We look at the stocks and funds exposed to this very important technology theme
Thursday 24 May 2018 Author: Steven Frazer

Artificial intelligence (AI) has been around for decades but it has only recently exploded into the everyday vernacular. At a simplistic level AI is a set of computer science techniques that give your software super powers.

AI has the capacity to create new businesses and opportunities, make our lives safer, and add massive growth to the global economy. It may also hold the threat of destroying jobs, spreading computer viruses and worse.

How to channel AI to deliver the former and avoid the latter is a hot topic of discussion among heads of state, technology developers and others.

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And how to realise and access this potentially vast new source of profit tends to be where the conversations head in company boardrooms, at fund management meetings and among ordinary savers and investors.

While sceptics may accuse AI of being no more than the latest investment fad, experts unequivocally see AI as a genuine long-run wealth creation opportunity with the scope to enrich all of our lives in multiple ways (and even in ways we haven’t even thought of yet).

Keep reading to learn more about AI and the funds and investment trusts to play the theme.

WHY ALL THE EXCITEMENT?

‘The disruption of an ever-greater number of industry verticals has arguably never been higher due to the growing influence of both cloud computing and the rise or early adoption of artificial intelligence,’ says Polar Capital fund manager Ben Rogoff.

‘Every industry that mankind created will be redefined,’ is how Masayoshi Son, the CEO of Japan’s Softbank, describes AI.

‘Just as 100 years ago electricity transformed industry after industry, AI will now do the same,’ believes Andrew Ng, an AI network pioneer and the former leader of the technology’s development at both Google and Baidu, the Chinese internet business.

Ng is putting his money where his mouth is, and earlier this year unveiled the US-based AI Fund, raising $175m to invest in new
AI start-ups.

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WHAT IS AI?

AI is the concept of machines accomplishing tasks which have historically required human intellectual input. It is the computer-powered capacity to perform functions such as logic, reasoning, planning, learning and perception; all very human qualities.

Or as boffins at Imperial College London put it, ‘AI now encompasses the whole conceptualisation of a machine that is intelligent in terms of both operational and social consequences.’

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People have relied on machines to increasingly do muscle work since the industrial revolution allowed steam and electricity to replace oxen, horse and our own physical strength.

But the coming transformation, sometimes called the digital revolution, will see computer algorithms take the strain for much of the brain work too.


 

How AI thinks like a human

Consider a basic AI system. Let’s say it has three levers to pull (neurons) to come up with a yes or no answer – or in binary-speak, a 1 or 0. The AI system wants
to determine if a photo is an image of an apple or a banana. It might establish certain facts:

1) Is the object in the picture round?

2) Is the object in the picture yellow?

3) Does the object in the picture have a separate stem?

If the photo was of a banana the AI system would respond with no, yes, no. If the photo is an apple it would answer yes, no, yes. In the binary language of digital communications this would translate as 010 for the banana, and 101 for an apple.

AI systems can be exponentially more complex than this example. Extrapolate this concept across thousands, millions or billions of yes/no questions and you have the basis for a super smart AI system capable of learning to predict customer preferences, detect fraud, fight computer viruses, conduct life-saving diagnoses, and recognise handwriting.

AI IN ACTION TODAY

A good example of AI is the defeat at chess of grandmaster Garry Kasparov by IBM’s Deep Blue super computer in 1997. More current uses for AI come in emerging applications such as whizzing from place to place in self-driving cars or quick diagnosis and prescriptions from automated GPs.

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Recent studies estimate that two-thirds of us have little or no idea that we are using AI technology every day. AI is far more ubiquitous than you may appreciate.

Have you bought an item recommended by Amazon lately? Logged on to Facebook or ‘Googled’ something on the internet? Then you’ve used AI.

It is this emerging technology that ensures the products, services and adverts presented to you are as relevant as possible. The algorithm used to serve up Google search results also learns which pages are the most relevant to users using AI.

It’s similar AI behind Netflix recommendations or ones that automatically suggests who to tag when you post a photo on social media sites. Smartphone assistants like Apple’s Siri, Google Assistant and Cortana by Microsoft are also powered by AI.

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ESCALATION OF AI ACCESS

AI is an increasingly busy investment space and there are more ways for ordinary investors to get involved than ever before.

For example, it’s worth looking at the world of robotics even though it is slightly different to AI. Robotics is a branch of technology which deals with robots – but AI can feature if the robots are required to ‘think’ and make decisions.

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The ROBO Global Robotics & Automation Index is the first benchmark index to track the global robotics and automation market (including AI companies). Its constituents have enjoyed soaring demand for things like 3D printing, track and trace distribution technologies and automated surgery systems.

Richard Lightbound, head of index provider ROBO Global’s Europe and Asia operations, says 88% of the index members beat consensus sales estimates in the last quarter of 2017.

The ROBO index was set up for the ETF market and is the backbone behind ROBO Global Robotics and Automation ETF (ROBG), one of Shares’ running Great Ideas.

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FUNDS PROVIDING EXPOSURE TO AI

Traditional funds are also being established to capture AI and other technology-specific trends. For example, Polar Capital Automation & Artificial Intelligence Fund (IE00BF0GL543) launched last year with AI one of three core

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investment themes at its heart (industrial automation and robotics being the other two).

Smith & Williamson, the investment management firm, has even set up a dedicated AI fund called Smith & Williamson Artificial Intelligence Fund (IE00BYPF2Z68).

‘We seek to invest in companies that offer what we regard as purity of AI revenue; companies which are able to demonstrate revenue growth that is being driven by the development or application of AI,’ say fund managers Chris Ford and Tim Day.

Pictet Robotics (LU1316549283), AXA Framlington Global Technology (GB0006598998), Polar Capital Global Technology (IE00B42W4J83) and Neptune Global Technology (GB00BYXZ5N79) are other fund options with a firm eye on AI development and potential returns.

Among the investment trust community, we’d highlight these three products as having AI-related investments: Allianz Technology Trust (ATT), Polar Capital Technology Trust (PCT) and Scottish Mortgage Investment Trust (SMT).

COMPANIES BEHIND THE AI REALITY

While there may be a lot of hype around the topic right now, ‘there are enough real life examples underway to indicate that AI will be a significant investment theme in the next decade,’ says Nick Hartley, co-head of active equities at Legal & General Investment Management (LGIM).

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One of the challenges facing investors and AI is that there is ‘little real world evidence of success, especially on a commercial scale,’ he remarks.

He believes there are three crucial components that make or break any AI enterprise from a financial perspective, the ultimate barometer of success for investors.

• Technical development capability

• Access to large scale volumes of data from which AI can learn

• Ability to successfully deploy AI applications at scale and keep improving

Hartley uses European travel ecosystem software supplier Amadeus as a good example, a company LGIM’s active funds have owned for some time and which is also a large holding for Fundsmith Equity (GB00B41YBW71) and Jupiter European Opportunities Trust (JEO).

‘Amadeus processed 595m bookings in 2017 involving 1.3bn passengers,’ says Hartley. That involves juggling thousands of live route and fare combinations; volumes of data it would be simply impossible for an army of humans to process.

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Another popular AI-related holding among certain funds is US customer engagement platform Pegasystems. The company says: ‘If you’ve driven a car, used a credit card, called a company for service, opened an account, flown on a plane, submitted a claim, or performed countless other everyday tasks, chances are you’ve interacted with Pega,’ referring to its platform product.

Pegasystems’ AI-powered applications are part of the reason why Neptune fund manager Ali Unwin is such a big fan. The stock is one of Neptune Global Technology Fund’s bigger holdings alongside some better-known companies such as Facebook, Apple and Visa.

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TODAY'’S OPPORTUNITIES

Right now most fund managers would probably look to traditional technology names to play the AI theme. FANG stocks (Facebook, Amazon, Google, Netflix) would be a good a place to start partly because their vast cash hoards means they can buy up the most interesting start-ups.

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Imperial College London research suggests the aforementioned FANG companies, plus IBM, Microsoft, Apple and Yahoo, spent more than $5bn between them on AI start-ups in 2015 and 2016 alone.

In 2014 Google spent $500m on buying DeepMind, the AI developer founded by neuroscientist Demis Hassabis who is widely considered to be one of the leading AI experts in the world.

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It highly likely that the big public cloud platforms will be the easiest way to get AI-based applications widely distributed.

Amazon Web Services, Microsoft’s Azure and Google Cloud are likely to provide clients with bolt-on and upsell AI tools and applications, all connected over the internet. IBM, Oracle, China’s Alibaba and Baidu may follow similar paths.

FAR-REACHING POTENTIAL

AI has such far-reaching potential that it is tough to envisage any industry that will not be somehow shaken up by emerging AI applications, especially now that data collection is becoming so easy and useful.

For example, oil giant Royal Dutch Shell (RDSB) is reported to be very enthusiastic about AI technology, saying sensors are cheap and can be used to monitor performance.

UK companies such as aero-engineer Rolls-Royce (RR.), pharma giant GlaxoSmithKline (GSK), UK-listed miners, banks and energy suppliers are also obvious potential beneficiaries of AI applications.

This may suggest that the best investment returns won’t necessarily come from AI application designers, but from those companies able to use them to their advantage.

DISCLAIMER: Editor Daniel Coatsworth has a personal investment in Fundsmith referenced in this article


 

AJ Bell to launch new fund with a tech element

Investment platform AJ Bell is launching a Global Growth Fund designed to take advantage of the world’s demographic, technological and economic changes.

The fund aims to take advantage of existing and emerging trends that will power improved prosperity for a large number of people, particularly the 6bn or so living in emerging or developing economies.

This will include dynamics such as smartphone and cloud computing proliferation plus nascent opportunities in robotics, AI, health applications, space travel and others.

The fund hopes to spread risk by investing in a basket of companies set to benefit from the aforementioned trends.

Around 8% of the fund is likely to be invested in technology specific areas, with substantial exposure to developed regions including Europe, North America, Asia and the UK.

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