LTGG Reflections: Politics and portfolios

…We would have been passionate about keeping out of the European single market, passionate about joining it, and passionate about leaving it. We would have been fervent advocates of nationalising industries, denationalising them, and renationalising them. Turning to the US, where there have been five administrations since LTGG’s inception in 2004, we would have been utterly convinced of the rightness of the country joining the 2015 Paris Agreement, and of leaving it, and of joining it again, and of leaving it again. We would have excitedly invested in Chinese companies, then divested, then reinvested and then divested again…¹

Above all, we would have been entirely distracted from the forces that have predominantly driven returns for our clients over the long term – i.e. bottom-up fundamentals. This is why our LTGG investment philosophy remains the same today as it did when it was introduced in early 2004.

If not politics and headlines, what then is on our minds? Well, here are three examples based on live conversations around our desk at the time of writing.

Beyond headlines: three case studies in solar, EVs and AI

Firstly, rooftop solar installations presently account for only about 5 per cent of all small-scale residential and commercial properties in the US (versus around 30 per cent in Australia). Yet that represents a tenfold increase in the US over the decade to 2022 (a decade which by the way included both Democratic and Republican administrations). And meanwhile, Texas has overtaken California as the US state with the most utility-scale solar generation capacity. Rooftop solar installers are one of the fastest growing jobs in the US. Looking to the decades ahead, solar is on a pathway to become an increasingly important part of US energy security.

These are the sorts of structural shifts we keep in mind when analysing LTGG’s holding in Enphase Energy, the provider of solar energy solutions for small-scale residential and commercial properties.

Meanwhile, the market has been punishing renewable energy stocks (Enphase included) amid the likelihood of changes to subsidies and tax benefits under the new US administration. Our view is that Enphase is relatively immune to such changes and they may even bolster its competitiveness (it has greater financial resilience to weather such policies compared to its leading competitor, SolarEdge).

The bigger issue central to our thesis is Enphase’s ability to spearhead long-term growth in solar penetration driven by higher electrical demand from homes and businesses, rising utility costs, and worsening grid reliability, both in the US and internationally. We embraced the short-term share price volatility by making a small addition to the holding in late 2024.

Secondly, in late 2023 the first headlines emerged referring to a slowdown in demand for electric vehicles, sending a crackle through stock markets. However, growth in global EV sales (including plug-in hybrids) was 25 per cent in 2024 – not as rapacious as prior years, but hardly a damp squib either. Interestingly, the US, Canada and Europe delivered only single-digit growth rates, which may go some way to explaining the negative headlines from traditional financial centres.

In China, however, sales grew by 40 per cent, while the rest of the World grew by 27 per cent. The fact that the batteries within these EVs still constitute the single most expensive part of an EV has been an important part of our upside case for CATL, the Chinese battery maker which commands over a third of the global battery market.

The question on our minds however is the extent to which software may become the more valuable component of EVs over the coming decade. The cost of battery production has fallen 10-fold over the past 15 years. Meanwhile, software is becoming increasingly important and sophisticated, not only to optimise battery management within vehicles, but also for advanced driver assistance systems and progress in autonomous driving. This led us to make an initial investment in Chinese market leader Horizon Robotics in late 2024.

Thirdly, we’re questioning where value is likely to accrue over the next decade in terms of artificial intelligence. Gains in computing power over the past several decades in line with Moore’s Law have been driven largely via shrinkage, such that now hundreds of billions of transistors can fit onto one chip. The single most important company enabling this phenomenon over the past couple of decades has been ASML, the maker of lithography machines. However, it is becoming increasingly clear that advanced architectures and manufacturing processes also play a valuable role in unlocking greater efficiencies, leading us to examine other players in the semiconductor value chain.

Similarly, there is read-across here to NVIDIA, where we remain enthused by its outlier upside potential but where we made a reduction to its position in the portfolio in late 2024 given that AI scaling laws appear to be slowing in training (where NVIDIA dominates) and shifting to inference (where its edge may be less robust).

Meanwhile, and as recently demonstrated by Chinese upstart DeepSeek, software and algorithmic improvements can massively boost computational performance. Despite geopolitical tensions and US trade restrictions on semiconductor exports to China (or because of them?), DeepSeek’s latest model appears to be just as effective and yet several times more efficient than other (Western) leading edge models. We intend to meet with various AI companies during a forthcoming visit to China this summer.

Commitment to long-term value

The three cases above exemplify our focus on company fundamentals and long-term shifts. However, for the avoidance of any doubt, we do not blind ourselves to politics and the swings and roundabouts of policymaking. There are instances throughout the history of the LTGG strategy where politics have overwhelmed our investment theses for companies, regardless of their attractive fundamentals and/or the compelling structural transformations they are pioneering. Historic examples include the likes of Petrobras and TAL Education, both sold from the portfolio in 2011 and 2021 respectively following political interventions in Brazil and China. But our investing experience tells us that these are the exceptions.

Political and regulatory considerations are embedded into our bottom-up analysis for every holding insofar as we determine they may materially impact our long-term thesis. In most cases, politics and their implications for LTGG portfolio holdings are overestimated by the market. In contrast, the impacts of company fundamentals and deep structural changes are typically underestimated. Therein lies our opportunity.

1For fans of the ‘Yes, Minister’ television series in the 1980s, we hope you enjoy echoes here of one of Sir Humphrey’s memorable soliloquies.

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