12 Oct 2026
Although the Magnificent Seven have driven the US market in recent years, returns are broadening out and we believe significant alpha can be generated outside of these stocks. Heavy investment in AI by large technology companies is creating attractive opportunities for a range of small and mid-cap companies in the US.
These include software companies. While certain software businesses may be at risk of being replaced by cheaper AI tools, others can benefit from growing adoption of AI.
Semiconductors are widely recognised as a key bottleneck in the race to increase AI capacity – but we also see opportunities among the companies that equip and build the data centres.
Despite an AI-related sell-off in July, these stocks have performed very well. And although the valuation multiples of these companies have risen, we expect demand for their products and services to continue to grow – and margins to increase – in response to capital expenditure by hyperscalers. That being said, we manage our portfolios’ exposure to the AI theme dynamically. We are still bullish on AI beneficiaries as a theme but are highly selective, investing only where we see an attractive ratio between risk and reward.
A recent ruling by the US Supreme Court is likely to raise costs and tighten capacity in the US trucking industry. That could make other forms of transporting goods, including ‘intermodal transport’ – incorporating different modes of transportation such as rail alongside trucks – increasingly attractive. We invest in J.B. Hunt, a leading provider of intermodal transport, and believe it is well positioned to benefit from this structural shift.
We are also positive on many industrials, particularly those that reflect idiosyncratic growth stories, such as ATI, a manufacturer of specialty nickel and titanium alloys for aerospace engines and airframes. Demand for new aircraft is strong but supplies remain constrained. So airlines need to invest more in maintaining older engines installed across existing fleets. That is giving ATI pricing power and underpinning attractive earnings growth.
Away from economically sensitive areas, we are slowly rebuilding our exposure to healthcare across our funds. This sector is just emerging from a long downturn. Overstocking post-Covid resulted in a lengthy fallow period for healthcare stocks but the structural overhangs in numerous end markets have finally started to dissipate.
Our bottom-up process focuses on companies with idiosyncratic growth drivers and asymmetric risk/reward. Although certain sectors are more exposed to economic uncertainty, we are finding plenty of attractive opportunities. We look for companies whose earnings are supported by expanding margins, sustainable free cashflows, strong returns on investment and growing demand. Quest Diagnostics, which carries out diagnostic testing, is a good example. As hospital labs increase outsourcing, strong core testing demand and new strategic partnerships helped drive 10% year-on-year organic growth in revenues1. Investments in automation and AI are helping to improve quality and productivity across the business.
FOR PROFESSIONAL INVESTORS AND/OR QUALIFIED INVESTORS AND/OR FINANCIAL INTERMEDIARIES ONLY. NOT FOR USE WITH OR BY PRIVATE INVESTORS.
CAPITAL AT RISK. All financial investments involve taking risk and the value of your investment may go down as well as up. This means your investment is not guaranteed and you may not get back as much as you put in. Any income from the investment is also likely to vary and cannot be guaranteed.
This is a marketing communication. Before making any final investment decisions, and to understand the investment risks involved, refer to the fund prospectus (or in the case of investment trusts, Investor Disclosure Document and Articles of Association), available in English, and KIID/KID, available in English and in your local language depending on local country registration, available in the literature library.