Gold-Rated STS Global Income & Growth Trust Shuns AI Rally for Value Plays

The Gold-rated STS Global Income & Growth Trust is intentionally distancing itself from the artificial intelligence boom, leading to a significant performance gap compared to its peers. This strategic avoidance of the AI-driven market rally has left the trust trailing its Morningstar category index by 30 percentage points as of the end of July.

To fund a pivot toward undervalued, dividend-paying assets, the trust recently added positions in Novo Nordisk, LVMH, and Vinci. These acquisitions were partly financed by selling existing holdings in Nestlé and McDonald's. Despite the recent underperformance, the trust traded at a discount to its net asset value (NAV) of approximately 2% at the end of July. The impact of this contrarian stance is evident in the rankings; the trust currently sits in the bottom 10% of its category across one-, three-, and five-year time frames.

The Value Mandate

Managed by James Harries and Tomasz Boniek, the trust maintains a concentrated portfolio of 30 to 50 companies. The strategy prioritizes firms with durable competitive advantages and strong cash generation, resulting in an intentional underweight position in technology, energy, and mining. While much of the global market has been swept up in the infrastructure buildout for AI, STS has remained disciplined in its focus on traditional income and growth metrics.

The Risk of the AI Boom

This divergence highlights a growing tension between the 'AI trade' and traditional value investing. Co-manager James Harries acknowledges that while AI is a transformative technology, he believes the current scale of capital expenditure is excessive. Harries warns that risk management is being ignored in the current climate, noting that "one thing that happens in great booms is that everyone forgets about risk management."

Harries further suggests that the speed of current investment is a red flag for long-term returns. "History would suggest that when you allocate money that quickly, it gets allocated quite poorly," he stated. By comparing the current AI trajectory to the airline industry—which he views as essential but plagued by high capital intensity and low margins—Harries implies that AI valuations may face a correction if revenues fail to justify the massive spending.

Outlook for the Trust

Investors are now watching whether the trust's shift toward luxury and healthcare giants like LVMH and Novo Nordisk can offset the gains missed in the tech sector. The primary question remains whether the broader market will eventually align with Harries' cautious view on AI expenditure or if the trust's commitment to value will continue to result in category underperformance.