‘AI-immunity’ and The Acronym Fallacy

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‘MAG 7’ is dead. The market has created a new four-letter basket as the flavour of the month: ‘HALO’, short for ‘Heavy asset, low obsolescence’, the supposed real-economy resistance to the age of AI.

The six months to end February delivered the worst performance of the software and services sector relative to the rest of the S&P 500 in the three decades since the sector was established – a gap even more extreme than the six months to end December 2000 as the dot.com bubble burst.

This time, though, the S&P 500 delivered a positive return rather than falling with everything else.

Cumulative total return: S&P 500 style tilts and notable industries

Source: S&P 500. From 29 August 2025 to 27 February 2026, USD.

As the Software & Services sector sold off (and anything adjacent to ‘digital’, like the Commercial and Professional Services sector), many businesses with tangible, productive assets, physical moats and perceived enduring demand performed well (such as energy and transport infrastructure). The market has framed this as a clean split between AI ‘winners’ and ‘losers’ and wrapped it, inevitably, in an acronym: the ‘HALO trade’.

The Acronym Fallacy

But acronyms and neat sector classifications distort and oversimplify reality. We live in a messy world. When faced with complexity, our industry reaches for shortcuts. It starts as a headline-grabbing label for a group of stocks that happened to work. Then it becomes a story. Then a trade. Then a belief system. Confirmation bias does the rest. Recency bias makes recent winners feel permanent. Herd mentality ensues.

The ‘insert acronym’ ETF (Exchange Traded Fund) sees large flows…until the trade stops working.

Robert Shiller calls this ‘narrative economics’: simple stories that are easy to repeat, that go ‘viral’, and that end up influencing real decisions. Acronyms are just the market’s most portable narratives, designed for memetic spread in our digitised connected system. They are not designed for nuance.

We’ve seen this film before: the Nifty Fifty, BRICs/BRICS, FANG/FAAMG/FAANG+, MAG 7, MANGO. Different trends. Same behavioural wiring. The returns of these acronyms diverged dramatically.

Nifty Fifty and BRICs both punished trend-following investors when market regimes shifted, while FAANG-style baskets compounded spectacularly over the decade, albeit as a volatile and concentrated ride. The earliest investors who could stomach that journey will have done well. Anyone who traded in and out is unlikely to have captured much of the return.

Crucially, then, an invisible variable here is the time horizon: most acronyms are created on the back of a 12–24-month run yet are often discussed and debated as longer-term probabilities. An acronym can look brilliant in the rear-view mirror yet disappoint once narratives change.

Just good long-term growth companies

The last six months for our US Growth portfolio have been challenging as well. As we said last month in ‘Is AI Eating Software?’, we are working through the portfolio to distinguish between firms with eroding moats and those becoming mission-critical in the software stack. We’re confident that companies led by AI-embracing technical teams, with tangible moats based on data, regulation or physical assets, can deliver attractive growth for years. Some babies have been thrown out with the bathwater.

This was in part why we seized the opportunity to add Axon Enterprises to US Growth portfolios in February. Axon develops integrated technology solutions, such as body-worn cameras, for law enforcement and other customers. It combines devices, software and data into an integrated system that becomes hard to displace once adopted. We had been researching it for some time (it is held in other Baillie Gifford portfolios). The share price had declined about 40 per cent from October 2025, yet growth remains robust, the opportunity remains large, and the management team is laser-focused on its mission.

But exceptional growth comes in more than one flavour. Some companies are transformational, reshaping industries and frontiers. Others are less glamorous, sometimes literally heavy, yet are still capable of outstanding long-term returns because they compound through durable demand, disciplined capital allocation and cultures that imbue long-term behaviour.

This is what we mean by AI-immunity: not immunity from AI existing (no company is immune from that, and nor should it want to be), but businesses whose economics don’t depend on a new AI regime to work. They can benefit from AI, but they don’t require it.

The market calls them ‘HALO’ stocks. We’d simply call them enduring growth companies, and we’ve invested in them for decades.

Enduring growth

For example, we first bought WATSCO, the heating, ventilation and air conditioning distributor, back in 2012. Not really rocket science, yet it earned its place because of its exceptional ability to compound earnings over the long run. We still own WATSCO today.

Other examples include the Ensign Group and Knife River. They aren’t racy, rapid growers, and they won’t dominate the world. We’re talking skilled nursing and aggregates. Yes, care homes and quarries. A bit dull on the surface, perhaps. Nonetheless, their profiles and prospects sit well apart from the humdrum of the market and offer a comforting level of diversification and a kind of AI-immunity.

Indeed, if AI transforms medicine as the narrative suggests, the population will age even more!

Then comes execution. Ensign owns roughly 350 facilities, operated under an entrepreneurial, field-driven structure. The decentralised model is a scalable operating system: it maintains high standards while allowing local managers to lead. Acquisitions are quickly introduced to ‘the Ensign way.’ Leadership understands the work at the coalface: CEO Barry Port and COO Spencer Burton were once facility managers. They know what success looks like and give local teams the freedom to deliver it.

Ensign can and will use AI where it helps (such as documentation, compliance and scheduling), but AI is additive rather than existential. The proof is in the fundamentals – it has grown EPS (earnings per share) by more than 40 per cent in the 18 months since we first invested, not because of AI but by executing relentlessly in a huge, fragmented market. Even today, Ensign is the largest provider, yet it only has approximately 4 per cent share. The runway remains long.

Over time, it has become a top ten aggregates producer through selective acquisitions and smart positioning across 14 states. In this industry, proximity is an advantage: quarries and mixing facilities near customers mean faster delivery and better margins. Many competitors, private equity-owned sites or small family outfits, struggle to match that scale, efficiency and pricing power.

Culture matters here, too. Knife River is led by CEO Brian Gray, a company lifer who has seen centralisation and decentralisation tried and retried. We believe he has struck the right balance: a clear strategy from the centre with empowered local leaders. The EDGE (Earnings, Discipline, Growth, Excellence) framework is the business process he has applied across operations. Knife River won’t chase business that doesn’t meet its return bar.

AI may show up in useful ways, such as routing, predictive maintenance and perhaps autonomy eventually. But again, these are a bonus and not central to the investment thesis.

Conclusion

So, what ties Ensign and Knife River together? It’s certainly not an acronym. Instead, they are examples of long-term compounding driven by leadership, culture and steady, measurable process. These companies remain focused on opportunity and execution while the stock market jolts back and forth between narratives.

Ultimately, for us, great businesses are just that: exceptional long-term growth companies, whatever the sector, and whatever the current acronym.

Cumulative total return: represents the total gain or loss of an investment over a specific period, expressed as a percentage.

ETF (exchange-traded fund): is a type of investment fund that holds a collection of assets – such as stocks, bonds, or commodities – and trades on stock exchanges like individual shares.

EPS (earnings per share): a financial metric representing a company's profit allocated to each outstanding share of common stock, serving as a key indicator of profitability.

Compound earnings: refer to the process of generating returns on both an initial principal investment and the accumulated interest or dividends from previous periods.

Capital allocation: is the strategic process of deciding how a company deploys its financial resources – such as cash, debt, and equity – to maximise long-term value, increase profitability, and drive growth.

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Baillie Gifford U.S. Equity Growth Fund's top ten holdings as at December 31, 2025

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