- The Osterweis Opportunity Fund beat the Russell 2000 in 2024 by finding overlooked tech stocks.
- Small-cap software stocks will benefit from the next wave of AI, says Bryan Wong, a PM of the fund.
- Here are 3 of his high-conviction AI stock picks.
The so-called "AI trade" has become almost synonymous with either Big Tech or utilities companies over the last two years. Now, Wall Street is expecting the scope of AI investment opportunities to widen into beneficiaries of the technology.
Bryan Wong, a portfolio manager of the small-cap Osterweis Opportunity Fund (OSTGX) with James Callinan and Matt Unger, has already been ahead of the curve.
Based in San Francisco, Wong has used his expertise in the technology industry and meticulous stock-picking process to find overlooked opportunities in the market, especially ones using AI to grow their margins. It's paid off: in 2024, the fund returned 22%, beating the Russell 2000 index's 15% return for the same period.
In an interview with Business Insider, Wong shared what's led to his success — and what he's betting on going forward.
The small-cap AI advantage
Most investors have gained exposure to the AI trade just by buying the S&P 500. After all, Apple, Microsoft, Amazon, Nvidia, and Alphabet make up roughly a third of the index's total capitalization.
But to capitalize on up-and-coming AI opportunities, investors need to do some more digging. There are a lot of AI winners in the small-cap space for those who take the time to look for them, Wong said.
As the AI trade matures, banks like Goldman Sachs are recommending investing in "Phase 3" stocks, or companies directly using AI to enhance their revenues, such as software companies.
Small-cap software companies are especially well-positioned to take advantage of this next wave of AI investing, according to Wong. He's particularly bullish on vertical software. Unlike horizontal software companies like Salesforce or Microsoft, which provide general-purpose solutions for many industries, vertical software companies are designed to address specific needs for a singular market.
Small caps have a competitive advantage when it comes to vertical software, according to Wong.
"If you're a vertical-specific company, you own the distribution, you own the data, you have relationships with the customers. You can be more efficient on sales and marketing as well because you're focused on one vertical," Wong said.
It's much easier for a smaller company to develop a specialized niche with stickier revenue streams. In contrast, a company like Salesforce has to spread its sales and marketing across hundreds of verticals, making it difficult to create a competitive advantage, Wong added.
Under this strategy, several of Wong's picks have expanded rapidly and outgrown the small-cap categorization. Below, Wong identified three software AI beneficiaries that he's bullish on going forward. They are all constituents of the Osterweis Opportunity Fund.
