Why 2024 will be a 'show me' year Alphinity Investment Management March 2024 2023 global equity returns were dominated by an alphabet soup of megatrends. From (Chat)GPT shining the spotlight on the lifechanging potential of Generative Artificial Intelligence (GEN AI), to a broader adoption of Glucagon-Like Peptide -1 (GLP-1) diabetes drugs for weight loss and other obesity-related diseases.  These megatrends resulted in extraordinary share price movements across multiple sectors as investors crowded into the themes and quickly decided who the winners and losers may be. As we head into the third month of 2024, we continue to see these megatrends dominate equity market returns. In contrast to 2023, there is a clear bifurcation between megatrend beneficiaries that can deliver revenue and earnings growth and those that can't.  This is not only evident within the Magnificent 7 ("Mag 7"), but also across other so-called GEN AI and GLP-1 winners and losers. Alphinity continues to have selective exposure across both megatrends.  Within GEN AI, we have exposure to early AI winners, such as Nvidia and Microsoft. In addition, we continue to invest in opportunities across the broader AI ecosystem.  SK Hynix, ASML, Cadence and Accenture are examples of technology enablers and facilitators where AI is augmenting company performance. Importantly, we continue to look further afield across sectors to companies not only enabling AI but those that will also reap its benefits. We also have a nuanced exposure to the GLP-1 megatrend where the initial market clamour to define "winners" and "losers" delivered some interesting opportunities. While market leader and key GLP-1 winner, Novo Nordisk, has seen strong share price gains, assisted robotic surgery company Intuitive Surgical was initially dropped into the loser bucket on account of minor exposure to gastric banding. The market has since recalibrated ISRG expectations, and the shares have more than recovered the initial knee jerk reaction. A further broadening out of these megatrends should continue to create exciting new "show me" opportunities in 2024 and beyond. GEN AI - Show me the earnings GEN AI truly entered our lives in 2023.  OpenAI's humanlike generative AI Chatbot, ChatGPT kicked off a wave of excitement across consumers and companies.  What ensued was a whirlwind of AI investments and developments across multiple industries as companies explored different ways of delivering AI building blocks or integrating these technologies into their businesses. During 2023, many companies in the AI ecosystem got swept up in the euphoria.  From the enablers and infrastructure providers on the front end (such as semiconductor makers and data centres) to those that design software and provide related services (including end-user applications and cloud computing), amongst others.  None more so than the Mag 7. While 2023 saw the rising AI tide lift most Mag 7 boats, year-to-date there has been a large divergence in performance amongst the group, defined by those that can deliver earnings growth to justify high multiples and those who can't.  AI posterchild, Nvidia, has added another c60% YTD, to be up more than 440% since the start of 2023.  Importantly, during this time the Nvidia forward PE multiple has come down, from 44x to 32x. The stock has got cheaper as earnings have outstripped the remarkable share price growth. Other major enablers such as Amazon and Microsoft have continued to rally supported by strong results from increased AI demand also. Meanwhile Tesla and Apple have been dethroned by GLP-1 winner Eli Lilly and AI winner ASML, who now occupy their top 7 spots in YTD contributors.  Both Tesla and Apple are facing a range of challenges, but also recently disappointed investors with the lack of progress with their AI related plans. Bifurcation within the Mag 7 driven by strong earnings power or the lack thereof:  Nvidia derated despite 441% return over the 14 months Source:  Bloomberg, 29 February 2024 While industry data suggest a rapid adoption of AI across industries, the enablers continue to lead the charge year-to-date.  Recent 4Q23 result releases and capex intentions underscore the longevity of investment intentions across enablers and adopters.  AI mentions were at all-time highs as AI diffusion becomes more commonplace and remains a top CIO priority. While AI is emerging as one of the largest innovation cycles in decades, we are only in the early innings of its diffusion.  It will take time for AI to impact revenues and margins more meaningfully and more broadly. Microsoft company quote 4Q23 results:  "We are also the leader in low-code/no-code development, helping everyone create apps, automate workflows, analyze data and now build custom copilots. More than 230,000 organizations have already used AI capabilities in Power Platform, up over 80% quarter over quarter." Conclusion In times when the stock market is infused with captivating megatrends, such as GEN AI and GLP-1, there is a tendency for investor expectations to overshoot. Resulting in share prices of perceived beneficiaries running on speculation and the fear-of-missing-out rather than fundamentals.  The intense market concentration and diverging price movements of the last 14 months is a good case in point. Looking ahead, we expect to see a continuous evolvement and adoption of both GEN AI and GLP-1.  Assessing long term winners and losers along the way will be crucial and fluid.  At Alphinity, we will continue to deploy our agile, tested investment process to find "show me" megatrend earnings leaders in 2024 and beyond.

Funds operated by this manager: Alphinity Australian Share Fund, Alphinity Concentrated Australian Share Fund, Alphinity Global Equity Fund, Alphinity Sustainable Share Fund Disclaimer The information on this website is general in nature and does not take into account your personal circumstances, financial needs or objectives. Before acting on any information, you should consider the appropriateness of it and the relevant product having regard to your objectives, financial situation and needs. In particular, you should seek independent financial advice and read the relevant Product Disclosure Statement or other offer document and the relevant Target Market Determination (available on the Apply Now page on this website) before making a decision whether to buy or hold a financial product.

Ferrari: The case for RACE (RACE IM) Alphinity Investment Management September 2023 Ferrari is one of the world's most iconic brands. It's also an amazing stock. Ferrari was founded in Italy in the 1940s and was spun off from Stellantis in 2016 under the ticker RACE IM. The IPO price was EUR43 and Ferrari is currently trading at ~EUR300 for a 600% return since listing. The analysis below outlines the Case for RACE and highlights 4 main reasons to why we love the stock. RACE Stock Price Since Listing in 2016 Reason #1: High margin, high return, high growth business Ferrari has achieved the holy trinity of high returns, high growth and a reasonable valuation. RACE boasts gross margins of ~50%, net margins of over 20% and an ROE of approximately 40%. This margin and non-cyclical earnings profile is why Ferrari is typically considered a luxury stock like Hermes, rather than an auto stock like GM, Ford or even Mercedes. Point #2: A+ industry structure leads to earnings visibility and upgrades When I was a student at Harvard Business School I did many case studies applying the Porter's 5 Forces Framework. The 5 Forces is an analytical tool developed by Michael Porter in the late 1970s to analyse industry structure and competitive environments. From this perspective, Ferrari is literally the textbook case of an A+ company. They are a heritage brand with incredibly high barriers to entry, they have few competitors, few substitutes, price insensitive customers with very little bargaining power, and a supply chain that is localised and very difficult to replicate. The net result is that Ferrari has an immense level of control over its own earnings and strong earnings visibility. Management upgraded its FY23 revenue guidance, adjusted EBIT margin guidance as well as adjusted EPS and FCF estimates at the last result. More importantly, this upgrade cycle is a consistent pattern shown by RACE management since listing. Reason #3: Impressive Brand Recognition and Unique Positioning Among Auto Peers Ferrari is repeatedly recognised as one of the world's leading brands and they are confident in what their brand stands for and who their target customer is. Most auto meetings these days are focused on the transition to EVs and the rise of autonomous driving (AD). While these are important strategic directions for the auto sector as a whole, it often feels like the companies are in a RACE (no pun intended) to out electrify and out tech each other. Ferrari is refreshingly contrarian on both these fronts. Ferrari management has made a strong commitment NOT to get into autonomous driving (AD). The whole point of buying a Ferrari is to drive it yourself! While Ferrari is a leader in hybrids with approximately 45% of deliveries already in the hybrid space, it's first fully electric car will not be presented until 2025 with the first deliveries the following year. They do not expect pure EVs to be more than 5% of total shipments by 2026.  Part of this is strategic positioning that one of the great joys (so I am told) of owning a Ferrari is the vrooooom, sound it makes when you start the ICE engine. EVs don't vroom so Ferrari plans to continue to develop ICE engines into the 2030s. Reason #4: Technological leader Technological leadership comes in part from the company's F1 racing pedigree. Scuderia Ferrari has been racing in the Formula 1 World Championship since the series was launched in 1950. RACE transfers technologies initially developed for racing to its road cars, which reinforces the brand identity and the scarcity value of the vehicles. Examples include steering wheel paddles for gear shifting, the use and development of composite materials, which make cars lighter and faster, and technology related to hybrid propulsion. RACE road cars have also benefited from the know-how acquired in the wind tunnel by racing car development teams, enjoying greater stability as they reach high speeds. Investment Risks Of course, no stock is without risks. For Ferrari, the main risks are that it is a single brand, single product company and therefore lack the diversification of a luxury stock like LVMH or a more diversified auto company like Mercedes or Tesla. From a governance perspective, this is still to some extent a family endeavour with the Agnelli family de facto controlling approximately 51% of the voting rights of the company. Finally, Euronext Milan is not the most liquid market so the Average Daily Traded Value (ADTV) of Ferrari as a EUR50 billion market cap company, is less than it would be if it was traded in the US or France. Conclusion The case for RACE is clear. Ferrari is a high margin, high return, high growth company operating in a competitive environment with high barriers to entry, few competitors, leading technology and loyal customers. What's not to like about Ferrari?

Funds operated by this manager: Alphinity Australian Share Fund, Alphinity Concentrated Australian Share Fund, Alphinity Global Equity Fund, Alphinity Sustainable Share Fund Disclaimer The information on this website is general in nature and does not take into account your personal circumstances, financial needs or objectives. Before acting on any information, you should consider the appropriateness of it and the relevant product having regard to your objectives, financial situation and needs. In particular, you should seek independent financial advice and read the relevant Product Disclosure Statement or other offer document and the relevant Target Market Determination (available on the Apply Now page on this website) before making a decision whether to buy or hold a financial product.

Sorting bubbles from justified inflations! Alphinity Investment Management August 2023 Since Chat GPT3 crashed onto the scene at the end of 2022, the world has been swept up in (generative) Artificial Intelligence (AI) euphoria.  AI related stocks have all rallied, companies have expanded their capital plans and gone to great lengths to explain how and why they use AI, and analysts have sharpened their bull case scenarios for future growth opportunities. We've seen similar transformative technology breakthrough exuberance rise and fall in the past, such as Web 3, the metaverse and crypto architecture last year.  Is AI just another tech bubble about to implode? Or something much more substantive? The answer is yes to both. In this note, we expand on why we remain excited about the use cases and subsequent earnings potential that can be built off the back of AI in the future and why we believe this technology shift, and the value that it can create, is real.  Investors however need to be very selective as the monetisation potential of AI will flow through different elements of the chain at various levels an at different times. Two clear early winners in our view are Microsoft and Nvidia. The AI induced rally The release of Chat GPT did bring the technology sector heavily back into focus in the first half of the year with the Mega (or profitable) Tech index rallying 64% to the end of July. But this reborn tech euphoria also dragged the Unprofitable Tech stocks 37% higher, to outperform the broader US market by more than 40% and 15% respectively. AI enthused rally has boosted profitable and unprofitable tech stocks YTD   There is undoubtedly an element of AI froth that has come into the technology sector, as some companies have seen AI potential wash into their share prices before a clear articulation of how the earnings that will back these valuations will emerge. And we have seen the downside of this where companies such as Data Dog and Palantir have had solid falls after earnings disappointments, while some of the air has also come out of other companies such as MongoDB, Snowflake and Salesforce. We expect the market to become more discerning in terms of wanting to see a clearer monetisation path to determine who the key winners will be as opposed to the broad lifting of almost all boats even tangentially brushing up against the AI theme that we have seen so far this year. Use cases of generative AI In terms of winners in the AI space, it is all about a clear identification of use cases. AI is not a new theme. The difference now is generative AI developments expand these technological capabilities and put them within the reach of hundreds of millions of new users each month.  The IDC estimates the global AI market will see 19% compound annual growth between now and 2026 to reach US$900bn while Goldman Sachs predicts generative AI alone could drive 7% or an almost $7trn increase in annual global GDP growth over the coming decade. There are various elements of the tech ecosystem where value will emerge to varying degrees. At the front end you have the key enablers such as semiconductor designers like Nvidia that will benefit along with foundry businesses like TSMC and Samsung and the semiconductor equipment players such as ASML, Applied Materials and Lam Research who supply them. Then you shift towards the infrastructure names such as networks businesses like Arista, and the cloud players that span Microsofts Azure, Amazons AWS and Googles GCP. But the really exciting opportunities should emerge beyond the initial enablers and infrastructure players and be in those businesses that can create applications based on AI. Established businesses such as ServiceNow, Workday and Salesforce are working to embed AI within their current offering, but the real opportunity is likely to be in the emergence of a business that applies AI to a deep revenue pool and owns that vertical. Whether that be in healthcare, finance or customer service, there is potential for an AI leader to emerge that could be the next big tech name in 5yrs. AI offers a plethora of investment opportunities, but not all created equal Source:  Alphinity, 31 July 2023 Two clear early winners currently - Microsoft & Nvidia Investing in AI is like investing in any other idea for Alphinity; find the investment ideas that are showing earnings leadership, come wrapped in a quality business, and are bound by a reasonable valuation. In AI it comes down to identifying a tangible use case and the monetisation potential that flows off the back of this to driving earnings outperformance, exceptional returns and valuation upside. Microsoft and Nvidia are two clear early winners in AI that display these characteristics. Microsoft (MSFT) - Well positioned for broad secular trends in technology and a leader in AI Microsoft has multiple legs of opportunity flowing from AI. At the front end, it has announced pricing for its AI infused M365 co-pilot product at $30per user per month. Applying this pricing to Microsoft's 250m commercial users of it's higher value products, we estimate Co-pilot can drive an extra $27bn in revenue, or 13%, over a 3-5yr period, assuming a conservative 30% penetration rate. There is also the uplift in consumption that will run through Microsofts cloud business Azure, a potentially simpler Ai product for the extra 200m commercial users on simple product sets, plus incremental gains from any shift in search traffic from Google to Bing. Wrap this together and while the Microsoft share price has risen in 1H23, investors are currently paying 30x Price to Earnings for a business that can grow mid-teens over the next 3 with multiple growth drivers. MSFT offers tangible AI monetisation Source:  Alphinity, Bloomberg, 31 July 2023 Nvidia (NVDA) - Global leader in Graphics Processing Units with generative AI a gamechanger Nvidia is the other key initial beneficiary from AI, with their most recent result generating an almost unprecedented upgrade in earnings expectations for a business of its scale. Generative Ai is all about GPU's given their ability to run calculations and simulations in parallel; the key tasks for AI. And Nvidia sits front and centre as the leader in terms of GPU performance coupled with a powerful software capability making their GPU's flexible and programmable. The key to the Nvidia investment case is ensuring that the current demand is not just a flash in the pan. To our mind, there is sustainability to this demand given that generative AI has triggered a shift in data centre infrastructure from CPU's towards GPU's. With around $1tr of datacentre infrastructure installed, and this infrastructure turning over around every 4 years, this provides rich structural tailwinds that should drive Nvidia earnings for years to come. On our estimates, NVDA should generate around $30bn in datacentre revenue this year (2/3rds of total revenue). If we push the shift from CPU to GPU through our discounted cashflow model, we estimate that datacentre revenues can increase to $80bn CY27. Investors are paying c40x FY24 Price/Earnings, with what looks like growth to come for the years ahead. Revenue & margin uplifts driving unprecedented EPS upgrades over next two years Source:  Alphinity, Bloomberg, 31 July 2023 In summary, AI is an exciting investment opportunity, with many growth tangents still to be discovered.  But like any investment, investors need to be able to have a line of sight to the earnings potential and be disciplined in terms of what they pay for these companies to ensure that they are not riding a bubble that may eventually pop. Authors: Elfreda Jonker, Client Portfolio Manager & Investment Specialist and Trent Masters, Global Portfolio Manager

Funds operated by this manager: Alphinity Australian Share Fund, Alphinity Concentrated Australian Share Fund, Alphinity Global Equity Fund, Alphinity Sustainable Share Fund Disclaimer The information on this website is general in nature and does not take into account your personal circumstances, financial needs or objectives. Before acting on any information, you should consider the appropriateness of it and the relevant product having regard to your objectives, financial situation and needs. In particular, you should seek independent financial advice and read the relevant Product Disclosure Statement or other offer document and the relevant Target Market Determination (available on the Apply Now page on this website) before making a decision whether to buy or hold a financial product.