Global stock markets, and in particular the technology sector, have been volatile over the past few weeks. Indeed a few of those days produced relative moves described as “one for the history books” by some commentators. We do not want to add another explanation of this market rotation, but instead thought we’d take a look back on some of the principles behind our investment approach and consider how these stood up to the recent market pressures.

When we launched the Amati Global Innovation fund in May 2022, we had two important considerations which defined our approach to innovation investing.

First – a clear focus on profitability and cash generation, "investing in real businesses, not science projects". We felt we could give our clients an exposure to game changing innovation and growth without taking excessive financial risks on unproven business models.

Second – follow our research to the best positioned companies. Our process can take us anywhere, across market cap range, but we prioritise non-consensus ideas, less well discovered and widely held. This has led us to look for innovation beyond big tech ("Magnificent 7" term was not yet widely used at the time).

Our first consideration had been validated by events. A return to a more normal macro environment meant high growth but low profit companies suffered, with many now close to or even in bankruptcy. Investing in innovation without that focus on cash, profits and valuation has been a volatile ride. Even though our Fund launched after the worst of post COVID sell-off, we still materially outperformed strategies that pursued a more aggressive, less disciplined approach.

The second consideration has required more patience. We did not anticipate how far investors would bid up the Magnificent 7 and AI theme, especially over the past 12 months. We admire many of these companies and have been positive on artificial intelligence. In fact, we owned NVidia stock in the fund until summer 2023, when AI enthusiasm reached fever pitch. We sold when we believed our research focus and our clients' capital was better spent on less well discovered ideas. Over the last 12 months, since selling Nvidia, we have not owned any of the Magnificent 7 stocks. Yet this did not preclude the Fund from delivering top quartile returns over that period, materially outperforming our peer group. It did mean, however, that our Fund’s performance lagged some of our innovation investor peers who ‘bet big’ on AI and pulled ahead.

We remain fully convinced that innovation extends beyond Magnificent 7, and that diversification beyond them has merits, as the past several weeks have shown. The value of AI is yet to be proven, some Magnificent 7 stocks are facing significant regulatory challenges, and the whole complex no longer looks like a one way bet. The importance of diversification beyond this much discussed cohort is once again obvious.

Looking over our 3-5 year investment outlook we will continue to tread the fine balance between our profitability, cash and valuation discipline, our focus on leading edge of innovation and technological change and our willingness to go off the beaten track in search of the best ideas. We think this approach has an important role to play in our clients' portfolios.

Warning: Capital at risk. Past performance is not a reliable indicator of future performance.