematic Trend Fund

US Election 2024: How will markets and sectors respond?

Magellan Asset Management

November 2024

Arvid Streimann offers an analysis of why Trump's victory was more decisive than predicted and the key issues that influenced voters' decisions. He provides insights into the market's reaction and shares his expectations for the next 12 months, highlighting which sectors are likely to perform better than others.

Funds operated by this manager:

Magellan Global Fund (Hedged), Magellan Global Fund (Open Class Units) ASX:MGOC, Magellan High Conviction Fund, Magellan Infrastructure Fund, Magellan Infrastructure Fund (Unhedged)

Important Information: 

Important Information: This material has been delivered to you by Magellan Asset Management Limited ABN 31 120 593 946 AFS Licence No. 304 301 ('Magellan') and has been prepared for general information purposes only and must not be construed as investment advice or as an investment recommendation.  This material does not take into account your investment objectives, financial situation or particular needs. This material does not constitute an offer or inducement to engage in an investment activity nor does it form part of any offer documentation, offer or invitation to purchase, sell or subscribe for interests in any type of investment product or service. You should obtain and consider the relevant Product Disclosure Statement ('PDS') and Target Market Determination ('TMD') and consider obtaining professional investment advice tailored to your specific circumstances before making a decision about whether to acquire, or continue to hold, the relevant financial product. A copy of the relevant PDS and TMD relating to a Magellan financial product may be obtained by calling +61 2 9235 4888 or by visiting www.magellangroup.com.au.

Past performance is not necessarily indicative of future results and no person guarantees the future performance of any financial product or service, the amount or timing of any return from it, that asset allocations will be met, that it will be able to implement its investment strategy or that its investment objectives will be achieved. This material may contain 'forward-looking statements'. Actual events or results or the actual performance of a Magellan financial product or service may differ materially from those reflected or contemplated in such forward-looking statements.

This material may include data, research and other information from third party sources. Magellan makes no guarantee that such information is accurate, complete or timely and does not provide any warranties regarding results obtained from its use. This information is subject to change at any time and no person has any responsibility to update any of the information provided in this material.  Statements contained in this material that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of Magellan. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. No representation or warranty is made with respect to the accuracy or completeness of any of the information contained in this material. Magellan will not be responsible or liable for any losses arising from your use or reliance upon any part of the information contained in this material.

Any third party trademarks contained herein are the property of their respective owners and Magellan claims no ownership in, nor any affiliation with, such trademarks.   Any third party trademarks that appear in this material are used for information purposes and only to identify the company names or brands of their respective owners. No affiliation, sponsorship or endorsement should be inferred from the use of these trademarks. This material and the information contained within it may not be reproduced, or disclosed, in whole or in part, without the prior written consent of Magellan.

Artificial Intelligence will change the world (eventually)

Alphinity Investment Management 

October 2024

"The risk of underinvesting is dramatically greater than the risk of overinvesting" (Sundar Pichai, Alphabet CEO, 23rd July 2024).

This quote from the Alphabet CEO during the Alphabet 2Q earnings call amplified investor concerns around the current Artificial Intelligence ("AI") investment landscape. The technology industry appears to be engaged in a high-stakes race to develop AI infrastructure, while the potential returns on these massive investments remain ambiguous.

Given the substantial market share and valuation premiums now commanded by AI-focused companies, there's mounting pressure for these firms to demonstrate tangible returns on their AI investments. Investors are increasingly looking for concrete evidence that the massive capital inflows into AI infrastructure and development will translate into sustainable revenue streams and long-term profitability.

Despite market impatience, we are observing encouraging signs of AI's impact starting to emerge from both the revenue and expense sides of businesses. Substantial returns will however take time to materialise. Given the current market dynamics, we remain nimble with our AI exposure in the short term, but unequivocally convinced on the longevity and scale of the AI opportunity over the long term.

Where are the returns?

Market concerns around overinvesting in AI are not without precedent given the technology sector's history of several technology boom-and-bust cycles: From the 1990's internet era exuberance leading to the dot.com crash, to the recent hype around the metaverse (virtual worlds), Web 3 (decentralised internet vision), and even non-fungible tokens (NFT's). These examples serve as cautionary tales, illustrating how technology hype can outpace real-world applications, leaving a trail of poor returns and crushed share prices in their wake.

Current investment levels into AI architecture are extraordinary. Hyperscaler (Microsoft (NASDAQ: MSFT), META (NASDAQ: META), Alphabet (NASDAQ: GOOGL) & Amazon (NASDAQ: AMZN)) capex will rise more than 40% in CY24 and is expected to rise further in CY25 to levels 2.5x what they were in CY20. This level of investment is starting to have an impact on financial returns for these companies, both in terms of cash flow returns and on margins as higher depreciation flowing from this investment begins to bite in the P&L.

Hyperscaler Capex ($bn)

Returns take time to materialise

In any major technological transition - be it internet, cloud computing, or the current wave of generative AI, there is a consistent pattern: infrastructure development precedes widespread application and the realisation of value. The internet evolution provides a compelling case study, where the true value from end applications and the resultant share price movements only started to emerge after 3 years and really gathered momentum after 5 years.

Internet Cycle Stock Performance

We can see a similar phenomenon play out with generative AI. Cloud AI services are beginning to inflect, as evidenced by recent results showing a reacceleration in cloud demand but several cutting-edge AI applications such as Edge AI, Smart Robots and Multi-Agent Systems are still in development and yet to reach widespread commercial deployment.

Where are the end applications?

Contrary to the notion that end applications of AI are not yet visible, we're witnessing a robust proliferation of AI-powered solutions across various sectors already emerging just ~20 months after the emergence of GEN AI.

While these applications are in their initial phases and will take time to scale, their market potential is substantial. Take for example the M365 co-pilot example: a US$30 subscription fee per month across their 160m high value commercial users, could add $58bn revenue annually (a +23% lift to FY24 revenue). Expansion to the remaining 200m commercial users and integration into broader product offerings offer additional upside.

Returns from "efficiencies"

The impact of generative AI on business efficiency and productivity is emerging as a transformative force, with potential returns far exceeding initial revenue gains. This trend, while significant, remains underappreciated due to public concerns about AI-driven job displacement. However, real-world applications are already demonstrating substantial benefits across diverse industries. Companies are implementing AI with measurable success. For example:

• Uber (NASDAQ: UBER) is using gen AI to enhance customer service and marketing efforts;
• Mercado Libre (NASDAQ: MELI) is optimising capacity planning and fulfillment operations;
• Wipro (NASDAQ: WIT) is using it to boost software development through code assistance & documentation;
• Best Buy (NASDAQ: BBY) is deploying AI-powered trouble-shooting assistants.

Importantly, companies are beginning to qualify these benefits well beyond the bounds of tech:

• Walmart's (NASDAQ: WMT) quantified generative AI's contribution to catalogue creation in their recent results call with the CEO stating that: "without the use of generative AI, the work would have required nearly 100 times the current head count to achieve what we did using generative AI"
• Pfizer (NASDAQ: PFE) is leveraging AI as a key component in a $4bn operating expense reduction initiative;
• American Express (NASDAQ: AXP) is realising a 30% higher response rate on corporate offers through AI assistance; and
• L'Oreal reported a 10-15% boost in advertising productivity, by spotting trends (using "Trendspotter") early and marketing to online shoppers.

The list goes on. The adoption of generative AI is rapidly expanding, with companies across various sectors reporting emerging and expanding use cases.

How to quantify these returns

Quantifying the actual returns from generative AI can be a difficult exercise. For example, disaggregating how much of the Meta revenue acceleration comes from product enhancement due to Gen AI is complex, as is product augmentations flowing from its application to existing capabilities.

Stepping back to a broader economic perspective, McKinsey undertook a study trying to piece together the incremental value that generative AI could bring. The total value was $6.1tr - $7.9tr annually across specific generative AI use cases and general productivity.

Taking specific use cases, McKinsey's comprehensive analysis of generative AI applications provides a detailed roadmap of its potential impact across various business functions. McKinsey identified activities within business functions where generative AI could be applied and then calculated both the efficiency impact (as a % of functional spend) and the aggregate size of the opportunity. Remarkably, 75% of the generative AI impact was across a handful of functions spanning sales, marketing, product R&D, customer operations and software engineering, estimated to be a c$400-500bn impact across each function.

Interestingly, we are beginning to get validation of some of these data points in our conversations with company management teams, for example in software engineering the efficiency/cost boost figure of c. 30% is now being discussed. Looking ahead, we will continue to monitor validation points of this return profile, but if this current trajectory of efficiency gains persists across various business functions, it suggests that the substantial investments in AI infrastructure are likely to be more than justified.

Funds operated by this manager:

Alphinity Australian Share Fund, Alphinity Concentrated Australian Share Fund, Alphinity Global Equity Fund, Alphinity Global Sustainable Equity Fund, Alphinity Sustainable Share Fund

Magellan Global Quarterly Update

Magellan Asset Management

October 2024

Arvid Streimann, Nikki Thomas and Alan Pullen discuss key market themes and how the global strategy is positioned to capitalise on emerging opportunities, whilst monitoring the risks. Arvid also discusses the potential market impacts of the upcoming US election based on various possible outcomes.

Funds operated by this manager:

Magellan Global Fund (Hedged), Magellan Global Fund (Open Class Units) ASX:MGOC, Magellan High Conviction Fund, Magellan Infrastructure Fund, Magellan Infrastructure Fund (Unhedged), MFG Core Infrastructure Fund, Magellan Core ESG Fund

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Chris Gosselin, CEO of Australian Fund Monitors, speaks to Nichols Chaplin, Director and Portfolio Manager at Seed Funds Management. Nicholas shares insights on APRA's plan to phase out additional tier one bonds, which could destabilise the banking sector and impact retail investors.

The Seed Funds Management Hybrid Income Fund has a track record of 9 years and has outperformed the Solactive Australian Hybrid Securities (Net) benchmark since inception in October 2015, providing investors with an annualised return of 6.39% compared with the benchmark's return of 4.86% over the same period.

Funds operated by this manager: Seed Funds Management Hybrid Income Fund