June Newsletter 2024

Memorial Day, 2024

“We Need More Power and Electricity to Run AI”

Celebrating Memorial Day and the start of summer; filled with bar-b-ques, golf, tennis, the Indy 500, baseball games and family get-to-gathers, we may forget why we celebrate! First, we are reminded that our Freedoms were not Free! Many brave men and women who wore the uniforms of our armed forces GAVE ALL so that we can live free. Free to pursue our dreams of a bountiful future, rewarded by our own hard work and efforts. To that end, all of us at Intelligent Investment Management have been putting in long hours lately to ensure that our managed portfolios have a high probability of meeting your long-term financial goals.

Looking back a year or so, we actively added significant allocations to all things’ technology and the new artificial intelligence (AI) chips that opened the door for the explosive AI revolution. Those allocations paid off with handsome gains; all in spite of the inflation hurdles that were hamstringing consumers at all levels. Many of the gains were left in the equity portfolio allocations to add growth potential to help with the inflationary demands. And, in many cases, we were able to increase distributions to clients living on fixed budgets.  Seeing the need for even additional growth to combat “sticky” inflation, we have generally left equity allocations somewhat higher to provide for future needs. Although inflation remains our number one concern for meeting client financial goals, we are also concerned about meeting the increased “longevity” expectations of our clients in their retirement years. We are now adding significant allocations to all things that “use” AI to address those concerns.

The experienced managers of each of the funds we invest in are also focusing on the growth in AI within the diverse companies they invest in. Companies like Amazon, Microsoft and Google are already at the forefront of meeting the computing needs inherent in the AI revolution. Our equity portfolio already has meaningful allocations to the companies that are leading the pack. Underlying the innovation that has added quantum leaps to the speed with which AI chip users can grow their businesses is the explosive need for more data centers and the enormous energy requirements to meet the demand.  The Alternative Equity and Income allocations have for years held positions in data center REITs and infrastructure and utility funds. We now believe it is time to “up the ante” and add to the Alternative Equity category positions with the commodities needed to generate the growing electrical demands.  The analysts at Columbia Threadneedle (think Tri Continental Domestic Equity fund) have identified the need for more data centers (with seven times more data center square footage to house high performance servers, storage systems and networking equipment) and their enormous energy requirements (with estimates of sixty gigawatts by 2028; or 400% more than current resources can produce).  For reference, 1.21 gigawatts would power more than ten million light bulbs or one fictional flux capacitor in a time-traveling DeLorean!

To meet the anticipated need for more (and clean) electrical power, James and I have been busy digging deep into the raw materials that will be needed to fuel the growth. Our efforts have so far been focused on how Copper, Silver, Natural Gas and Lithium are integral elements of the electrical energy generation equation. We have been addressing opportunities where our portfolio can gain exposure through companies involved in mining, refinement, and related activities.  To illustrate our thinking, Laura has included the three graphs below depicting the one-year history of Copper, Silver and Natural Gas valuations as the increasing need for more electricity has expanded on the back of the AI revolution.                                                

Over the past month, we have added meaningful positions to managed portfolios in Kinder Morgan (natural gas logistics, pays six percent dividend); Rio Tinto ( one of world’s largest mining companies providing broad range of metals and minerals including copper, aluminum, and iron ore, pays six percent dividend); Teck Resources (Canadian mining company producing copper, zinc and metallurgical coal). All representing historically strong and well-managed companies believed to be up to the task of producing the raw materials needed for energy expansion to meet the growing AI explosion.

James has also identified Albermare Corporation as an investment option to meet the lithium needs of the EV industry. Investment in lithium producers is not for the faint of heart and currently is being added in only small increments to the portfolios of our much younger clients with a very long investment horizon. As that investment option becomes less volatile, we will consider adding it to a broader portion of our managed accounts. Our current goal is to allocate as much as five percent of the total portfolio to these raw material positions. In that process, our total equity allocation could also increase by the same five percent. Under current economic and market conditions, we believe that the increased risk allocation is prudent to meet the inflation and longevity concerns discussed above. Also note that our long-time allocation to Adams Natural Resources Fund (PEO)  investing primarily in oil and gas producing companies continues to add meaningful energy-related returns to the portfolio. We currently allocate up to four percent of the total portfolio to PEO, which has produced year-to-date total returns of over twelve percent (before IIM management fees).  We will keep a sharp eye on these decisions and report as we go along throughout the year.

Our managed portfolio has traditionally held positions in three utility/infrastructure funds for both income returns (high dividends) and growth from increasing infrastructure investment. Year-to-date returns (before management fees) have been impressive as they garner their share of the AI growth: Cohen and Steers Infrastructure (UTF, 11.36% return); Gabelli Global Utility Fund (GLU, 13.59% return), Reeves Utility Income (UTG,6.96% return).

All of us at Intelligent Investment Management, LLP wish you and yours a summer filled with family, fun and sunshine!

Sincerely,

Intelligent Investment Management, LLP

Steve, James, Jeannie, Laura, Helen and Stephenie