Steve Johnson: What the market is missing about the AI boom

Steve Johnson (0:00)

Every single bubble has a true and strong narrative behind it, and the stronger the narrative, the bigger the bubble. Look, it's the theme driving life too, isn't it? I think over the next 10 years, I mean, people that are at the coalface era are talking about it, destroying humanity. A not insignificant probability. If that breaks, that is the huge problem for Australian property.

Bryce Leske (0:23)

Welcome to another episode of Equity Mates, a show where we explore what's possible in the world of investing. If you've just joined us for the very first time, a massive welcome to our community. My name is Bryce.

Alec Renehan (0:33)

And I'm Wren, and today we're talking to one of the most candid fund managers out there. He recently wrote a letter to his investors telling them to expect underperformance.

Gotta respect that. Gotta respect that.

Bryce Leske (0:45)

We love transparency in the industry. We are welcoming to the studio Steve Johnson. He's the founder and CIO of Forager Funds Management. He has an Australian fund and a global fund.

We start the conversation with his letter, as you said.

Alec Renehan (1:03)

We should be clear. He didn't just say expect underperformance forever.

He was talking about it in the context of the AI trade. He said as long as the AI trade continues, his fund will underperform. We start with where he thinks the trade is out and how he's counter positioning his fund against it. But then we go beyond AI.

Bryce Leske (1:22)

Yes, we talk what's going on in the world of small caps here in Australia, where he's finding opportunity beyond the AI trade.

He brings a couple of stocks to the table as well that we go deep on. And then we get his thoughts on Australian property because back in 2017, he said he would always be a renter and that stocks will beat property.

Alec Renehan (1:40)

Nice. Love that. Well, without any further ado, let's get to our conversation with Steve Johnson.

Bryce Leske (1:48)

Well, Steve, welcome to Equity Mates.

Steve Johnson (1:50)

Thanks. Good to be here.

Bryce Leske (1:51)

In your recent CIO letter, you wrote, as long as it, being the AI trade, goes on, you should expect both funds to continue their underperformance. Now, this is an unusually candid take from a fund manager.

What was the response from investors?

Steve Johnson (2:07)

I think amongst our client base, it's a welcome message to them. Most of our clients are using index funds or have the core of their portfolio in those big large blue chip companies, and they are getting exposure to everything that's working in that space through that. And our job is to give them something different. And I think if anything, it's also just, I'd say over the past decade, we've not been as counter-cyclical as I would have liked. And part of that is making too much money in the good times. I think to actually protect yourself in the downtime, you need to be willing to lose out on some of those opportunities. And we're trying to do a much better job of that in our portfolios. And I think that's what our clients want, and it's the message that they want to hear. So it was interesting, I saw that question on the list that you put forward. I haven't actually had one client query about that as a concept. I think it's actually what they expect from us. That's our investment strategy, and it's the product that they've invested in. And they want to see more of that, not less.

Alec Renehan (3:06)

Well, we want to hold on the AI trade, and we promise we're not going to just talk about AI for 35 minutes, but it is front of mind for everyone at the moment. The theme driving markets, we're coming up almost four years since Chut GPT was first launched. What's your take on the AI trade today?

Steve Johnson (3:23)

Look, it's the theme driving life, too, isn't it? I think over the next 10 years, I mean, people that are at the call phase here are talking about it destroying humanity.

A not insignificant probability of it destroying humanity. So if that's going to happen, I want to be alive for it, and it's going to be an interesting decade ahead as all of that unfolds. And I am a big user of the product. I think this is a genuinely transformational technology. I don't know that it's that much more transformational than electricity or than sewerage works back in the early days. There's been a lot of things that have changed our life as we know it dramatically, combustion engine being another one. Maybe this one is faster, and that's been a trend with technologies that these things get quicker and quicker in terms of the impact that they have. But it is a genuinely transformational technology. We're using it in our business more and more. We're on a race really to try and keep up with what everyone else is doing to start with. But it is doing a lot of things that we used to do ourselves better than we used to do them. So I think the technology is amazing, and it's only going to get better. Every model that comes out is better than the one before it.