Top Stock Picker Scouts AI Fringes to Beat 97% of Peers

(Bloomberg) — When it comes to trading the artificial intelligence frenzy, one top-performing global equity fund is winning big by scouting out some out-of-the-box ideas.

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Fairlight Asset Management’s Nick Cregan invests in companies he believes will be enhanced by AI or well protected from its implications. It’s a conviction that’s helped propel his Fairlight Global Small & Mid Cap fund up 24% over the past year, beating 97% of peers, according to data compiled by Bloomberg.

“We’re not trying to pick the winner in AI, we think that that’s a mugs game,” Cregan said in a phone interview. “You’re going to have some leading companies, which you think are going be the winner, and then all of a sudden there’s gonna be some interesting technology that emerges that completely displaces that business.”

The fervor around AI has grown since ChatGPT’s release last year and has snowballed as companies race to churn out rival tools and products to power them. Many investors see the technology as on the cusp of revolutionizing the way some companies and sectors operate. The Nasdaq Composite Index has climbed 31% in 2023, and tech stocks have helped pull the broader S&P 500 Index up 15%.

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German online marketplace Scout24 SE, up 26% year to date, is among the Sydney-based fund’s top holdings. AI should help the company drill into pricing and analyze market trends, but is unlikely to replace the site’s uploaded inventory and customer base, Cregan said. The company already is the market leader in the space and AI will only optimize efficiency of its site and pricing, he believes.

He also owns shares in Copart Inc, a US-based auctioneer website for repairable and wholesale vehicles, for similar reasons. Copart has surged 43% in 2023.

The A$900 million ($612 million) fund also holds Nordson Corp, a maker of hot melt glue dispensing equipment used in industrial environments, on expectations that it will benefit from increased microchip demand. The shares are little-changed so far this year.

Chips are put together with “absolutely microscopic drops of glue and it has to be done at precision” and speed, he said. “AI is going to help Nordson in developing that technology where they’ve got such a head start in the mechanics of how that works.”

The performance of the fund, launched in 2018, has been underpinned by attractive valuations in small and mid-cap shares since inception, according to Cregan. They’re especially cheap right now, he said, adding that he’s keeping his cash holdings close to zero and is finding opportunities in the UK and Germany.