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In 2025, the Financial Times’ Business Book of the Year was Stephen Witt’s The Thinking Machine, a story that helped bring Nvidia and the AI boom into the mainstream.

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But, if there is one point we would emphasise for investors, it is this: the semiconductor industry encompasses much more than Nvidia.

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Behind every AI model, every cloud data centre, every smartphone upgrade, and increasingly, every vehicle and factory, sits a global supply chain that is both astonishingly complex and surprisingly concentrated.

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And that combination — complexity and concentration — is exactly why we continue to invest in the sector.

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Why the semiconductor industry is attractive

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Almost every major innovation of the past few decades, from personal computers and smartphones to electric vehicles, cloud computing and now AI, has relied on semiconductors.

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Over the last 10 years, industry revenues have grown at roughly 9% per annum, reflecting a world that is becoming more connected, more digital, and more compute-intensive.

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For investors, however, the most interesting part of the story is not simply growth.

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The real story is barriers to entry

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Semiconductors are unusual: innovation is relentless, yet competition at the highest level is extremely limited. That is because it is extraordinarily difficult to compete.

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Building advanced manufacturing capacity is extremely expensive, technically demanding, and takes years to scale successfully.

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At the leading edge, manufacturing tolerances are measured in atoms. Production happens in ultra-clean environments where even microscopic contamination can destroy yield. The complexity is so high that execution matters just as much as technology.

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A concentrated industry structure has emerged

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A simple way to understand the industry is to break it into three layers:

• Design houses (e.g., Apple, Nvidia, AMD) design chips
• Foundries manufacture them
• Equipment suppliers provide the critical tools used to make them
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The design layer is highly competitive and fast-moving. But manufacturing and equipment have become increasingly concentrated. In many segments, one or two global companies dominate.

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That structure has created a small number of world-class businesses that combine strong growth, high margins, excellent cash generation, and — importantly for our clients — the ability to grow dividends over time.

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What has changed over the last decade

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For decades, progress in semiconductor industry followed a relatively intuitive pattern: chips became smaller, faster and cheaper with each new generation.

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That trend — often referred to as Moore’s Law — has slowed, but the demand for performance has not.

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Complexity has accelerated — and so has cost

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The cost of competing at the leading edge has risen sharply with each generation. For example, industry estimates suggested that a next generation ~10nm fab could require more than $12 billion of investment as far back as 2015. Today, a state-of-the-art <3nm facility is commonly discussed at well over $20 billion, depending on location and configuration.

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And it is not just the buildings. Each new node requires more process steps, more precision, and a narrower set of specialist tools — reinforcing why the frontier is increasingly dominated by a small number of global leaders.

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In other words, progress has become less about “shrinking transistors” and more about solving a growing set of engineering problems across manufacturing, materials, and packaging.

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The investment implication: value has shifted

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This matters for investors. When progress becomes harder, the companies with scale, execution capability, and the most specialised equipment tend to become more important, not less.

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As a result, more of the value has moved toward the companies that manufacture chips and supply the critical equipment — not just those that design them.

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While parts of semiconductors remain cyclical, the industry’s profit pool has increasingly shifted toward structurally advantaged bottlenecks — particularly leading-edge manufacturing and equipment.

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CHART 1 - the rising cost of leading-edge manufacturing

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As Moore’s Law slows, the cost of competing at the frontier has risen dramatically — reinforcing barriers to entry and industry concentration.

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How we have positioned — and why we have owned these businesses for so long

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Our semiconductor exposure is built around a simple idea: We invest in great businesses, and that includes semiconductor companies.

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We do not try to compete as semiconductor physicists. Our edge is as generalist investors: identifying companies with durable competitive advantages, strong cash generation, and the ability to consistently compound shareholder returns over the long term.

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That has led us to focus on the points in the value chain where market power is strongest — and where the industrial bottlenecks are most obvious.

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TSMC: the manufacturing backbone of advanced compute

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At the leading edge, TSMC is the company that repeatedly manufactures the most advanced chips in the world — at scale, at high yield, and with the reliability demanded by the world’s best designers.

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TSMC’s competitive advantage is built on three pillars: scale, yield leadership and customer trust.

Over the long term, its record is striking in that manufacturing capacity has grown around 10% per annum over 20 years, and around 7% per annum over the last decade.

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More importantly, its revenue mix has shifted meaningfully toward higher-value compute, with high-performance computing rising from 32% of sales in 2018 to 55% in 2025.

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This reflects a shift toward more complex, higher-value chips — exactly where global investment is focused today.

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TSMC has also consistently led major node transitions, from 7nm to 5nm to 3nm, reinforcing its strategic importance to the entire ecosystem.

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CHART 2 - TSMC’s revenue mix has shifted toward higher-value compute

TSMC has become increasingly exposed to high-performance computing — a structural shift toward more complex, higher-value demand.

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ASML: the heartbeat of the leading edge

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If TSMC is the manufacturer, ASML is the toolmaker that makes leading-edge manufacturing possible.

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ASML is the sole supplier of extreme ultraviolet (EUV) lithography machines — the most critical equipment required to produce the world’s most advanced chips.

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Each EUV system costs several hundred million dollars, and the engineering complexity is extraordinary. ASML sits at the convergence of optics, lasers, materials science, precision engineering and systems integration.

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There is no alternative supplier — and as chips become more complex, ASML’s monopoly position only strengthens.

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That supports long-term growth, strong cash generation, and long-term dividend growth.

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Why complexity matters

In many industries, complexity attracts competitors. In semiconductors, complexity has done the opposite — it has narrowed the field.

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Disco: precision where it matters most

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Disco is less well-known than TSMC or ASML, but it illustrates another part of our approach: investing in specialised industrial leaders in narrow niches.

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Disco supplies grinding and dicing tools used in wafer finishing — steps that are becoming increasingly important as the industry shifts toward advanced packaging.

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As Moore’s Law slows, progress increasingly comes from stacking chips, splitting chips into chiplets and integrating them through advanced packaging.

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Technologies such as high-bandwidth memory are scaling rapidly, and packaging is becoming a bottleneck. Disco’s tools sit directly in that bottleneck.

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Disco operates in narrow segments with limited competition, where precision and reliability matter more every year.

Where we are not invested — and why

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It is worth being clear about what we are not trying to do.

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We have not built our semiconductor exposure around the most visible headline designers. Those can be excellent businesses — but they often face more intense competition, faster product cycles, and greater valuation sensitivity to short-term expectations.

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Similarly, we have tended to avoid more commodity-leaning segments of the market, where pricing power can weaken quickly when supply catches demand.

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Instead, we prefer owning the enabling layers. These are the companies that multiple designers rely on, and where the barriers to entry are highest.

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What we are watching next

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One of the advantages of investing in manufacturing and tools is that it naturally leads you toward the frontier of industrial progress.

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We are currently paying close attention to several themes shaping the next phase of semiconductor investment:

• High-bandwidth memory and the infrastructure required to feed AI accelerators
• Advanced packaging, as complexity increasingly shifts into assembly and integration
• Power semiconductors, including materials such as silicon carbide and gallium nitride
• The evolution of capex discipline across the ecosystem

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These are areas where we expect the “industrial bottleneck” dynamic to persist.

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Long-term perspective — with discipline

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Semiconductors are often described as cyclical and in some parts of the market, they still are.

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But for the dominant suppliers at the leading edge, the economics have become structurally more attractive:

• fewer competitors
• higher barriers to entry
• and a growing share of value accruing to manufacturing and tools

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That said, we are very conscious of what we do not control.

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AI-related capital spending is elevated and will fluctuate. Valuations across parts of the sector have rerated. And even leaders such as TSMC have increased capital commitments significantly in recent years.

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This is precisely why we focus on businesses with market power, rising complexity, and capital discipline. Those characteristics underpin strong cash generation today — and, just as importantly for our clients, the ability to grow dividends sustainably over time.

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In our view, semiconductors remain one of the most important long-term investment themes globally — but the best opportunities are often found not in the most famous names, but in the quiet industrial leaders that make the entire ecosystem work.