Funds to navigate a big risk heading into 2026

The heady enthusiasm around artificial intelligence (AI) has pushed valuations ever higher, as investors pile into AI-related names and hyperscalers ramp up capital expenditure (capex).

With Amazon.com Inc (NASDAQ:AMZN)’s 2025 capex expected to be greater than that of the entire US energy sector, the question increasingly is: are these valuations grounded in long-term value, or are we in the grip of a bubble?

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One way to see potential froth is via price-to-sales (P/S) multiples. Many AI-related stocks trade at steep P/S multiples compared with traditional businesses, reflecting aggressive growth expectations.

Roughly 13% of the S&P 500 (by index weight) trade at more than 20x P/S as at the end of September 2025. This exceeds the level from the peak of the dotcom bubble in 2000, when it was roughly 11% of the index.

While this capex may support future profits, it also raises the stakes: if adoption lags, or capex cycles are shorter than anticipated, the cost burden could weigh heavily on earnings and valuations. The combination of high multiples plus heavy upfront investment can resemble classic “growth-hype” dynamics, suggesting some segments of the AI space may be vulnerable if sentiment or execution slips. Concentration risk adds to fragility, as a handful of large firms dominate AI hype and valuations.

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Given that uncertainty, it can make sense for investors to consider a defensive tilt: reduce exposure to ultra-growth/high-multiples, and instead lean into funds that prioritise quality, stability or diversified global exposure. That doesn’t mean abandoning technology, but blending growth potential with defensive discipline can smooth volatility and give investors a better chance of weathering any correction.

If you believe that parts of the AI-driven rally may be overdone, now could be a good time to reassess exposure.

Ways to access a more defensive approach to global equities

There are two global equity funds on the ii Super 60 list of investment ideas that may offer some protection, by emphasising defensiveness, quality, and longer-term stability.

First, the well-known and widely held Fundsmith Equity I Acc, which has a Morningstar Medalist Rating of Bronze. Its conservative, quality-growth tilt means it has notably lagged more aggressive growth-oriented funds during the recent AI-driven market surge.

However, if investor sentiment shifts away from high-multiple technology stocks, for example in a profit-taking phase or broader correction, its emphasis on durable cash flows and defensive characteristics could lead to relatively stronger performance.

The fund was founded in 2010 by Terry Smith, and its investment process is simple and well-articulated. It aims to buy and hold, ideally forever, high-quality businesses that will continually compound in value.

High-quality companies are considered those that have an above-average cash return on operating capital employed, and an ability to sustainably grow at this rate of return.

To achieve these two criteria, the team targets companies with a strong competitive advantage (typically based on significant intangible assets) and with little need for financial leverage.

Smith constructs a focused, benchmark-agnostic portfolio of 20 to 30 names, with position sizes reflecting the best combination of current value and future growth prospects. Smith is an original thinker and has often demonstrated his willingness to bet against the crowd by taking a longer-term view.

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A second investment idea from the ii Super 60 is GQG Partners Global Equity, which has a Morningstar Medalist Rating of Gold.

The fund is managed by Rajiv Jain, who established GQG Partners in 2016 after a long and successful career at Vontobel Asset Management. Sudarshan Murthy and Bian Kersmanc support him as portfolio managers on global mandates and in early 2024, analyst Siddarth Jain, Rajiv Jain’s son, was promoted to deputy manager. They are also supported by the firm’s wider team of 20 analysts and managers.

The managers have a quality-growth oriented outlook, but in seeking to achieve this, they adopt a flexible, medium-term investment approach and consider limiting losses a priority. Fundamental analysis that focuses on the certainty of earnings growth over the investment horizon is combined with a risk-aware approach to portfolio construction.

The fund typically comprises 40 to 50 names and can take significant active positions at the sector level. The manager’s flexible, well-executed investment approach and quality bias have typically led to strong performance throughout the market cycle, with good downside protection during periods of market weakness, as evidenced by the fund’s strong showing in 2022 when the managers pivoted out of technology stocks and into energy.

In early 2025, the managers of the fund pivoted to a more defensive positioning (reducing higher-growth names) as they were concerned about a tariff-induced economic slowdown and valuations/earnings risk in certain market segments.

Given this, the fund failed to rebound along with the market, which was led by the mega-cap technology names. However, the fund continues to be overweight defensive sectors such as consumer staples and utilities, and underweight technology as at the end of October 2025.

In an environment where markets rotate towards value or lower-volatility sectors, GQG’s defensive and quality-focused positioning could prove advantageous, potentially narrowing or reversing the recent performance gap.

Jack Paterson is an investment analyst at Morningstar.