Five-star fund manager bets on cheap AI, beer and China plays

McLennan, who oversees around $90 billion in assets, says with high U.S. employment, it may be tough for the Fed to ease much without triggering more inflation. He also frets the market is ignoring a poor U.S. fiscal situation, with government debt rolling into higher rates.

Those concerns can be tempered with diversified and balanced investments, says McLennan, also co-portfolio manager of the five-star First Eagle Global Fund SGENX that he’s managed since 2008. Bottom-up stock pickers, they want businesses with an “incumbency advantage in industry niches that are available at the right price.”

He says their portfolio is split 50/50 between U.S. and international names, and some gold.

“Around 70 to 75% of our portfolio is in businesses that we want to own for the next decade, but we have about 15% of the portfolio in gold and gold miners as a potential hedge,” McLennan said, noting that slightly more gold exposure lately addresses U.S. fiscal worries, as it will perform well “if expectations become more modest going forward.”

As for stock picks, the manager begins with the hot artificial intelligence (AI) sector, where he sees a range of companies benefiting. Two of his biggest holdings have been Meta Platforms
META,
+1.75%
and Oracle
ORCL,
-0.78%,
where says valuations are “quite reasonable” relative to potential growth.

But he also likes companies using AI in their business processes, such as Japan’s Fanuc
6954,
-2.54%,
an industrial automation giant that has “long been invested in studying AI,” and using it for predictive maintenance of its robots.

McLennan says investors “don’t have to buy a concept stock at 40 times earnings or 50 times earnings to be a beneficiary of AI in the economy.” Fanuc trades at 28 times current earnings, versus 35 for Meta and 82 for Nvidia
NVDA,
+2.35%.

His next pick is Latin America’s leading beer maker AmBev
ABEV,
-0.37%,
which is just over half owned by Anheuser-Busch
BUD,
+0.48%,
with a growing business, no debt, net cash and a 6% dividend yield. It’s just one of many staples with “century-long brands that trade at a discount to the market,” he says.

“And so if you’re willing to buy something that’s seen as a little more stodgy in this environment, then I think something like an AmBev, because of its emerging market taint…is reasonably valued,” he says.

McLennan also invests in China’s unloved market via Dutch-listed holding company Prosus
PRX,
-0.91%
that owns a 27% stake in Tencent
700,
-2.91%,
a leading online Chinese business with top gaming, social-media platforms and ad platforms.

Tencent trades at less than ten times earnings before interest taxes depreciation and amortization, with a strong balance sheet and is buying back stock, he notes. Prosus trades at a discount to the value of its Tencent Holdings and has another 25% chunk in leading online businesses in Eastern Europe, Brazil and India.

He lastly flags Exxon Mobil
XOM,
+0.13%,
“an essential infrastructure company” that they’ve owned a few years, as an investment for long-term investors looking to diversify.

Exxon holds some of the “greatest energy basins in the world that have the longest duration and are the most cost-effective,” while its upstream business is oil and natural gas, which has a far lower hydrocarbon intensity,” he says.

And the above companies can ride out tougher environments, says McLennan. “I think if you own good businesses that sell relevant products at rational prices, it’s a good place to be long term,” he says.

The markets

Stock futures
ES00,
-0.14%

YM00,
-0.18%

NQ00,
-0.05%
are languishing and bond yields
BX:TMUBMUSD10Y

BX:TMUBMUSD02Y
dipped with a two-day Fed meeting set to get under way. Gold
GC00,
+0.35%
is higher at $2,034.20/oz. The Hang Seng
HK:HSI
dropped 2.3%.

The buzz

UPS
UPS,
-0.80%
is sinking on a revenue fall and downbeat outlook. After hours, Alphabet
GOOGL,
+0.87%
(preview), Microsoft
MSFT,
+1.43%
(preview) and AMD
AMD,
+0.33%
(preview), alongside Starbucks
SBUX,
+1.08%
and Electronics Arts
EA,
-0.60%
will all report.

Berkshire Hathaway-held BYD
002594,
-3.63%
earnings guidance disappointed and the Tesla
TSLA,
+4.19%
rival’s shares fell 4%.

The S&P Case-Shiller home price index is due at 9 a.m., followed by job openings and consumer confidence at 10 a.m. Data showed Europe’s economic stagnation continued.

Elon Musk says his neurotechnology company Neuralink carried out its first brain implant in a human patient, and early results were “promising.”

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