I was fortunate enough to be invited to and attend TCI’s annual investor conference in New York two days ago. Aside from the obligatory rubbing of shoulders with other family offices, endowment funds, and asset allocators, the conference itself featured presentations from the TCI investment team and executives at their portfolio companies.
The headline for me wasn’t a stock pick, it was Chris Hohn admitting he’s “scared” about what he’s seeing in equities today. This is coming from a man who has delivered 7% net alpha over 22 years. In accordance with this, he has quietly reshaped his portfolio towards more defensive businesses featuring hard assets whilst leaning into weakness for some purported AI losers.
Two names did draw much of the room’s attention during the day:
Microsoft – which TCI has now fully exited
S&P Global – which they have added to
I have strong views on both businesses and if you haven’t read my write up on Microsoft, start here:
If you haven’t heard Chris Hohn present, his gentle monotone can even put an insomniac to sleep. However, his exceptional track record suggests it’s probably worth listening when he speaks.
Chris kicked off the event by providing an update on the portfolio and performance. Notable changes include a full exit from their long-standing position in Microsoft (read on to find out why) and an addition to the portfolio in Deutsche Borse.
Nearly half of his portfolio’s assets are concentrated in three aerospace names – Safran, GE Aerospace, and Airbus. This reflects his view that these businesses are highly protected from disruption (a common theme throughout the day) and have decades long backlogs which provides unusual earnings visibility.
He is also very underweight technology relative to the benchmark and has almost zero exposure to the semiconductor supply chain which has driven much of the recent market gains. This naturally means that the fund has underperformed by quite some margin year-to-date. However, his view is that under the paradigm of AI, previously established moats across software and professional service companies are being eroded and that innovation is now more important than ever which is making it harder to pick between winners and losers. Geopolitical uncertainty and rising competition are also keeping him largely on the sidelines with semis.
I largely echo his sentiment and there’s nothing wrong with putting things in the “too hard basket” especially when staying true to process. But I would argue there are several businesses within the software/semi complex which fit within his definition of durable compounders with pricing power that could warrant consideration – ASML being a good example.
Within the technology sphere, TCI maintains positions in Google and SAP. Whilst they didn’t really discuss SAP, they seemed quite bullish on Google and its prospects in AI. Notably, they pointed out that unlike its peers, Google has a strong presence across every layer of the AI stack and that AI was a self-reinforcing competitive advantage in its other businesses e.g., AI has made the search business even better for users and customers. TCI project Google Cloud to grow at a 45% p.a. rate to 2030 and see it as one of the big winners in AI.
The rest of the conference featured presentations from analysts discussing their thesis in businesses like Ferrovial, Vinci, Airbus as well as presentations from management at Visa, S&P Global and Aena.
There was quite a bit of discussion around businesses in what TCI labels financial markets infrastructure – Visa, S&P Global, Moody’s, Deutsche Borse. The common seam through these discussions was the standards/protocol nature of these businesses which makes them near impossible to disrupt. All the while, most of these companies seem to be trading at decades low valuations on the fear of AI disruption from the market. TCI’s conviction here was evidenced by the increased allocation of capital to these businesses which the firm hopes will generate a high-teens net IRR over the next five years.
Finally, the conference concluded with a panel of the entire investment team discussing AI and disruption. I’ll pull a few interesting snapshots from the discussion:
Rapid technological change is making competitive advantages harder to predict. This is why TCI prefers asset-heavy industries where the risk of disruption is very low. The investment team mentioned that Aena represents a “perfect Chris Hohn stock” and its one they never lose sleep over.
Previously, TCI described its investable universe comprising of 200 stocks. That may be shrinking. Chris noted there is a real scarcity value of great assets and they may choose to hold existing positions for longer. Their average holding period is 9 years.
Chris said that most companies he speaks to state they are at “peak employment”, meaning they don’t need to add headcount to grow and if anything will rationalise headcount from here on.
Higher index concentration, momentum driven investing and elevated equity valuations is creating a more cautious investing environment for TCI. Chris stated, “Investors are complacent about the risks in equities today – I am scared about what I am seeing in the market, it feels quite dangerous”.
As I mentioned, TCI fully exited its position in Microsoft on three primary concerns:
Increasing competitiveness across Office and Azure franchises.
Net reduction in knowledge workforce impacting seat growth.
Lack of confidence in their ability to innovate and stay relevant.
On competitive pressure across Office and Azure, the investment team noted that AI is augmenting workflows for businesses and see the Office franchise in particular under threat from competition with OpenAI and Anthropic. As for Azure, they noted the business is becoming less special as it becomes more of a GPU rental business – I spoke to this at length in my write-up on Microsoft.
Whilst I would agree with their point on Azure, I challenge their assertion on Office being disrupted by competitive pressure.
First, I believe Office (like TCI’s other investments) represents more of a standard. It is the agreed upon global platform for knowledge work and despite competent free products from Google, Office seats and usage continues to grow. Let’s also not forget that many enterprise software businesses over the past two decades have been built around the premise of replacing “spreadsheets” or simplifying workflows within an organisation. Despite that, Office has continued to grow at healthy levels.
Second, OpenAI and Anthropic seek to capture value within the Office ecosystem not in spite of it. They have launched plug-ins which integrate with Excel, Word, and PowerPoint and I don’t necessarily see the value or incremental ROI in reinventing the wheel. The modus operandi for the LLM companies is to increase token usage. Doing that within Microsoft’s enormous distribution network seems to be far more advantageous than convincing millions of businesses to switch off their Office licenses for a potential product suite that is at most incrementally better than what is currently on offer.
Finally, I believe TCI are undervaluing the platform nature of Office. It comprises workflow tools, communications applications, and security all at an incredibly compelling price point. For decades, enterprises have built their businesses on the back of these applications and to unwind that today will take decades still.
Yes I agree that Office growth may be pressured if there is little growth in knowledge workers. I also agree that Microsoft has missed the mark when it comes to innovation, after all it should’ve never been Claude that lives within my Excel spreadsheets. But to sell the position on the premise that somehow OpenAI and Anthropic will replace or disrupt the tools which represent the gold standard for all knowledge work seems a bit shortsighted.
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S&P Global has been a victim of the AI loser trade with many believing that its products are prone to being disrupted. TCI does not believe this to be the case and Martina Cheung, CEO of S&P Global, was also there in person to drive this point.
Much of S&P’s business represents standards or benchmarks upon which global markets operate. Take the rating agency which is critical for global debt markets or the Platt’s business which is written into to almost every physical oil contract traded. AI can help improve but not supersede these offerings.
TCI made the rather salient point that throughout human history, rarely has a standard or benchmark been disrupted. Rather they tend to become less relevant measures and in turn lose importance e.g., the Dow Jones Industrial Average index is less meaningful today than it was 50 years ago but is still widely quoted. Market standards work in reverse to most moats which erode over time – trust and liquidity reinforce the standard, and time makes it harder to replace.
Moreover, over 80% of S&P’s profits are generated from the three franchises which TCI believe face no AI disruption risk – Ratings, Indices, Platt’s. The market is therefore concerned about the Market Intelligence division, which by revenues is the largest business. However, the mental shortcut made by many investors is that CapIQ (S&P’s Bloomberg equivalent product) represents the bulk of this business and it largely feeds publicly available data to its customers.
That is a false assertion, in fact Martina Cheung noted that in an absolute worst-case scenario, 5% of S&P’s revenue is at risk from AI and the proportion of profits is even lower. CapIQ therefore is a small part of an otherwise important Market Intelligence division. The majority of revenues within the division are tied to datasets which are either proprietary, contributory, or hard to source (physical records).
Thus far, S&P has only made a small portion of its data available to the LLM companies, most of this being public data. The strategy is to use the LLMs as an additional distribution arm for its data but there is no intention of letting them train on or acquire the data. Martina also noted that there hasn’t been a single customer who has found an AI alternative for their products.
What I found most interesting is just how compelling (and undemanding) the valuation of the business is right now. At 19x forward earnings, the business is trading at not only its decade low valuation but at the largest spread to its closest competitor Moody’s. In fact, if you take the current multiple for Moody’s and apply it to S&P’s ratings business and you take the current multiple of MSCI and apply it to S&P’s index business, then you effectively receive the rest of S&P for free.
For a business that has highly favourable risk characteristics, is growing at MSD-HSD, expanding its margins and delivering over 85% of FCF back to shareholders, I agree with TCI in believing this might be a unique buying opportunity.
If there was one thread running through the day, its that TCI is buying standards and selling stories. Airports, exchanges, rating agencies are businesses exempt from running in the AI race and TCI seem to prefer getting a full eight hours of sleep each night than fret over competitive displacement of their investments. I admire the conviction to stick to process even when performance is lacking. After all, it’s easy to compromise on your principles when profits are at stake. Whether they are right or wrong, is yet to be seen. But Hohn’s portfolio is a bet that in an age of increasing uncertainty the most valuable thing a business can be is irreplaceable.