Over the past two years, the AI "Gold Rush" has led to the MSCI World Index becoming concentrated in just a handful of AI-related stocks. In this investment letter, Comgest’s Global Equity team explains why we typically focus on AI infrastructure companies with high barriers to entry and strong pricing power, while avoiding early-stage AI models and software due to intense competition and potential commoditisation.

Investors often focus on tangible assets like inventory and machinery, but human capital—employee knowledge, skills, and experience—is oftentimes undervalued. French leather goods company Hermès exemplifies how human capital is the quiet force behind long-term success.

What makes the US the world's strongest stock market? While many attribute it to leading technology, research facilities, and abundant natural resources, Comgest believes the true driver of US growth is labor productivity. Our US Equities strategy aims to leverage this efficiency by focusing on companies that achieve more with fewer resources.

Investor focus in Japan has recently shifted towards cyclical stocks like automotives, commodities, and financial services, driven by a weak yen and rising global interest rates. However, Comgest believes that companies involved in structural growth trends, such as digitalisation and ageing populations, are better positioned for consistent long-term returns.

In 2024, several companies in our Comgest Pan Europe Equity portfolio encountered challenges due to weak consumer spending in China. Despite this headwind, growth drivers, including healthcare, digitalisation and artificial intelligence provided significant tailwinds for our strategy. By focusing on resilient performance in the face of macroeconomic uncertainties, our investment approach aims to harness these underlying growth trends.

The US stock market has become increasingly dominated by just a handful of stocks, driven by the rapid rise of artificial intelligence. This concentration raises questions about diversification and whether this narrow collection of companies can continue to outperform in the future. At Comgest, we go beyond index performance to offer investors exposure to leading quality growth companies that benefit from long-term growth trends.