Through what can only be described as an exceptionally volatile year, we continue to be amazed at the level of innovation and financial strength that U.S. businesses present. While other countries’ economies have had their day in the sun as well, the U.S., following a much-welcomed reprieve from tariffs, has once again established itself as the global superpower in technological innovation and value creation for shareholders.
As a result, we have increased our allocations to artificial intelligence technologies and adjacent industries. We continue to believe in the reliability of passive indexing, as it still accounts for 50% – 60% of our allocations, so in order to skew our portfolios to a more AI-centric makeup we’ve added Van Eck’s Semiconductor ETF (SMH) and Global X’s Artificial Intelligence ETF (AIQ). Between the two, we gain focused exposure to the hardware backbone of the AI boom, as well as cloud computing hyperscalers and software innovators. In order to fund these investments, we have decided to sell Nvidia and Google after multi-year runs of outsized gains. Nvidia and Google will remain large components of the portfolio – the largest and fifth largest respectively – but they will be held through various ETFs rather than individual positions at this point. This is in an effort to capture exposure from competing businesses and partnership businesses that may not have yet experienced their “Nvidia Moment”.
We have also made an allocation to another trend that we believe has a multi-year compounding opportunity behind it: Alternative Asset (Managers). Private equity, hedge funds, private credit, private real estate, infrastructure, etc., once an investment opportunity only for institutions and sovereign wealth funds, has now gone mainstream. The fees are high, the returns are inconsistent, and the transparency is opaque at best. Nonetheless, wealth advisors and high-net worth individuals have poured money into these vehicles as a record pace, and for no other reason than because for the first time, they can. Private investments have long been touted for their capacity to produce consistently high returns, and in some cases that is true. Interestingly, the data going back to the mid-1990s proves that in order for private equity to produce a market (S&P 500) beating return, you would have needed to pick the top decile of managers and then allocate to the top performing decile of funds from that manager. If not, you were far better off buying something liquid with minimal fees. Still, these managers are getting a ton of traction with a poor, albeit rapidly improving product, and we expect that over the next decade there will be a very user-friendly vehicle for individual investors to earn attractive returns in private investments. In the interim, one of the most efficient ways to piggyback on this trend is to own the common shares of the alternative asset managers, Blackstone, KKR, Apollo, Ares, etc., Their stock prices have outperformed 97% of their funds for the past decade, There is legislation pending to allow these assets into the qualified retirement plan market, a multi-trillion-dollar opportunity for them and a bigger tailwind for their stock prices. We have elected to gain exposure through Van Eck’s Alternative Asset Manager ETF (GPZ).
A Note on Investing at All-Time Highs and Valuation Concerns:
Buying stocks at “the top” can feel counterintuitive, but the reality is that there is virtually no evidence to suggest that stocks have peaked or that we are at risk of some kind of lost decade. Fundamentals continue to justify increases in stock prices and support the multiples that investors are willing to pay. In contrast to the dotcom bubble, the quality of today’s businesses is exponentially better than those of the 1990’s. As an example, we can compare Intel of 1999 to Nvidia of 2025. The two biggest companies in the world, each serving as the supercharger for their respective industrial booms. Nvidia’s operating margins are nearly 2X Intel’s in 1999, while their net margins are almost 2.5X 1999 Intel’s. Nvidia’s asset intensity is 8X less than Intel’s in 1999. Intel’s return on equity in 1999 was 23%, Nvidia’s annualized ROE using Q2 2025 is 106%, more than 4.5X 1999 Intel’s. Inflation adjusted revenues for Intel would be $57B in 2025, Nvidia’s 2025 annualized revenue from Q2 revenues are $187B. Nvidia is 3X the size and 7.5X more profitable ($106B annualized Q2) than the inflation adjusted Intel of 1999 ($14B). The point is that today’s businesses are much sturdier than even the strongest companies of the dotcom era, and they deserve a higher multiple as a result. Even with a higher multiple on S&P 500 businesses, management teams and boards by-and-large believe their shares are undervalued. In 2025, S&P 500 stock buybacks are likely to exceed $1,000,000,000,000 (yes, one trillion dollars) for the first time ever. The boards that govern these businesses, in the best interest of their shareholders, are telling the market that they are undervalued and they are expressing that in the purest way possible – authorizing and completing record amounts of stock buybacks. Investing at all-time highs supported by fundamentals is nothing to be afraid of, especially when the companies you are investing in are putting their money where their mouths are.
As always, please reach out if you have any questions or interest in discussing your investments and planning. We thank you for your continued trust.