Artificial intelligence (AI) brings to mind the notion of Pandora’s box. The benefits are clear, but it has also created a lot of problems. The lid is now open and companies are having to adjust to a changing world where AI is a centrepiece, says Darius McDermott, managing director of FundCalibre.
AI is nothing new, but its acceleration means it drives much of what we do. When we wake, many of us reach for our mobile phone or laptop to start our day. Doing so has become automatic, and integral to how we function in terms of our decision-making, planning and information-seeking. Shopping, emails, driving aids, leisure downtime, online banking and face recognition are all examples of its growth.
Technology and automation have impacted the job market for decades; the difference with AI is that it is expected to impact high-skilled jobs. Research from the International Monetary Fund indicated the pros and cons of this. It found that about 60% of jobs may be impacted by AI. Roughly half the exposed jobs may benefit from AI integration, enhancing productivity. For the other half, AI applications may execute key tasks currently performed by humans, which could lower labour demand, leading to lower wages and reduced hiring*.
The focus on how to invest in AI has been very narrow until now, with the Magnificent Seven at the forefront. Nvidia is a good example – in August 2024 it announced revenues of £24.7bn for just three months, a rise of 122% on the previous year. Not bad? But the market was not impressed and the share price fell, a reflection of the strength of the run the company has been on in the past 18 months (to be fair it has since rebounded to some degree).
Nvidia is a good example of the challenge investors face when tapping into the AI theme. The stock’s share price has risen some 730% since the start of 2023**, but with the exponential growth of AI, we do not know whether it is cheap, expensive or fairly valued at this point. The pessimist might point to Nvidia’s competitors also looking to produce chips, which could challenge their position in the market – disruption is nothing new in the technology sector and things can change fast.
But the AI theme is widening and there are funds allowing investors to tap into this, such as companies further down the semiconductor supply chain or specific sectors which can benefit from this growth.
The reality is there are actually three ways to invest in the AI theme. The technology angle, which is the development of AI from a technical perspective; the companies (adopters) in terms of their engagement in AI (which is clearly still at a very early stage); and finally from an investment perspective, how do we engage with AI in the investment world?
With this in mind, here are a few alternative routes and funds investors may want to consider beyond the traditional large-cap technology holdings.
We need more data centres
The energy transition to a lower carbon world cannot happen without an increased use of metals – the likes of electric vehicles are dependent on this (all electrification needs mining). But people also forget we need to consider the importance of metals for the likes of artificial intelligence. AI can’t commoditise commodities and if you want more AI you need more data centres (computing power) and that requires more commodities.
Data centre demand is expected to double. As the International Energy Agency states, “data centres are significant drivers of growth in electricity demand in many regions. After globally consuming an estimated 460 terawatt-hours (TWh) in 2022, data centres’ total electricity consumption could reach more than 1,000 TWh in 2026.***” A portfolio to consider here would be BlackRock World Mining, a trust which has significant flexibility to invest across various metals and mining companies, including unquoted companies. The trust also offers an alternative – and attractive – source of income to investors. The result is a conviction-led approach to investing in the mining sector, as opposed to focusing on the short-term direction of commodity prices.
The climate angle
It has been a difficult time for environmentally-focused companies. Governments have vacillated on climate commitments, while rising inflation has raised build costs for many renewable energy companies. There was also some over-exuberance on pricing during the pandemic. The adjustment has been painful, but there are signs that this is now starting to turn.
The energy transition is a major long-term growth theme. It is estimated that around $2.4 trillion of annual spend will be needed to meet global temperature goals. There are also goals around waste management, and the circular economy. Companies tapped into these themes have a long tailwind of growth and this could be a good moment to buy in while prices are still depressed.
The Ninety One Global Environment fund is a good option for a potential recovery in this part of the market. Manager Deirdre Cooper points out that renewable energy demand is set to grow still further: “The speed of AI development and adoption is generating new structural growth drivers for power demand and a willingness to spend to bring reliable power online quickly. This has resulted in a large tailwind for the utilities we own that are quickly deploying low-cost renewable energy to meet expected demand from the data centres required for AI.” The fund’s top holdings include Waste Management, Nextera Energy and Spanish utility Iberdrola****.
Further down the market-cap
There are plenty of options to consider in terms of portfolios that invest in growing businesses further down the chain – such as some of the enablers as the focus moves to picks and shovels. A good example is the IFSL Marlborough Global Innovation fund, which looks to provide investors with exposure to all areas which drive society and business forward.
Examples of holdings in the portfolio which tap into this include the likes of Munters, a Swedish business providing air cooling solutions, with a third of their business linked to selling industrial business units to cool servers in data centres. Another is Suess MicroTec, a semiconductor equipment manufacturer. Investment analyst Tom Hutchinson says the firm is involved in the printing of what chips look like (templating, screening and cleaning). He says the firm is a small business, but with significant orders from equipment manufacturers and the chip companies themselves^.
An alternative would be the Sanlam Global Artificial Intelligence fund, managed by Chris Ford, which invests across the AI spectrum, from large players like Nvidia****, to those much further down the market cap.
Advancements in healthcare
AI is also embedded in the advancements within the healthcare space – this ranges beyond increased speed and accuracy. Examples include diagnosing patients, transcription of medical documents, drug discovery and development all the way to robot-assisted surgeries.
Polar Capital Global Healthcare Trust co-manager James Douglas says there are two areas where AI is making the industry more productive. He says: “The overlay of AI/machine learning is likely to make more accurate diagnoses, particularly around ultrasound, and the other area is healthcare which is very regulatory and process-driven, and can technology be used to put more oxygen into the system and make employees more productive? Can we get to a point where revenues can grow and cost bases remain stable if we put more AI/machine learning into the system? We are starting to see it but it is a long journey ahead of us.^^”
*Source: International Monetary Fund, 14 January 2024
**Source: MotleyFool, 29 September 2024
***Source: HANetf, 25 April 2024
****Source: fund factsheet, 31 August 2024
^Source: Marlborough, August 2024
^^Source: Polar Capital, 16 September 2024
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’s views are his own and do not constitute financial advice.
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