As long-time technology investors, we believe we’re at an inflection point similar to the late 1990s and early 2000s. The landscape is set to change significantly in the medium term. While AI will define this next cycle, the real driver of winners and losers could be the application of vast data and processing power across industries.  Forecasting becomes harder when you can’t simply extrapolate from the past. But that’s precisely where we believe we have an edge, experience, judgment, and the willingness to think independently. With higher interest rates and the end of “free money,” many companies have been forced to focus on profitability. This creates a compelling opportunity in our view, to identify those in the sweet spot of sales growth and margin expansion. Once companies turn profitable, the market starts valuing them on earnings or free cash flow. Managing the “valuation fade” that growth companies face in this transition is something we’ve seen many times and know how to navigate.

What do we mean by future leaders? They are fast-growing businesses that mature into highly profitable, market-dominating companies over time. The first stock I ever analysed was ASML, followed closely by ARM Holdings, both under $10 billion in market capitalisation at the time. Two decades later, each has multiplied many times in value. That is our mission and passion, to identify today’s emerging innovators that we believe will become tomorrow’s global leaders. Our stocks bridge growth and quality and can be overlooked in a world of allocation by style bucket. 

The Goodhart Global Future Leaders Fund was created with the above in mind.  Non benchmark focused, concentrated sector exposure and a highly active yet diversified portfolio. The best fundamental investors can achieve returns of 20% or more; that would, of course, be an excellent result, but we begin with a 15% hurdle, particularly as the NASDAQ sits at an all-time high. Markets can move quickly, and fashions change faster, but our focus remains on what endures; using our specialist knowledge to identify and patiently own the next generation of future leaders.

Given the rise of the internet and now AI we are all increasingly exposed to a handful of large cap US technology stocks.  Passive funds are structurally tied to large caps. Active managers often also own large caps to stay close to the index.  Our fund looks different. We focus on the next generation of winners, businesses intuitively attractive to many, but difficult to own at scale.   Private equity firms and entrepreneurial founders may need to exit in the coming years, and we are well positioned to be on the other side of that trade within our sectors.

It is brilliant to join an experienced yet humble team aiming to build strategies fit for purpose for the next 30 years of investing. When I met the team, I immediately aligned with the four defining forces that underpin the past and future market return drivers. Demographics, security, environment, and technology. These have been powerful drivers across the sectors I have invested in for more than three decades. Goodhart believes tailwinds turning into headwinds in all except Technology will make returns harder to achieve, but as an engineer and entrepreneur, I believe challenges are simply opportunities to innovate. Starting with a blank page to design a fund focused purely on returns and built upon a proven process was something I jumped at.

We remain underweight in the United States, where valuations make future returns less compelling. Europe and Japan offer attractive opportunities beyond the current AI infrastructure surge and stand to benefit as the next phase of AI adoption unfolds. We focus on a small number of sectors with the ingredients for sustainable growth, margin expansion, and high returns on capital. Technology (~40%), Healthcare (~40%), Others including Communications, Industrials, Financials all with a tech enablement lens.

These sectors have historically delivered superior returns and we believe they’ll continue to do so. However, the leaders within them will change. AI and regulation will reshape competitive dynamics.  Within technology, we favour firms with unique data assets and deep customer relationships that can harness AI effectively as infrastructure constraints emerge. While infrastructure builders are currently in the spotlight, we see long-term value in those positioned to enable the next wave of AI adoption. The digitization cycle that began in the late 1990s ended with COVID, when the laggards finally came online. Healthcare saw unrestrained budget growth to solve pressing issues. But the next cycle is about productivity, doing more with less, not spending more. Pricing will shift from “per seat” to charging for access to data and compute. Healthcare will face mounting budget pressures and be forced to do more while focusing on affordability and outcomes. The winners will be those who can enable this shift. Many funds are not positioned to benefit. We believe we are.

We classify each holding according to its current lifecycle stage, based on distinct attributes that shape its risk profile and provide diversification benefits within a concentrated portfolio. Exploit businesses are smaller firms capitalising on niche opportunities with rapid growth from swift product adoption. Scale companies expand faster than market expectations, while Convert firms achieve profitability sooner than anticipated once pricing power emerges. Displace businesses gain market share by replacing incumbents, and Defend companies maintain or grow share more effectively than perceived, resisting competitive fade. The fund currently allocates more than 50% to Defend and Displace for more stability to proven, higher-quality names, while Exploit carries the lowest weighting. Convert opportunities are rare but highly attractive when identified.

We expect short-term volatility including valuation compressions driven by AI disappointments or interest rate shocks as inflation proves stickier but believe in the robustness of our long-term approach.  Public markets are notoriously poor at forecasting company fundamentals, just look at the scale of 1–3 year forward estimate revisions. Many managers give up and rely on management guidance or simplistic extrapolations. We take the opposite view. We build our own 5–10 year forecasts, built from the bottom up. That gives us a very different profit picture and lets us find value in places others miss. If we get the numbers right, we should deliver the outcomes we seek.