The Friction Test: What the market gets wrong about AI disruption

It has been a difficult period for the strategy. At the time of writing, a number of our holdings are being challenged by an increasingly narrow view of where durable value creation will sit in an artificial intelligence (AI)-driven world.

On one side sit the obvious beneficiaries of the current AI build-out – semiconductors, memory companies, selected hard assets tied to data-centre investment, parts of defence and other businesses linked to physical capacity.

On the other side sit the digital and capital-light companies we tend to prefer, many of which have been treated as though disruption is not only coming, it is likely to impair their long-term economics in a meaningful way. In most of these businesses, underlying earnings have continued to grow, buybacks have generally increased, and competitive positions appear intact – in some cases, stronger. Yet share prices have de-rated materially.

In our view, part of the problem is that investors are applying a broad “AI discount” to businesses that may look similar at a distance, but whose economics, competitive positions and exposure to disruption differ markedly. We continue to see this as an area where a long-term investor can add value: not by denying the importance of AI, but by distinguishing between businesses where AI may genuinely alter long-term industry structure and cash-flow durability, and those where we believe the effect is being extrapolated too broadly.