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227. Bull, Bear & Beyond – Vantage: Shovel makers, halo assets and the biggest infrastructure build in history with Alex Gunz
1 Plays2 seconds ago
Why are the world’s growth investors quietly favouring ‘shovel makers’ over ‘miners’? In this Vantage interview, Alex Gunz, manager of the Heptagon Future Trends Equity Fund, which has just passed its 10-year anniversary, explains why the AI story is far bigger than GPUs and data centres, and where the most durable opportunities are hiding. Alex makes the case for ‘halo’ assets – heavy asset, low obsolescence businesses such as ASML, whose 100,000kg lithography machines are integral to the entire semiconductor supply chain. With US hyperscaler capex on track to top $1tn this year, and AI infrastructure spend already at 5.2% of US GDP (above the dotcom peak), Alex argues the build-out has years left to run. He brings the strategy to life through holdings, including Quanta Services and MDA Space, and explains why bottlenecks in power, grid, land and skilled labour are creating real pricing power for the right businesses. Alex also shares why he believes the traditional 60/40 portfolio needs rethinking, and why gold, physical infrastructure and alternatives now deserve a place alongside equities.
Watch the full interview now to hear Alex’s high-conviction take on where the smart money is going next.
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About ‘Bull, Bear & Beyond’
Bull, Bear & Beyond': features candid conversations with senior executives and from our own team of experts from across industries, exploring strategy, innovation, and the opportunities shaping their markets and 60-second pieces are a compressed summary of content designed to convey our message in a single, easily shareable hit.
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Transcript
Introduction to Alex Guns and Future Trends Fund
00:00:06
Speaker
Welcome back to Vantage. We had our growth conference earlier this month and we're sort of playing on a theme. So I'm actually delighted to have a manager who's been on but before. He runs a thematic fund.
00:00:17
Speaker
Welcome to back to Vantage, Alex. Always a pleasure to be here, Neil. Thank you. And for those those who haven't seen you previously, perhaps you could just briefly introduce yourself, ah introduce the fund, um the objectives of the fund, the philosophy, and then we'll get into a little bit more of the detail.
00:00:36
Speaker
Yeah, 100%. Lots of ground to cover then, without a doubt. So
Future Trends Fund Strategy
00:00:40
Speaker
just to remind everyone, my name is Alex Guns. I run the Future Trends Fund at Hepticon Capital. Hepticon is a boutique founded in 2005. We manage and advise on over billion dollars of assets.
00:00:53
Speaker
I set up the fund in 2016, so it passed its 10-year anniversary in January, and the strategy is a concentrated yet multi-thematic fund. So we invest in everything from logistics to longevity. And the idea really is to identify those long-term trends that we think are going to grow in importance broadly regardless of what's happening to GDP, where governments and regulators, if they're present in the industry, are tailwinds rather than headwinds, and then find the businesses the best place to benefit from those trends.
00:01:22
Speaker
Thank you. and Congratulations on 10 years, firstly. And i have said it previously, but for viewers who want to learn more, you've got a great website, great resources, you write regularly on some of the themes, and those are accessible on the themes. One
AI Investment Strategy
00:01:37
Speaker
of the things that that stood out for me, and it was one of the themes we were talking about in the conference was one of your statements that around, you know, AI in particular, which is that actually you know, you you have a preference for the shovel makers rather than the miners. What do you mean by that?
00:01:53
Speaker
This is something we've talked about many, many times and not just within the sphere of AI. And really, the idea is that we think technology is an enabler, a means to an end.
00:02:04
Speaker
And really, what I perhaps should have highlighted to listeners earlier on is that the strategy that we manage and consistent really with all of the other products on the Hepticon platform is that by definition, by design, they really emphasize high active share. So in other words, we are looking for differentiated businesses and the reason we think why asset allocators want to focus on in on our products is because of that element of differentiation but to respond to your question I think normally what you see with a trend such as artificial intelligence is that really you move through three phases first of all you have the infrastructure then you have the platforms then you have the applications
00:02:45
Speaker
We're still very much in the infrastructure phase at the moment. But I think what's almost forgotten is that you need a whole set of supporting elements, supporting businesses above and beyond the GPU chips and the data centers that are often talked about.
00:03:00
Speaker
One expression that I know we've discussed in the past and was a theme at your conference last week, Neil, is this idea of halo assets, so heavy um heavy asset, low obsolescence businesses. yeah And this is really something that we've spent a huge amount of time thinking about and implementing in our investment strategy. Very happy to give an example if that's helpful. Yeah, I mean, so look, it was a great segue because I was going to ask you about it because you wrote about it post the conference. So firstly, for those who've never come across Halo, um what does it actually mean? So how do you think about it? And maybe, ah yeah, bring it to life by giving you, give us an example of, you know, how you are, you know, buying into that within the fund. Yeah.
00:03:41
Speaker
I sort of figured this topic was likely to come up. So on
Case Study: ASML and Halo Strategy
00:03:45
Speaker
the way here, I was thinking about an example, one of the most tangible ones, and when we're literally talking about heaviness and the the business that sprung to mind, this is a business for record that we've invested in, or been invested in since 2017. And it's a Dutch business called ASML yeah to highlight for listeners who may not be familiar with this business. And obviously we'll come back to how this fits into Halo in a second. ASML is a Dutch business. It is the it is the producer of the machines that make semiconductor chips.
00:04:15
Speaker
We've said before, perhaps even on one of the Vantage shows in the past, the future simply can't happen without this company. So if you think about one of their machines, these machines, they literally weigh 100,000 kilograms. You know, that's immense. If you are building one in the Netherlands and then shipping it, say, to Taiwan, to TSMC, who's a major customer, it needs to be packed into 13 crates going across three cargo planes. So this is real heavy infrastructure. These these machines have a list price probably starting at 120 million euros.
00:04:46
Speaker
And this is a business that for many, many years was not on investors radar screens at all. And really, I think it captures perfectly this idea of number one, differentiated assets. Number two, something which is pure halo. And number three, something which is a metaphorical shovel maker. In other words, it is it is something which is integral to the whole process of actually building out artificial intelligence.
00:05:11
Speaker
Okay. and And again, so just to to go through why Halo, yeah mean, I think, you know, we we talked about it that, you know, Claude suddenly came out with his legal services plugin.
00:05:23
Speaker
All the software companies suddenly were being questioned around their economic moat because AI is eroding it potentially. there are certain ah areas where actually they are defensible. We we don't see AI eroding those modes. So heavy assets, you're not going to see oil wells disappear because of AI, etc. So that that piece is really interesting and low obsolescence, meaning, okay, there is longevity in terms of what they do. I think that that that matters as well.
00:05:52
Speaker
I think your point about ASML is is is great, which is that There is, you know, if you want to participate in this industry, you have to turn to ASML. There is no obsolescence in that story. and And yes, you know, we will normally look at look how much of the business is represented by tangible assets. It's a big manufacturer. So ah a great case study.
00:06:18
Speaker
um Now some of the stats that ah if I've been reading your material, so some of the stats you've been sharing, is ah yeah I would describe me as genuinely staggering. $700 billion dollars of AI infrastructure to spend from the US hyperscalers alone this year.
00:06:32
Speaker
ah a single Utah data center that will consume more power daily than the whole of London. ah And the 100,000 tons of steel per gigawatt of capacity Now, what these the the the one number of comparison that chris what is the one sort of number that really stands out for you that that sort of crystallizes the the sheer scale of this builder That's so it's a wonderful question, and I will answer it in just one moment, Neil. But
The Scale of AI Infrastructure
00:07:03
Speaker
I think it's maybe helpful for listeners to frame the context of a couple of those statistics you mentioned previously, almost to go back a step. yeah Every statistic we read, you read, I read, many of our listeners read, will probably fall into that staggering bucket. yeah The first one you cited, $700 billion dollars of infrastructure spent, and that's just by the major hyperscalers, so yeah big cloud providers. At the start of this year, that that figure was $450 billion.
00:07:29
Speaker
um by the end of this year, best guess, it could top a trillion. Pardon me. The other statistic that I found that I think is relevant is you you talked about 100 tons of steel or going into a one gigawatt capacity data center. To frame that, we're here in London. If you take Wembley Stadium,
00:07:48
Speaker
23 tons of steel in that. If you take the shard, 10 tons of steel in that. And these are both huge iconic buildings. So I think hopefully that gives some context to just how much steel is going into a data center.
00:08:00
Speaker
If you ask for one specific statistic, um I would say it is the percentage of GDP in the United States that is being spent on this whole infrastructure build at the moment. yeah Today, we're at about 5.2% of us GDP. when you were When telecoms network operators were building out fibre during the dot-com boom, that was about 5%. So we've crossed that figure already. But in terms of where might we get to, two possible examples spring to mind.
00:08:30
Speaker
Number one would be residential fixed investments, i.e. when you had the housing boom in the United States in the mid-2000s, you peaked at about 7.5% of GDP. Okay.
00:08:41
Speaker
And then clearly with the railroads in the 19th century, you peaked at about 8% of GDP. So I guess what one could infer from all of this is that the infrastructure build still has quite a long way to run. yeah As many people will be aware, NVIDIA, ah biggest company in the world, had their results earlier earlier on this week in in in the middle of May. and Jensen Huang, CEO, he actually described what's going on at the moment as quote-unquote, the biggest infrastructure build known in humankind. yeah And I think really yeah this is ah the correct way to think about current dynamics. Yeah, that's a great way of illustrating it. um Okay, one of the things, it's like given the scale of the build, one of the concerns is around bottlenecks. And you've highlighted that you know there are projects waiting potentially 10 years for grid connectivity. um And, you know, there's quite a lot of delay and deferment effectively in a lot of the US data center projects, for instance.
00:09:42
Speaker
Where in the value chain do you see the sort of tightest bottlenecks? Because I'm assuming that's where you see, you know, potential pricing power and potential sort of margin sort of creation. Is it power generation, transmission, steel, cooling, permitting? What what are the sort of areas that you focus on?
AI Infrastructure Bottlenecks and Pricing Power
00:10:00
Speaker
I would say, Neil, that the the simple answer to that question is is all of the above. so in other words, pretty much every single business we talked to. i was in ah the United States on the East Coast in March, and this was probably one of the most consistent messages from meeting with businesses there. yeah Perhaps a couple of comments that might help frame or um ah broaden out the discussion.
00:10:21
Speaker
So really it's fascinating when you look at many of the companies, as you alluded to in our universe, and I'm thinking about Siemens Energy, which builds out grid infrastructure. I'm thinking about first solar that manufactures solar panels. I'm thinking about Qantas services that effectively is laying the cables that go across the electricity network. Even Prologis, which is the biggest owner of industrial warehouses in the world, they're converting some of those typical big box warehouses you see on the edge of motorways, near airports, and so on. They're converting some of those into data centers. yeah And the message we hear from pretty much all of those businesses is that when you think about line of sight and demand, they are taking orders now that they envisage, and and that's really the the crux word here, envisage being filled in in the twenty early twenty thirty s yeah So that, I think, gives you a sense or gives our listeners a sense of that imbalance between demand and supply. Obviously, what this implies and what we look for in the businesses in which we invest is do they have pricing power? How effectively are they able to exercise that pricing power?
00:11:28
Speaker
There may be one final really quick observation. I think in some ways this almost comes back to economics 101. What we really care about is where there is a tangible scarcity of an asset. So that the two I'd call out in particular, and in some ways this links back to Halo again, number one would be land, you know, until we go to the moon, so to speak. There is only a finite number of places in the United Kingdom, in the United States, anywhere else where you can physically find the available land to build a data center.
00:11:59
Speaker
And then the second dynamic is, and we again hear this from a number of the businesses we invest in and we talk to, it is just actually having those really skilled people who physically know how to yeah dig a trench or climb up a pylon to to stitch cables together. And though those for us are really, really interesting areas. Let's let's focus on the fund itself, okay? um So we it's a concentrated um holdings, typically around sort of 25. And, you know, we don't necessarily want you to sort of recommend things to people. But I believe in talking through your holdings, you're bringing that the story, the investment process to life. So I think you've illustrated some great examples that we've gone through Halo as we've gone through the infrastructure build of the kind of stocks.
00:12:45
Speaker
Give me a couple of other things that you're sort of invested in and the themes that they're exemplifying.
Multi-thematic Investment Examples
00:12:51
Speaker
100% Neil, and just to remind everyone, this is by design a multi-thematic strategy. yeah We're looking at a whole range of different things. I'd like perhaps to begin by circling back to one of the names we touched on earlier, because to our mind, it actually plays to a huge number of the future trends in which we invest.
00:13:07
Speaker
This is a company called Qantas Services. They're based in Texas, and they have the largest workforce in the United States that are actually involved in upgrading and repairing grid infrastructure.
00:13:18
Speaker
And it's really interesting. Every time you meet with Qantas, I met with them in London earlier on this month, actually. yeah And they will highlight that forget AI for a moment. There are actually a couple of other dynamics going on.
00:13:29
Speaker
If you think about it, most grid infrastructure, whether in the United States, in the United Kingdom, pretty much anywhere in the Western world, was built in 1945 or just after the the Second World War. And therefore, if you think about what's happened since then, massive population growth, massive digitization of everything. So every time you order a pair of trainers on Amazon, you watch a new video on Netflix, whatever it might be, those are ones and zeros effectively traveling over your electricity network. yeah So networks need upgrading.
00:13:59
Speaker
We've got more weather extremes. So networks need hardening, if you will, for for that dynamic. Geopolitics, which we may come to later on, is obviously becoming more of an issue. So networks are being upgraded to provide resilience against possible cyber threats. And all of this is providing an absolutely massive tailwind of demand for a business like Qanta, even before you get onto AI. One of the other really interesting statistics they will often highlight to investors is that you think about cloud, it may be quite normal for for many businesses to have moved their workloads into the cloud, certainly say within financial services. But when you look globally, only about 30% of all workloads have been moved into the cloud.
00:14:41
Speaker
So when you're actually thinking about the criticality of different parts of the value chain, yeah pretty much everything today runs on electricity. The great the great news for a business like Quanta, just to really round out this case study before we move on to number two,
00:14:55
Speaker
is that about 80% of their revenues are occurring. In other words, they come from utilities, from government entities, and therefore that provides great line of sight, great visibility, great cash flow generation.
00:15:08
Speaker
So Qantas would be number one. And then to pivot to a totally different theme, but also um really honing in on this idea of very difficult to replicate a classic halo-like company, It's the business we invested in towards the end of last year called MDA Space. okay This one is ah less likely to be familiar to listeners. Although the company has a heritage that dates back to the very late 50s, they were involved in some of the early lunar landings. It's a company headquartered in Toronto, Canada. I was there in March.
00:15:40
Speaker
ah They were spun out of a larger business called Maxar and have existed as ah a single standalone entity only for a handful of years. Clearly, space is incredibly topical, as we know, with regard to the the pending flotation of SpaceX. yeah This business is, dare I say, benefiting from a a halo effect in that sense. But whereas SpaceX is all about physically launching satellites into space, what MDA does is they actually build the hardware and the software for those satellites. and really our contention again in some ways it comes back to this whole idea about the data deluge that data demand is growing much more quickly than networks can actually supply it or match it um space is not about tourism it's not about resource extraction certainly not yet it is all about effectively another way of transmitting and potentially longer term storing data that's why you need the satellites up there yeah
00:16:35
Speaker
The second thing, and again to link it back to geopolitics, is simply that pretty much everything that goes is sent up into space is inherently dual use. So in other words, it will have civil and commercial purposes. And space is only going to get more contested congested and competitive. And if you have a leading franchise in that area, we think this is a potential um potential durable advantage.
00:17:00
Speaker
That's great. And but the the space theme is something that we're actively looking at right now. So we will certainly take a closer look at at that. um you You put out a ah view from the top, which is you giving you know your thoughts across different asset classes.
Managing Market Risks and Diversification
00:17:16
Speaker
um I think the last one described equity markets as disconnected. um All-time highs, but at the same time, you've got credit spreads widening, yields increasing, oil at $100 a barrel.
00:17:30
Speaker
um And I think that you know we we should talk about risks. So if hyperscaler capex was to slow, or indeed the returns from it disappointed,
00:17:42
Speaker
you know How exposed ah do you think we are? And you know is there a risk effectively that that things the valuations have run a little bit ahead of themselves? It's a great question and a very pertinent question. And I suppose there are several different ways of responding responding to it. yeah I guess one what your you may effectively be trying to ask, Neil, is how much is actually priced in today, the extent to which um equity markets in general or certain stocks are priced for perfection.
00:18:11
Speaker
And I think the two things that we find really encouraging dynamics would be the following. Number one, and really in contrast, say, to the late 90s when I began my career, is that this um this recent momentum that we've seen in equities has been driven much more by earnings upgrades rather than by multiple expansions. So that, in one sense, points to its durability.
00:18:32
Speaker
The second dynamic I'd call out is that whereas, say, the the story in equity markets, if you will, for 24 and 25, and again, we may have talked about it on ah on a previous program, it's this whole idea of the the the magnificent seven, what to our mind has been encouraging is actually that the rally has broadened and that, again, speaks to its durability.
00:18:53
Speaker
the um The second crucial point I'd make, and this is something we've highlighted and due from the top and really have done for many, many years now, is really we cannot overemphasize the importance of diversification. And i guess in one sense, this would speak to having a multithematic approach. yeah you know we're We're not just invested, as the case study showed, in in in the so and solely in the AI trade. And there'll be other areas we we haven't had a chance to talk about today, like healthcare, like water, for example, that we also have thematic exposure to.
00:19:27
Speaker
More generally, if you step back, we're thinking about a broader macro view. Again, we advocate diversification within the equity market. We've made the case for some time at Heptagon for small caps, for example. They haven't perhaps participated in the rally as much as ah the mega cap companies. And from a regional perspective, we continue to see value in geographies like Japan and for the very longer term, for the longer term, a geography like India too.
00:19:54
Speaker
Okay. And perhaps one of the things that stood out for me is that that in one of your pieces, you argue that the post-World War II rules-based order is effectively order over and that fiscal dominance may now become the new normal.
00:20:10
Speaker
um
Role of Gold and Alternative Assets in Geopolitical Changes
00:20:11
Speaker
And I think that that you know your conclusion around that is that actually because of that, gold and alternative asset classes deserve space and so tying into your theme of diversification explain that to us what do what do you mean by that and what what gets you interested in gold and alternative asset classes I think the simplest way of answering that question, Neil, is that for many years there has been a prevailing mantra, if you will, within financial markets about the the merits, if you will, of a 60-40 portfolio. yeah What we mean by that is, crudely speaking, a 60% allocation to equities, is a 40% allocation to government bonds.
00:20:50
Speaker
If we think about what is arguably the new normal, the um old geopolitical order has changed. that That is pretty much accepted universally. So what are the conclusions of that? Number one, countries are spending more on defense now. Number two, and this has really been brought to life in the last few months,
00:21:09
Speaker
Countries are spending more on energy independence, building in resilience. yeah and This is something which really began during COVID. It accelerated when Russia invaded Ukraine. It's now accelerated again. But the whole reconfiguring of supply chains moving from just in time to just in case is pervasive. That's going to carry on.
00:21:30
Speaker
At the same time, you've got a dynamic where populations are getting older, which means more expenditure on health care, arguably lower tax takes as well. yeah ah The final dynamic would be that clearly there is a huge reluctance. It is a vote loser pretty much anywhere for governments to contemplate putting up taxes.
00:21:50
Speaker
The conclusion one might plausibly derive from all of this is that debt levels, government debt levels are going up. Many people are of the opinion that debt levels are unsustainable. There'll have to be a reckoning at some stage. That's less of the debate for today.
00:22:05
Speaker
But I think from an investing conclusion, what should be abundantly clear is that the period of falling and indeed negative government bond yields yeah that we saw in the 2010s, for example, that was the exception.
00:22:19
Speaker
rather than the rule. The reality is that government bond yields are are only headed higher. And therefore, the role of fixed income, government bonds in a portfolio as a diversifier, perhaps is not as compelling today as it was in the past.
00:22:35
Speaker
Yes, to jump back quickly to AI. We are bulls of AI. We do think AI will improve productivity and that could um lower some of these pressures. But this is going to take, as we highlighted, particularly given the bottlenecks, a number of years to to really play out.
00:22:51
Speaker
So really to come to the conclusion, Equities, um we think, are durable. Fixed income, we do not think is is durable. And therefore, how do you fill that gap? How do you diversify adequately? And we think asset classes such as gold, such as physical infrastructure, again, arguably the halo point, yeah um alternative asset managers, they are really well-placed to benefit. And I suppose really to to conclude in one word or one sentence, it is, as we cannot stress heavily enough, all about portfolio diversification.
00:23:26
Speaker
ah Alex, thank you so much for being on Vantage. Always a pleasure, Neil. Thank you for having me on the show.