A leading emerging markets fund with exceptional performance is increasing its investments in China's major AI hyperscalers, betting these companies offer better value than U.S. tech giants spending heavily on expansion. Caroline Cai, CEO of Pzena Investment Management, stated that her firm's $3.9 billion fund has been raising its holdings in digital platform companies like TENCENT (00700) and Alibaba (BABA). She believes these firms are undervalued and possess significant upside potential, considering their capacity to transform daily life.
Cai remarked in a New York interview, "You don't have to pay a high price for the potential productivity gains from AI." She added that this strategy should prove effective in the early stages, as predicting the ultimate winners and losers remains challenging. As AI technology increasingly becomes the next battleground for tech supremacy, investors are weighing the prospects of AI in the U.S. versus China. In the U.S., major corporations are investing hundreds of billions of dollars to build data centers and computing power, racing to develop the most advanced models. In contrast, Chinese internet companies are committing far less capital, focusing more on application development that integrates AI into existing platforms.
Data shows that Pzena's Emerging Markets Value Fund has outperformed 97% of its peers over the past five years. Year-to-date, the fund has also performed better than 90% of comparable funds. Its major holdings include Samsung Electronics, Taiwan Semiconductor Manufacturing Company (TSM), and Alibaba. Cai serves as co-portfolio manager for approximately $67 billion in assets across all Pzena products.
Cai indicated that part of the capital used to increase positions in Alibaba and TENCENT came from reducing holdings in Samsung and TSMC, as the fund views these companies as less attractive than before. For the Korean chipmaker, the investment thesis was validated more quickly than anticipated due to soaring memory chip prices driven by AI demand. Her perspective contrasts with broader market sentiment. In recent months, investors have been selling shares of TENCENT and Alibaba amid concerns about intensifying competition in their Chinese platform businesses, with some shifting investments to AI startups like MiniMax Group Inc.
A key question for investors in the AI sector is whether massive capital expenditures will yield tangible returns. In the U.S., the four largest tech companies project their capital expenditures could reach approximately $650 billion by 2026, primarily for new data centers and related equipment. Chinese firms are also increasing spending, albeit at a much slower rate. Industry research estimates that leading internet companies, including Alibaba, TENCENT, Baidu, JD.com, and Meituan, will spend over $240 billion by 2030. While this figure may continue to rise, these companies collectively hold $224 billion in cash reserves, providing a substantial buffer.
Cai stated that what is truly compelling is how the capital is being utilized. "When you look at the quality of models emerging now and the focus on the application layer, you see this might be a more interesting AI monetization model compared to developed markets," she said.
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