U.K. Billionaire's Investment Fund Pulls the Plug on 'Magnificent Seven' Stocks Amid AI Backlash Fears

In a surprising turn of events for tech investors, Peter Hargreaves, the billionaire co-founder of Hargreaves Lansdown, is spearheading a dramatic sell-off of the so-called 'Magnificent Seven' stocks—dominant players in the tech sector that have recently been under scrutiny due to concerns over unchecked investments in artificial intelligence (AI). Hargreaves, whose fortune is estimated at £2 billion, established the Blue Whale Growth Fund in 2017 and has seen returns soar over 100% since its inception. However, growing fears of a looming stock market correction are pushing the fund to reevaluate its heavy tech stock portfolio.

Stephen Yiu, who manages the Blue Whale Growth Fund, which oversees assets worth approximately £1.3 billion, revealed to the Financial Times that the fund has aggressively reduced its exposure to major technology stocks, including Microsoft. Since the start of the year, the fund's stake in Microsoft has plummeted from 8% to a mere 2%. "Microsoft’s return on invested capital is likely to decline from here, given the significant investment made in AI infrastructure,” Yiu stated.

Interestingly, while most of the Magnificent Seven are falling out of favor, Nvidia remains a bright spot in the fund’s strategy. Yiu emphasized, "A lot of people talk about the Magnificent Seven, and we are backing Nvidia. Outside of Nvidia, we are increasingly less positive on the other six.” With rising capital demands for AI-related investments, the risks associated with these stocks are escalating.

The amount that major tech firms are pouring into AI has reached staggering heights, with Amazon, Microsoft, and Alphabet collectively investing about $133 billion in AI capabilities in just the first nine months of 2024—an increase of 57% compared to the previous year. Despite this spending frenzy, many experts point to a discrepancy between expected returns on investment and reality. The anticipated next phase of the AI revolution, which hinges on delivering concrete returns, appears to be further away than previously thought.

As these tech giants adjust their strategies, the implications for Meta, which is also heavily investing—projected to spend up to $40 billion this year, primarily on AI—are concerning. Yiu mentioned that he has not seen these monumental investments translating into sufficient profits, raising alarms amongst potential investors.

"While I’m not suggesting that six of the Magnificent Seven stocks will vanish from the market, we do believe they could become a drag on market performance," Yiu cautioned.

The Blue Whale Growth Fund—which boasts significant investments from the Hargreaves family, amounting to over £200 million—has enjoyed substantial growth since its start, increasing more than 23% in 2024 alone, on the heels of a 30% rise in the previous year. Alongside Nvidia, its key investments include TSMC, Visa, and Flutter, a sports betting company.

In a market characterized by AI frenzy, the S&P 500 has experienced an impressive 25% growth this year. However, a growing faction of investors remains wary, citing the potential that this AI bubble could burst as reality sets in and expectations start to misalign. Is this the beginning of a major pivot in the tech investment landscape? Only time will tell!