00:00Bailey Gifford joined us now. You heard what Shep was reporting on there. We often frame
00:05the US-China AI race in terms of who has better chips, who is doing the most work on advanced
00:12models. But access to capital seems an important swing factor right now.
00:18I mean, that's always been the case, that capital matters, and particularly in a high
00:23CapEx or CapEx-intensive industry like artificial intelligence. I'd maybe take a step back. I think
00:29for long-term investors, what really matters is more finding outliers. And those outliers will
00:34naturally have greater access to capital because they are fundamentally better businesses. In some
00:40ways, I actually think I might be a bit of a boring guest for you today because I'm going to
00:43be
00:43repeating quite a lot of older information rather than giving you new news. But I think increasingly
00:48market participants tend to be conflating new and important. And that's particularly easy to do in
00:53AI given the pace of change and growth. And it's exacerbated by structural market dynamics, I
00:59think. You know, 60% of US investing is done through passive vehicles, 75% of trading volume is
01:05from quant funds, and there's increasing retail participation. So markets have never been faster
01:10or noisier. And being able to take that step back and focus on the fundamental attributes of a company,
01:16what industry are they trying to disrupt? What new industry are they creating? Are they investing in
01:21innovation over the long term? And long term here means five or 10 years because true change takes
01:27decades and not quarters. I think those are the kinds of businesses that are going to grow well
01:32in the long term, regardless of which industry they're in. Okay, so I'm happy to park the new
01:37for a second and stick with the important. I did spend a bit of time going through the holdings in
01:41your fund. So two interesting parallel case studies is TSMC is a top holding, right? As is SK
01:57China's efforts to have domestic manufacturing capacity? How would you sort of interpret that?
02:03I think China has been a tremendous engine for growth and disruption and innovation for a very
02:09long time. And I certainly wouldn't want to bet against China. Indeed, we have holdings in China,
02:13such as BYD and Pinduoduo and Tencent, and they're tremendous companies. But I think companies like TSMC
02:21and SK Hynix and ASML are almost in a league of their own. TSMC in particular has created effectively
02:27a monopoly at the leading edge of chips. And that's going to be very difficult to disrupt,
02:32not just because of access to capital, which is a limiting factor still given the amount of money it
02:37takes to build a leading node fab, but also because there's so much inherent process knowledge
02:43that TSMC has built up over decades. And that is incredibly hard to replicate,
02:47even if Chinese companies had access to a lot of the equipment that they need,
02:51which they simply do not because of export controls. And I think a similar story is probably
02:56going to happen with SK Hynix, where a growing proportion of their revenue and earnings are
03:01coming from HBM, high bandwidth memory, which is very complicated to make, again, requires quite
03:07complex processes and equipment. And TSMC doesn't actually have access to a lot of that equipment yet.
03:13Now, will they be able to replicate it over time? Perhaps, but that will take time.
03:20If I was going to give it the sort of umbrella label of the AI trade, you know, your non
03:26-US focus
03:27is TSMC, SML, SK Hynix, very, very chip concentrated. Where is the non-US AI opportunity
03:34outside of semiconductors that you look at right now?
03:37I mean, there's a number of them, but I'd perhaps pull out two really exciting ones that
03:42actually reported relatively recently. So I am going to give you some new news.
03:46Please.
03:47And that's Shopify on the one hand and MercadoLibre on the other. And I'd contrast them again,
03:52because I think that there's some recognition that what Shopify is doing with AI is bearing fruit.
03:58So fundamentally, they mediate complexity for merchants and consumers. And what AI does is it
04:02introduces ever more complexity into the shopping journey. So increasingly autonomous agents are
04:08capable of making decisions for consumers. That means that you need more of a source of ground
04:12truth for those agents to be able to rely on when offering up potential purchases to their users.
04:19So Catalog, Shopify's record of all the items that merchants has and all the metadata associated with
04:25that is showing two times higher conversion on orders than simply scraping website data when AI
04:33agents are involved. And that's tremendous for a company that monetizes based on GMV.
04:40On the other hand, I put MercadoLibre, where it's almost a classic example of, again,
04:44a lot of investors are not taking the long-term view here, because what MercadoLibre is doing is
04:48something they've done multiple times in the past, where they're investing substantially in growing
04:52users because they see this as a really critical inflection point in the markets. And so they're
04:58seeing a very strong GMV growth, very strong user growth on the back of lower shipping requirements
05:05and lower take rates for merchants. And at the same time, they're investing in AI in order to speed up
05:12the cadence of development internally. So they've seen 75% higher deployment of code internally,
05:17at the same time as the number of rollbacks has gone down. So not only are they moving faster,
05:23they're moving at a higher quality. And I think that's really exciting. And the market probably
05:29isn't recognizing that.
Comments