Liontrust's Innovation Fund team has made a bold prediction that contradicts the common belief about leading tech stocks, stating that Microsoft, one of the globe's most valuable companies, may not be a long-term victor, according to a º£½ÇÊÓƵ fund manager.
Storm Uru and Clare Pleydell-Bouverie, co-managers of Liontrust's Innovation Fund, informed City AM that they no longer possess any of the tech behemoth's shares in the fund's portfolio – a daring move at a time when the software titan is a dominant force in benchmarks and investor portfolios alike, as reported by .
"We sold out of Microsoft after six years" Pleydell-Bouverie declared. "We don't think the Windows operating system is necessarily in this age of what we call software 2.0 – built on accelerated compute infrastructure."
The firm is currently underweight, five of the seven so-called magnificent seven mega-cap tech names. Uru and Pleydell-Bouverie contended that this decision is driven by a fundamental rethink of who will lead in the AI age.
"The winners over the next decade will be different from the last decade," Uru stated.
AI could harm Microsoft
According to Liontrust, Microsoft – and legacy tech more broadly – is being squeezed by a faster innovation cycle and fresh new AI-native competitors.
The fund's managers point to a "collapse" in product development timelines driven by advances in chip architecture and software automation.
"When you have a doubling of the rate of innovation from the linchpin of the ecosystem, that means everyone around you had to respond or be left behind," Pleydell-Bouverie told City AM. "We're already starting to see that – look at Intel."
Despite this, Microsoft's AI initiatives, including its Copilot and Azure expansion, have impressed analysts and investors.
Analysts at TD Cowen and eToro highlighted the importance of keeping an eye on CapEx trends, AI monetisation, and Azure's ongoing growth momentum.
"Although the spending is high, it's what's needed to stay ahead," stated Etoro analyst Josh Gilbert.
"Microsoft's ability to generate high returns on capital and sustained revenue growth should help ease concerns."
However, this wasn't enough to persuade the asset management firm.
"I don't know if you've tried Copilot," added Pleydell-Bouverie, "it's a pretty clunky experience."
Re-evaluating the AI advantage
While Microsoft holds a significant stake in OpenAI, Liontrust has questioned whether that's sufficient to maintain dominance.
"They've been over-earning," says Uru. "It's not just about having the data – it's about having real-time data. That's why we're excited about companies like Spotify, Netflix, and even satellite firms like Planet Labs."
Pleydell-Bouverie added: "Enterprise software companies like Microsoft and Salesforce don't actually own much of the data they claim to. Their moats are eroding, and they'll have to recalibrate their pricing models."
However, Liontrust's stance comes with its own set of risks. As one of the largest components of global equity benchmarks, not holding Microsoft could potentially hinder short-term performance.
Moreover, the tech giant has just reported another quarter of earnings that exceeded expectations, driven by the rapid growth of its cloud and artificial intelligence (AI) businesses.
The company's revenue for the quarter ending in March reached $70.1bn (£52.5bn), a 13% increase year-on-year, while net income rose 18% to $25.8bn, surpassing analyst forecasts.
Despite this, the team remains resolute, seemingly unconcerned about the benchmark. "Only 10 per cent of global equity funds have beaten the benchmark recently," Uru explained, highlighting that one cannot generate differentiated returns by owning the same stocks as everyone else.
