Why there’s a bubble in ‘bubble’ talk

Paul Niven, who runs the F&C investment trust, takes issue with worries about markets looking overstretched and outlines his case for optimism. He also identifies a few more contrarian stock picks in the fund, beyond usual suspects such as the Magnificent Seven.

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Dave Baxter, senior fund content specialist at interactive investor: Hello, and welcome back to our Insider Interview series. I’m Dave Baxter, and today I’m joined by Paul Niven, fund manager on the F&C Investment Trust Ord (LSE:FCIT). Paul, thanks very much for joining me today.

Paul Niven, fund manager of F&C Investment Trust: Good to see you.

Dave Baxter: So, F&C seeks to give a diversified form of exposure to global markets, but you’re really not short of competition. There are lots of other active funds that do something similar and, of course, lots of tracker funds. So, what makes you different?

Paul Niven: Great question. There’s a lot of competition for sure and the rise of trackers certainly is putting pressure on active fund management in general.

I think there’s a few points with respect to our proposition. We’re a closed-ended fund, an investment trust, as you’ve said, and that confers certain advantages which I’m sure your viewers know.

But just to remind you, we’re a company, so we can borrow to invest, we can set aside income from the dividends that we receive to provision for perhaps tougher times to ensure we can [not] only pay dividends, but as we have done over time, pay rising dividends.

We also have a closed-ended capital structure, which means we can take illiquidity and a longer-term perspective than if we were running an open-ended fund. So, I think the structure gives us some advantages.

We are active, as you’ve said, so that is a differentiation against the passive tracker funds, and we’re looking to provide a one-stop shop for investors looking for exposureto growth assets.

In contrast to a pure equity fund or a pure global tracking fund, we are looking for exposure to growth assets, and that is listed equities and private equity. And we have, as I said, the ability to invest in those less-liquid areas such as private equity by virtue of the structure that we have.

Again, a couple of additional points of differentiation. We’re attractively priced. The ongoing charges figure (OCF) is 0.45%, which we think is very competitive given the offering that we have, and our performance is strong and ultimately one has to be judged on the merits of performance.

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Dave Baxter: Interestingly, you do have a roughly 11% allocation to private equity. So, just tell me how does that fit in with the broader portfolio and what’s your outlook on it now?

Paul Niven: Sure. So, to my point on being a one-stop shop for growth assets, when we think about what the opportunity set looks like, it is predominantly equities and private equity.

We expect that in the medium to longer term we will achieve a benefit in terms of excess return by locking up capital, and finding differentiated opportunities in the private market space. We look at the broad private markets landscape in terms of opportunities.

Just in summary, there are many, many opportunities in terms of scope for investments, but we do invest in funds. So, unlisted private equity funds with typically a 10-year-plus life. So again, long term in nature, but also co-investments. So, specific individual company opportunities that arise.

Dave Baxter: So, where you invest alongside another professional investor basically?

Paul Niven: Exactly. Again, both those aspects bring, from our perspective, differentiated return prospects that we don’t typically see in the listed market. We’ve got a bespoke programme, for example, run by Pantheon for us who invest in leading venture and growth managers. So, we get access to those opportunities that would otherwise not be available to investors through a different form.

Dave Baxter: It’s been a big risk in the last decade to bet against the US, but last year we did see it falter, we saw the dollar weaken, some of the shares weaken, and this year again we’ve seen sabre-rattling from Donald Trump and we’ve seen some of those movements. What’s your outlook on the US going into 2026?

Paul Niven: First, I think you’re right. The US,going short, the US is like a widow-maker trade, right? It’s been wrong in the last decade and more to bet against the US market.

What is very interesting, as you’ve said, is that there has been a pivot, partly driven by, from a sterling perspective, weakness in the dollar, leading to US equity underperformance against other developed markets last year, even in local currency terms, that was true. That’s quite a big change, actually, and in addition, far more discrimination within the US market, than perhaps we have had, even though it remains very, very concentrated.

We are heavily weighted in the US. We have more than 60% of our portfolio in US assets. There is much talk about US exceptionalism, on whether that US trade is over. We think the US remains home to many of the obvious world-leading companies. Valuations are relatively rich, but we think return prospects are relatively good from that market.

That said, I would concur with the general view that markets should broaden from here and the trends that we saw last year are likely to persist to a greater or lesser extent. So, what do I mean by that? Emerging markets, for example, lower interest rates from the US, a weaker dollar, good global growth. That’s a relatively constructive backdrop and a valuation differential in EM. That means there’s maybe more opportunities for investors than had been evident up until 12 months or so ago.

And to the sabre-rattling point, we’re, as we speak, going through another episode early in the year where President Trump is causing some market volatility.

From our perspective, there’s a lot of noise, a lot of volatility. One needs to focus on the fundamental backdrop, what valuations look like in terms of the opportunity set and investor behaviour and overall risk appetite. And many, many risk factors. I’m sure there’ll be more bouts of volatility, but we’re trying to focus very much on fundamentals to drive our decision-making process.

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Dave Baxter: Interestingly, in the last year or so, you seemed quite relaxed, maybe upbeat about the AI investment theme. Now we’re into a new year, what’s fueling that optimism? What’s your outlook?

Paul Niven: Yes, so I think there’s different aspects to the AI question, or numerous aspects. There’s the broader question as to what AI application or application of AI is going to mean in terms of wider productivity gains from an economy perspective and a corporate sector perspective.

We’re relatively optimistic there actually. We think that we’re in a situation similar to that which we saw in the late 1990s and one can draw the parallel to markets perhaps, but there was a productivity boom that occurred after the market had crashed. The market got somewhat ahead of itself, but it was a very real phenomenon actually, which led to a substantial rise in productivity in the US economy in the early 2000s.

And that environment, if one believes that that will be the outcome, is one in which the corporate sector and capital is probably going to continue to win at the expense of labour. It should be good in aggregate for owners of capital and equities if margins are maintained. Or even improve because it should help the overall corporate earnings picture.

That said, clearly we’re moving to a different environment in terms of the AI cycle. There’s huge pick-up in terms of spending by what, up until this point, have been capital-light businesses.

They are beginning now, in some instances, Oracle Corp (NYSE:ORCL) being a very good example of this, to tap credit markets, and there’s some concern about what that might mean in terms of creditworthiness, how much borrowing will be required to fund what are expected to be trillions of dollars in terms of the AI roll-out. In the next 12 months, I think $450 billion of spending is expected from those leading technology companies.

So, I think the short answer to your question is that we need to be discriminatory in terms of the opportunity set and looking more towards the winners being the recipients of that capital allocation rather than necessarily the spenders of capital.

I think the jury’s out as to what the return on a lot of this investment is going to be at the aggregate level. As I said, at the economy-wide level, it looks to me and our business like this is going to be a positive environment in terms of productivity in the years to come. But the individual micro winners and losers are quite difficult to ascertain beyond the winners in terms of NVIDIA Corp (NASDAQ:NVDA), which we’re still constructive on, and the roll-out of infrastructure and data centres.

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Dave Baxter: And on those points about capex spending, you mentioned the late 1990s and people are raising, I suppose, parallels with the dot-com boom and bust. Do you share any of those bubble concerns that are doing the rounds at the minute?

Paul Niven: Without being flippant, I think there’s a bubble in talk of bubbles. There’s an awful lot of discussion about a bubble and stock markets driven by this AI theme.

Certainly, I would not be complacent because I think we have to recognise that valuations in equity markets are high relative to historic norms or, essentially, US valuations are high relative to historic norms. And that is driven by a small cohort of really exceptional companies. So, not complacent. Bubbles tend, when they burst, to lead to very large losses for investors.

If you take the bubble of the late 1990s, we had an 80% drop in the Nasdaq, the Japanese bubble an 80% drop in terms of the Nikkei. Now, I can definitely see corrections and I’m sure we will have volatility, as I said, in the year ahead, but are we in a bubble? We don’t think so at the present time.

There are certainly pockets of speculation. If one compares the current situation to the late 1990s, valuations reached far more extended levels than where we are today. Again, one shouldn’t dismiss current levels of valuation, but we were far more extended.

We are dealing with highly profitable businesses in terms of those leading companies today compared to the speculation in certain areas that we saw in the late 1990s. The US Federal Reserve was raising interest rates into that late 1990s environment, the final blow off that subsequently led to a bust. They’re currently cutting and we think they will cut into 2026 as well.

And credit markets were seeing spreads significantly widening for quite a period before the equity market cracked. So, one can make an argument that maybe we’re going to head into an environment where valuations become more extended, where we do see a bit more by way of spread widening in due course if, actually, technology companies really begin to tap credit markets, but we don’t think we’re there yet.

That could be a landing point in terms of where markets get to, a trend taken to extreme, but as things stand today, we don’t think that we’re at that point of excess where the market’s really going to collapse under its own weight, and importantly, the cyclical backdrop is constructive, we believe the Fed is cutting rates, growth remains reasonable.

Dave Baxter: Six of your top 10 holdings at the end of November were actually Magnificent Seven members, so everything but Tesla Inc (NASDAQ:TSLA). If we dig into the portfolio, what are the more surprising or contrarian stock picks?

Paul Niven: Yeah, good question. So, the Magnificent Seven are relatively well represented in terms of our positions. And for us, it’s been really important to maintain exposure, which, notwithstanding a little bit of the stocks lagging in the last six, 12 months,or some of those stocks lagging in the six or 12 months. It’s been important to be fully weighted in that area to actually keep up with markets in the past few years, or the last decade or thereabouts.

Last year, we only sold two of those seven stocks actually outperformed the market, that was NVIDIA Corp (NASDAQ:NVDA) and Alphabet Inc Class A (NASDAQ:GOOGL), the other ones lagged. If you look at our portfolio positioning, you just think about that equity component. We are long against the market index on Nvidia, and we are short [underweight] the rest of the Mag Seven. So, we’re slightly short in aggregate that cohort, and only actually long on Nvidia.

But we are not taking a big negative position in terms of zero weight, simply because, again, these are very profitable businesses, and we think that they are well positioned.

But to your point about other areas of the portfolio where we’re seeing opportunities, there’s a number of examples. Last year, we had a very high performance from Applied Materials Inc (NASDAQ:AMAT) and Taiwan Semiconductor Manufacturing Co Ltd ADR (NYSE:TSM) playing the AI theme but outside the Magnificent Seven - they are both involved in the semiconductor space. Also, Howmet Aerospace Inc (NYSE:HWM), a US stock which did very well for us in 2024. It is involved in the production of engines for aircraft and aero parts, and performed extremely well.

And then a name that I remember, because I was working back in the late 1990s and early 2000s, is Nokia Oyj ADR (NYSE:NOK), which made a reappearance in the portfolio. For those with long memories, they were a dominant player in terms of handsets, and that position has long passed, clearly.

But they’re actually, interestingly, very well placed in terms of Chinese networks’ roll-out to 6G. They’ve got a good position in terms of optical networks, which makes them well placed in terms of the data centre roll-out. So, that is a position that we took before Nvidia took a position in that company themselves, reflecting the strength of their proposition.

So, there’s numerous opportunities beyond the Magnificent Seven that we see in the portfolio. In fact, if you look at the drivers of return on our portfolio last year, there were actually some of the US value stocks, and some of the global income stocks that performed better for us than some of those US growth-oriented names that have been driving returns in recent years.

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Dave Baxter: In terms of how the fund actually operates, you’d tend to think about things like asset allocation, the big picture, and then you have different fund managers running segments of the portfolio. Looking at that line-up, what changes have you made in the last year or so?

Paul Niven: The most significant change that we’ve made in the past year is that we made a change in our emerging market equity allocation.

In the first quarter of last year, we gave a mandate to Invesco. That followed an extensive research process. We used internal resources from our manager selection team to scour the market, looking for differentiated managers with an edge from an alpha standpoint. We concluded that Invesco, which runs a value-oriented process with a quality perspective, looking for companies with strong balance sheets, and has a very strong track record in terms of performance delivery, we felt that the team, again, a long-tenure team with very good performance, were the right line-up to manage the allocation for us.

We’ve got off to a very good start since we gave them that allocation and indeed we have allocated more money to emerging markets over the course of the past year. That’s the most significant manager change that was made in the past year.

Dave Baxter: Paul, thanks very much for joining.

Paul Niven: Thank you, good to see you.

Dave Baxter: Thank you for watching. Please do let us know what you think in the comments. And if you’re enjoying this series, do hit the like button and the subscribe button. Take care.