In the first part of a three-part series featuring opinions and ideas from some of the UK’s leading fund managers, we asked which stocks have surprised them the most over the course of the 2024 and why.

While it was hard to avoid the influence of AI (artificial intelligence) on portfolios, the breadth of responses was surprising and goes to show how skilled stock-pickers can turn up gems in parts of the market which are overlooked by the majority of investors.

Read on to find out more and look out for parts two and three in the New Year.

THE AI WINNERS

Given the extraordinary performance of the US market, and AI-related stocks in particular, it is only fitting that first up is Ben Rogoff, lead manager of Polar Capital Technology Trust (PCT), who describes his team as ‘AI Maximalists’.

Having fully embraced Generative AI following the launch of Chat GPT, in early 2023 the team pivoted their portfolios decisively in favour of AI and added an ‘AI lens’ to their investment process through which all themes and investments are now evaluated.

‘Even we have been surprised by the pace of hyperscale capex, AI model improvement and the rate of AI diffusion,’ says Rogoff.

‘We have also been pleasantly surprised by how quickly industry leaders such as (defence firm) Axon (AXON:NASDAQ) and (retailer) Walmart (WMT:NYSE) have been able to monetise AI-enabled products, and/or capture AI-related efficiency gains. These perceived “AI winners” have been well rewarded by investors, with many outperforming their technology peers with lower volatility.’

Paul Niven, manager of F&C Investment Trust (FCIT), singles out communication network and infrastructure provider Vertiv (VRT:NYSE) as the biggest surprise of the year for his fund.

‘Vertiv was our best-performing holding in 2023, outperforming Nvidia (NVDA:NASDAQ) and delivering a sterling denominated return of 233%, and so far in 2024 it has posted a gain of over 165%,’ says the manager.

The company provides power and cooling systems for data centres and has been a major beneficiary from rising demand for  AI projects.

ENERGISED BY ARTIFICIAL INTELLIGENCE

Cormac Weldon, head of US equities at Artemis, picks out two more stocks which have ridden the wave of AI investment, independent power producers Constellation Energy (CEG:NASDAQ) and Vistra (VST:NYSE).

The former is the largest nuclear power generator in the US, while the latter is a more diversified clean energy provider.

‘Utilities are often heavily regulated, and typically we haven’t viewed the sector positively, but the independent nature of these companies allows them to sell their electricity into the open market at market rates,’ reveals Weldon.

‘The combination of this pricing advantage and the ‘clean’, ‘always on’ nature of their power has made them desirable partners for the likes of Amazon (AMZN:NASDAQ), Meta (META:NASDAQ) and Google in meeting the power needs of their highly energy-consumptive data centres,’ adds the manager.

Nicholas Khuu, chief investment officer at J. Rothschild Capital Management Limited, which manages RIT Capital Partners (RCP), also cites utilities as a successful side play on AI and data centres.

‘In the second half of 2023 we purchased Talen Energy (TLN:NASDAQ) for a combination of factors: its electricity generation assets, which are vital to US industry, its government-underwritten downside protection, and the material upside potential from the monetisation of a datacentre co-located at its nuclear plant and the sale of conventional assets.

‘With so many moving pieces, we thought this thesis would play out over an 18 to 36-month period, but were surprised by how quickly, and how much, value was achieved for Talen’s assets within the year, as the market embraced the critical role Talen could play in the AI boom,’ observes Khuu.

SUCCESSFUL STOCKPICKING

Leaving the AI theme aside, James Cook, co-manager of JPMorgan Global Growth & Income (JGGI), flags Progressive (PGR:NYSE), a US insurance-based group as a surprise outperformer.

‘The stock contributed strongly to returns during the year after we initiated the position at a compelling valuation point. With concerns around inflation having heightened since 2022, Progressive has performed incredibly well against a backdrop of elevated interest rates.’

In the year to the end of September the stock returned almost 50% in sterling terms which meant it became more expensive in the fund’s stock selection framework so the team fully exited the position, taking profits and allocating them to more attractively valued opportunities.

Staying with the US, but eschewing AI, Fundsmith Equity (B41YBW7) chief executive and chief investment officer Terry Smith (and head of research Julian Robbins) cite Philip Morris (PM:NYSE) as their biggest positive surprise.

‘We have long believed the company was on the right track with the development of its “heat not burn” reduced-risk products and the acquisition of Swedish Match with its nicotine pouches, but we wondered whether there were enough people who weren’t forbidden from buying it by the sustainability thought police for its prospects to ever be reflected in the share price. It seems there are as the shares are up over 40% in 2024.’

The pair were also surprised by Danish drugmaker Novo Nordisk (NOVO-B:CPH), although not in a good way as the shares have only risen 7% this year against a 35% gain for Eli Lilly (LLY:NYSE), its competitor in the weight-loss market duopoly.

‘At times in 2024, Novo shares have traded on close to the average valuation of the market despite sales and profits which are expected to have doubled between 2022 and 2025,’ point out the managers.

‘The only limit on sales currently is the inability to produce Wegovy and Ozempic fast enough. The reasons for this sluggish share price performance are allegedly competition and political pressure on prices.

‘Given this is set to be a market worth hundreds of billions of dollars, it would be surprising if there were not competition, but meanwhile the current two players are likely to have the market to themselves for quite a few more years.’

ANOTHER TOBACCO STOCK SPRINGS A SURPRISE

Job Curtis, manager of City of London (CTY) investment trust, also picked a tobacco stock as his surprise winner of 2024.

‘Imperial Brands (IMB) surprised me pleasantly by performing very well, despite the UK government passing legislation to ban the sales of cigarettes to those born after 2008. Critics have often said that there are no marginal buyers of tobacco shares, but Imperial has been the marginal buyer of its own shares. The share buyback programme has been very enhancing for remaining shareholders because it has been done at a “rock bottom” valuation,’ observes Curtis.

Sticking with the UK, Stephen Anness, manager of Invesco Global Equity Income (IGET), believes the biggest surprise for the market was probably a second year of strong performance by engineering firm Rolls-Royce (RR.), which after Nvidia-beating returns in 2023 has delivered another 90%-plus gain year-to-date.

‘The trust first invested in the shares back in 2020 and it has gone through a remarkable transformation,’ says Anness.

‘We always believed in the business’s exceptional engineering pedigree, with its strong, duopolistic position in wide body engines, but it had been mismanaged for a long period of time.

‘The company went through a near-death experience after the onset of Covid, with new engine orders cancelled and existing fleets grounded, but that also presented an opportunity for accelerated transformation. New management have delivered cost savings, free cash flow continues to grow, and we have seen record new orders for engines. We believe there continues to be room for recovery in travel demand, and the company remains attractively valued versus other civil aerospace peers.’

DISCLAIMER: Ian Conway has a personal holding in Fundsmith referenced in this article.

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