AI fund bet pays off for Dubai’s Invesense

The Dubai-based AI Focus Fund, set up to provide Shariah-focused investors exponential returns from stocks of the world's top technology companies, has lived up to its start-up promise - with a 28.4% gain over the last three months and 30% returns year-to-date.

Moving forward, portfolio manager Ahmed Ali is exploring adding more tech middleweights and other promising candidates to balance out volatility often associated with high-flying performers such as Nvidia, Meta, Apple, Alphabet and Broadcom.

"Spreading small allocations toward those names will hedge you; you will not actually be losing out if those companies play catch up with Nvidia, and Nvidia suffers a bit," Ahmed explained, referring to the second liners.

Nvidia is the world’s dominant maker of graphics processing units (GPUs) for gaming, cryptocurrency mining and professional applications, as well as chip systems for use in vehicles and robotics. It is also currently the world’s most valuable company, with a market capitalization of US$4.28 trillion.

Beyond Nvidia, Meta, Apple, Alphabet and Broadcom, the AI Focus Fund holds positions in 60 other companies, with allocations as small as 10bps.

The diversification is to capture the upside from emerging players such as Taiwan Semiconductor Manufacturing Co and Advanced Micro Devices, which are aggressively competing in the semiconductor market for AI inference.

Ahmed, instrumental in establishing the AI Focus Fund at Dubai’s Invesense Asset Management just three months ago, emphasized its commitment to a "market-aware" approach.

While the initial impressive gains of the fund are largely attributed to significant allocations in the aforementioned tech giants, he acknowledges the inherent risks of such concentration.

Outwardly, the fund may appear to have front-loaded 45% of its portfolio with the top five sector names in AI, but "this is what those names represent in the market from a market cap perspective," Ahmed explained, noting the valuation of the trillion-dollar-club companies.

Indeed, the performance of these mega-cap AI enablers has been nothing short of spectacular. Nvidia, in particular, is up 27% for the year and 57% since the start of April. The stock is driven by the company’s near-monopoly in high-end GPUs that are essential for AI model training.

Analysts widely agree that Nvidia's foresight in building out its AI infrastructure over a decade ago, initially for cryptocurrency mining, positioned it perfectly for the current AI boom. Its revenue growth, often exceeding 100% annually, underscores its dominance.

While rewarding in a bull market, such concentration also raises questions about diversification and risk.

The tech sector, especially the burgeoning AI space, is known for its rapid shifts and potential for sharp corrections. The dot-com bubble of the late 1990s serves as a cautionary tale, where speculative interest in companies with little to no revenue led to significant losses.

While it is noted that the current AI landscape, dominated by revenue-generating giants, is "not as expensive as the dot-com bubble," the specter of overvaluation always looms.

To mitigate this, the AI Focus Fund employs a dual strategy of thematic and quantitative screening, with a strong emphasis on momentum.

"We mainly rely on momentum because we think it's very hard to use valuation metrics for those companies because they are growing companies from a top-line perspective," Ahmed said. This means the fund prioritizes companies showing strong revenue growth and positive market sentiment, rather than traditional bottom-line profitability, which can be elusive for rapidly expanding tech firms.

The fund's Shariah compliance adds another layer of unique filtering. Invesense is a fully Shariah compliant firm that applies rigorous screens to its investment universe. Also noted is that out of 70-80,000 global stocks, only about 12,000 are Shariah compliant, creating a "quality-driven" universe due to the exclusion of highly leveraged financials.

The fund's investment philosophy also extends beyond just IT. Ahmed revealed that its strategy is only 50% in IT, with the remaining 50% allocated to sectors like industrials (due to robotics) and pharmaceuticals. The latter, he explained, is also increasingly linked to AI, citing a recent Nobel Prize awarded for defining human amino acids through AI, leading to customized pharmaceuticals.

This broad market approach, he argues, offers a more comprehensive exposure to the horizontal impact of AI across various industries, rather than a narrow focus solely on technology companies.

Risk management for the fund is an active, daily process. The portfolio is rebalanced every day, consuming millions of data points to generate buy and sell lists. This continuous adjustment ensures the fund remains aligned with its high-growth AI focus, adapting to rapid shifts in trends and market sentiment. While acknowledging the "bumpy ride" ahead for AI investments over the next three to five years, the portfolio manager remains optimistic about the long-term rewards.

Geopolitical factors also play a significant role in the fund's considerations. Ahmed pointed to the impact of government policies, particularly from the US, on companies like Nvidia. The past ban on Nvidia exporting chips to China, which caused its stock to stagnate, illustrates how geopolitical tensions can influence short-term price movements. However, he believes that such influences will "wash out" over the long term, as the fundamental drivers of AI growth remain strong.