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In the last week, Microsoft has joined Apple as the only US companies to reach a $US3 trillion market valuation.

Just seven tech stocks – Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla – make up almost 30 percent of the S&P500.

So can they keep growing? Catriona Burns, Lead Portfolio Manager for WAM Global, talks to Sean Aylmer about what it mean for investors when so few companies make up such a large portion of the market.

This is general information only. You should seek professional advice before making investment decisions.

Find out more: https://fearandgreed.com.au

See omnystudio.com/listener for privacy information.

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Sean Aman: Welcome to the Fear and Greed Business Interview. I’m Sean

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Sean Aman: Aylmer. In the last week, Microsoft has become the second

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Sean Aman: US company to hit the $ 3 trillion market valuation. Apple

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Sean Aman: reached that milestone mid last year. The size of these

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Sean Aman: companies is staggering. Individually, they’re worth more than the total

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Sean Aman: value of every company on the ASX combined, but it

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Sean Aman: also raises a lot of questions for investors, including what

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Sean Aman: happens when the seven tech stocks, Apple, Microsoft Alphabet, Amazon,

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Sean Aman: Nvidia, Meta and Tesla, make up about 28% of the S&P

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Sean Aman: 500.
Remember, this is general information only and you should

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Sean Aman: always seek professional advice before making investment decisions. In the

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Sean Aman: past, we’ve had some terrific insights into Wall Street from

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Sean Aman: Catriona Burns, part of the team at Wilson Asset Management.

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Sean Aman: Catriona is the Lead Portfolio Manager for WAM Global, and

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Sean Aman: joins me again from New York. Catriona, welcome back to

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Sean Aman: Fear and Greed.

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Catriona Burns: Thanks so much for having me.

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Sean Aman: So let’s get some context first, just how fast have

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Sean Aman: these tech stocks grown over the past year or so,

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Sean Aman: the big seven?

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Catriona Burns: The Mag Seven are up over 100% relative to MSCI World, which is

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Catriona Burns: up about 23%, and the S&P 500, which is up

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Catriona Burns: about 26%.

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Sean Aman: Okay. Why?

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Catriona Burns: Within the Mag Seven, it’s quite an interesting collection of

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Catriona Burns: businesses that have quite a few differences between them, but

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Catriona Burns: I’d say one of the large factors is that as

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Catriona Burns: we’ve gone into the backend of last year, we’ve had

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Catriona Burns: interest rate expectations for what the Fed would do come

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Catriona Burns: down, which has seen equity markets rocket, and this collection

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Catriona Burns: of businesses does have very strong earnings growth. So one,

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Catriona Burns: it’s expectations coming down. Two, it’s the earnings growth relative

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Catriona Burns: to the market for this group of stocks is very

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Catriona Burns: strong. And then thirdly, there’s been all the buzz around

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Catriona Burns: AI.
So a few within the group are very much

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Catriona Burns: related to artificial intelligence. And so say Nvidia, for example,

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Catriona Burns: in particular, is the one that’s rocketed the most, up

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Catriona Burns: over 300%. And it’s specifically related to CPU chips related

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Catriona Burns: to artificial intelligence.

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Sean Aman: Okay, so Nvidia, it’s about the chips. I think Microsoft

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Sean Aman: has also done pretty well out of AI. And am

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Sean Aman: I right in saying, I’m going to say Google’s the

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Sean Aman: other one, I think?

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Catriona Burns: Yep, absolutely.

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Sean Aman: That’s not about chips, is it? That’s about… Well, I

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Sean Aman: suppose Microsoft’s about ChatGPT.

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Catriona Burns: Yes, ChatGPT and also the Copilots they’re putting into their

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Catriona Burns: office suite of products and the ChatGPT ownership stake. So

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Catriona Burns: yeah, that’s for Microsoft. And then Google has its AI

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Catriona Burns: equivalent to ChatGPT, Bard. So yeah, both very much benefiting

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Catriona Burns: from that AI thematic.

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Sean Aman: Okay. So before we get onto whether they can keep

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Sean Aman: going, what’s it mean when you have these Magnificent Seven…

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Sean Aman: I think it’s 28% of the S&P 500, thereabouts, just under 30% of the S&P

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Sean Aman: 500. As an investor, does that make it harder?

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Catriona Burns: Well, for us, it’s about the individual stock and do

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Catriona Burns: they stack up in terms of the fundamentals and the

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Catriona Burns: valuation? And I guess for us, the long- term earnings

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Catriona Burns: trajectory of each of the stocks. And so you’ve just

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Catriona Burns: got to make a decision around, do you think those

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Catriona Burns: fundamentals stack up to justify investing in them? When there’s a

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Catriona Burns: concentration of returns, we tend to love hunting down that

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Catriona Burns: small mid- cap end of the market, which we have

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Catriona Burns: had that Mag Seven drive. I think it’s basically over

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Catriona Burns: 70% of S& P returns for that 2023 year. So

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Catriona Burns: you are competing against that if you don’t own them.

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Catriona Burns: But we think within the world, there are many, many

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Catriona Burns: different businesses to invest in. You’re obviously in a market

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Catriona Burns: where the concentration of returns is very concentrated. That can

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Catriona Burns: continue on for however long. But ultimately, the share prices

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Catriona Burns: come down to earnings growth. And so it’s about the

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Catriona Burns: fundamentals of the stocks. And it’s interesting, even within the

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Catriona Burns: Mag Seven, there is quite different dynamics between each of

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Catriona Burns: the stocks. And you take Apple and Tesla for example,

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Catriona Burns: and the earnings growth there is very, very different to

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Catriona Burns: something like Nvidia, which has had massive earnings upgrades through

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Catriona Burns: that 2023 year, is the earnings just beat expectations that analysts

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Catriona Burns: had.
And whereas Meta, there was a lot of skepticism

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Catriona Burns: around the Facebook platform, et cetera. And then you’ve seen

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Catriona Burns: sentiment turn. So there’s two elements that have been driving

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Catriona Burns: them, additional elements that have been driving them. One is

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Catriona Burns: like there is the earnings story, but two, you have to overlay

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Catriona Burns: what’s happened to some of the valuations. And you’ve seen

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Catriona Burns: particularly in the case of say Microsoft, Google, Meta and

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Catriona Burns: so forth, it’s not as much… Well, actually, outside Nvidia

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Catriona Burns: and Microsoft, it’s been more about PE rerate than actual

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Catriona Burns: earnings growth.
So yeah, it’s just interesting to overlay. Is

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Catriona Burns: it the valuation that’s just gone up or is it

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Catriona Burns: the earnings that have worked? Nvidia, for sure, the earnings

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Catriona Burns: have beat massively, but in some of the other cases,

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Catriona Burns: it’s more a case of the PE going up a lot.

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Sean Aman: Stay with me, Catriona, we’ll be back in a minute.

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Sean Aman: I’m speaking to Catriona Burns, Lead Portfolio Manager for WAM

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Sean Aman: Global. It’s easy to jump on the bandwagon here, but

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Sean Aman: surely, when shares have gone up that even Nvidia, which looks fantastic,

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Sean Aman: right? But will have competitors out of China and there

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Sean Aman: will be competitors in other places and it can’t run

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Sean Aman: forever. So where are valuations at the moment?

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Catriona Burns: Well, that’s the interesting thing. When you look at say

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Catriona Burns: Nvidia. As I said, that earnings story has been phenomenal,

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Catriona Burns: but what you’re baking in now into the valuation is

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Catriona Burns: a significant amount of expectations about what earnings will do

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Catriona Burns: going forward. And so if I look at earnings expectations

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Catriona Burns: for the coming year, they’re expecting 60% revenue growth and

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Catriona Burns: 68% EPS growth, which they may do, but that’s already

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Catriona Burns: in numbers. So if they miss expectations there, then it’ll

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Catriona Burns: be a lot harder for the share price to necessarily

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Catriona Burns: work.
So you have to marry up, have forecasts got

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Catriona Burns: ahead of themselves, or can the company continue to beat?

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Catriona Burns: So in the case of Nvidia, if they keep beating

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Catriona Burns: what the market has for consensus numbers, this share price

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Catriona Burns: can certainly keep working, but they need to. It’s already

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Catriona Burns: had a phenomenal run. Whereas I’d say something like, say

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Catriona Burns: Google for example, the earnings expectations aren’t crazy and the

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Catriona Burns: valuation’s a lot more reasonable. So very much in terms

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Catriona Burns: of whether they can keep going and where we go

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Catriona Burns: from here is about being able to meet earnings expectations

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Catriona Burns: and continuing to deliver on what the market’s expecting.

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Sean Aman: So what are the biggest risks for the tech stocks?

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Sean Aman: And earlier on, you talked about the fact that interest

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Sean Aman: rates are expected to fall and a lot of tech

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Sean Aman: stocks are priced off, the discounted value is priced off

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Sean Aman: the interest rate, therefore if it goes down, it looks

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Sean Aman: better, an explainer there. But what are the big risks

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Sean Aman: for the tech stocks?

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Catriona Burns: Yeah, so I think, as you said, that is definitely

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Catriona Burns: one risk. We are now pricing into forward mark interest

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Catriona Burns: rate curves, a lot of cuts in the current year.

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Catriona Burns: So if the Fed doesn’t cut rates as much as

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Catriona Burns: is expected this year, that sets up a bit of

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Catriona Burns: a valuation headwind for stocks more generally, and particularly ones

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Catriona Burns: where the valuation has run up quite a lot. So

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Catriona Burns: that’s one risk that the rates cuts aren’t as significant

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Catriona Burns: as people are expecting. And then that earnings piece that

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Catriona Burns: basically the numbers that analysts have in their forecast that

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Catriona Burns: the companies can’t meet those expectations. And then, this long

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Catriona Burns: debated recession that we’re-

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Sean Aman: I’m still waiting for it, Catriona. I’m still waiting for it.

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Catriona Burns: Exactly. Us too. If we were to start seeing the

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Catriona Burns: jobs market fall apart and so forth, and we went

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Catriona Burns: into deeper recession, then there’ll be a debate around where

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Catriona Burns: earnings again, hold up.

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Sean Aman: Okay. You mentioned earlier on Catriona, it’s not just about

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Sean Aman: the Magnificent Seven, and particularly at Wilson Asset Management, you

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Sean Aman: tend to go for the mid to smaller caps. How

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Sean Aman: do you play the Magnificent Seven outside the Magnificent Seven?

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Catriona Burns: Yeah, definitely. So I particularly if we thought about AI

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Catriona Burns: being just an enormous driver of what was that rhetoric

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Catriona Burns: for 2023, there are lots of different companies outside the

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Catriona Burns: Mag Seven that we think are potentially even better ways

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Catriona Burns: of paying AI or very solid ways. And where you’ve

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Catriona Burns: got things like… A big part of the value will

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Catriona Burns: be in owning the data. So we own companies such

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Catriona Burns: as Intuit that does the tax software, which will have

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Catriona Burns: Copilots and be using AI there. We own data providers

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Catriona Burns: like Dun & Bradstreet in the US. We own the exchanges

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Catriona Burns: like Intercontinental Exchange, which have a lot of data coming

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Catriona Burns: in. And we think it’s interesting. We think whether it’s

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Catriona Burns: in the platforms like Intuits and SAP, for example, out

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Catriona Burns: of Germany, we think they’re great plays on AI. We think

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Catriona Burns: the data companies like Dun & Bradstreet, et cetera, are great

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Catriona Burns: ways of playing it.
We own a business in the

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Catriona Burns: US called Booz Allen Hamilton, which is the provider and

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Catriona Burns: facilitator of AI to the US government. So we think there

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Catriona Burns: are lots of different ways to play AI outside of

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Catriona Burns: the Mag Seven.

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Sean Aman: Okay. And AI will be something we’ll be talking about

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Sean Aman: this year, next year and the year after, you think?

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Catriona Burns: I think so. I think there’s been a lot of hype, so

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Catriona Burns: you only had to say AI in your earnings call

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Catriona Burns: and the share prices were running. So I think there’ll

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Catriona Burns: be some companies where it’s more hype than reality, but

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Catriona Burns: I think, look, there’s some very exciting applications of the

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Catriona Burns: technology as we go forward.

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Sean Aman: Catriona, thank you for talking to Fear and Greed.

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Catriona Burns: Thanks so much.

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Sean Aman: That was Catriona Burns, Lead Portfolio Manager for WAM Global.

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Sean Aman: This is the Fear and Greed Business Interview. Remember, this

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Sean Aman: is general information only and you should seek professional advice

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Sean Aman: before making investment decisions. Join us every morning for the

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Sean Aman: full episode of Fear and Greed, Australia’s best business podcast.

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Sean Aman: I’m Sean Elmer. Enjoy your day.