As part of her ongoing series for Professional Paraplanner looking at funds which have recently obtained a three year track record, Juliet Schooling Latter, research director, FundCalibre looks at the Smith & Williamson Artificial Intelligence fund.
Artificial Intelligence (AI) is one of the biggest investment opportunities of the 21st century and the numbers behind it are staggering.
According to a report by CB insights, since 2013, $66 billion has been invested in AI start-ups, across nearly 7,000 deals, including several $100m+ mega deals*. A report from PwC also estimates that AI will add $15.7trn to the global economy in the next decade**.
AI has actually been around since the 1950s, but what it has done in the past decade or so is truly phenomenal as it has moved from the experimental to the commercial application phase. For example, engineers have built self-driving cars that have clocked up millions of miles on our roads, with autonomous decisions. Scientists are also developing service robots to provide care for the elderly or disabled. There’s also chatbots that conduct a conversation via auditory or textual methods – such programs are often designed to convincingly simulate how a human would behave as a conversational partner.
Chris Ford, manager of Smith & Williamson Artificial Intelligence fund, believes it has reached a point where those firms who refuse to engage with AI will be faced with an “unbridgeable chasm” when the pin drops and they start trying to catch-up.
Chris joined Smith & Williamson in 2015 and set up this fund in June 2017. He earned his stripes working as an analyst on US small cap technology names in the late 1990s at Schroders, before moving to Aegon where he ran their US and technology offerings until 2006. He then moved to Pictet where again he ran a technology fund and a global equities mandate. Chris is supported on the fund by Tim Day. The UK has long been a centre of innovation in the AI world, with the managers’ based in London as a result.
The process of this fund is powered by an AI tool called Orbit, which is designed to identify key ‘markers’ of companies using AI within their business models. It works by scanning thousands of company documents (in just a few minutes) using character recognition, and applying natural language processing, to identify key words and relevant phrases that indicate the use of AI in the accounts.
There is also a language processing tool to translate all statements into English, to remove any potential country biases. This initial screen takes the universe down to about 400 potential ideas, with fundamental analysis of these companies then undertaken, based on five elements of AI. These are: the use of algorithms, sensing, applications, high-powered computing and data. This enables the managers to create a purity score, which shows the percentage of revenue generated by AI, or the percentage impact on growth.
In addition to this, the managers will still want to understand the key fundamentals of their stocks, such as cash generation, debt levels and stock valuations. These factors are not ignored simply because it is a fund with a growth approach. The minimum market cap size for a holding is $250 million.
The fund’s sell discipline is similarly fundamental to the portfolio’s construction, with stocks sold should the importance of their AI exposure fall, or their valuation increase beyond a tolerable range.
Despite the technology-orientated title, the fund is not simply a tech or US fund. It has notable exposure to all global regions and Industrials, Communication Services, Consumer Discretionary and Health Care companies currently make up almost half of the portfolio^^.
The fund, which sits in the IA Specialist sector, has returned 68.1% since its launch in June 2017^^. Neither are a direct comparison, but out of interest, the average IA Technology & Telecommunications fund has returned 43.7%^^ over the same period and the average IA Global fund just 16.2%^^.
A specialist in a rapidly growing global industry, as this fund approaches its third anniversary, I think it is well-placed to take advantage of that growth in the future.
*Source: Roboglobal Research Update: Capturing the Rapid Growth of Artificial Intelligence
**Source: PwC’s Global Artificial Intelligence Study: Exploiting the AI Revolution
^Source: Fund factsheet, 31 January 2020
^^Source: FE Analytics, total returns in sterling from 23 June 2017 to 4 March 2020
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. Juliet’s views are her own and do not constitute financial advice.
