After a brief pause, equity investors returned to the well of AI in the second quarter. For the better part of three years now, market returns have been driven by AI hyperscalers and the companies supporting the infrastructure build-out, from chips to connectivity to networking equipment to data center construction to specialty materials.

The Riverbridge portfolios have not fully participated in this proverbial gold rush. Though we have owned shares in Nvidia and the hyperscalers (Microsoft, Amazon, and Alphabet) since long before the emergence of generative AI, we do so at lower weights than our primary benchmark, and our investment thesis for all four companies goes well beyond their positions as the scale players in high performance compute. Meanwhile, in the smaller cap portions of the equity market, the AI winners have been concentrated in capital intensive end markets such as technology hardware and construction and engineering, where we do not tend to find our investment criteria.

These dynamics have resulted in a period of challenging relative performance for the Riverbridge strategies, though not an unprecedented one. In the late ‘90s dotcom era, investors similarly flocked to the visible, here-and-now demand for the companies building the infrastructure for the internet. In that era, like today, we did not chase the short-term momentum in those business models. In that era, like today, it was not because we did not believe in the promise of the emerging technology–quite the opposite. It was because we believed that more enduring value would be created by companies building on top of the new capabilities, rather than those laying the groundwork. This ultimately proved true, and we anticipate the same trajectory for generative AI.

For examples of value creation built on the internet, one need not look past the largest companies on the planet. Amazon and Google (now Alphabet) were founded to offer customers new ways of shopping and obtaining information that were enabled by broadband. Microsoft’s transition to subscription software and becoming the largest provider of cloud computing was likewise possible only because of global, high-speed connectivity. And it’s safe to say the most transformational consumer product of the 21st century, the iPhone, would have been far less relevant.

Perhaps more importantly, we also observe that transformational technologies ultimately permeate every part of the economy. Though they may be forgotten for a period, we believe the businesses best positioned to create enduring value through AI advancements are those with strategic customer relationships, recognized domain expertise, and the financial flexibility to make forward-looking investments in emerging opportunities.

We seek to populate the Riverbridge strategies with such companies across a variety of end markets. As we move into the deployment phase of AI, we expect our portfolio companies to be key partners in delivering AI’s value to their customers.