How to tap into the AI boom via investment trusts

Artificial intelligence (AI) has generated – in some cases quite literally – so many column inches in recent times that it is perhaps hard to credit that it is only six months since generative AI chatbot ChatGPT was launched to the public.

But while ChatGPT may have grabbed (or indeed written) the headlines, it is far from the whole AI story.

For investors seeking exposure to the opportunities that AI may offer, ChatGPT itself is largely a non-starter, being the intellectual property of a private research-based organisation, OpenAI (although a large investment from Microsoft earlier this year means investors in the software giant do have an indirect stake).

However, there are plenty of other ways to play the emerging trend, as highlighted by the Association of Investment Companies (using research from Winterflood Securities) this week.

Winterflood came up with a list of 18 companies set to benefit from generative AI. The names include semiconductor companies (Nvidia, Taiwan Semiconductor Manufacturing, ASML, AMD, Applied Materials and Intel); search companies (Alphabet, Microsoft and Baidu); enterprise and productivity software companies (Salesforce, Workday, HubSpot, SAP and ServiceNow); and companies offering cloud computing (Amazon, IBM, Oracle and Cisco).

See also: The AI gold rush

The AIC then analysed the investment company universe to identify the 20 trusts with the most exposure to these companies and therefore to the underlying theme. The top five are in the table below.

Unsurprisingly the funds with the greatest exposure are technology specialists. However, the full list includes global, Asia Pacific, emerging markets, multi-asset and North American funds. The global fund with the largest position in these ‘AI winners’ is Alliance Trust, which takes a multi-manager approach and whose underlying managers have stakes in 13 of the 18 companies, making up 19% of the portfolio.

Co-portfolio manager Stuart Gray stresses the importance of looking past the headlines to understand how AI can benefit investors. “AI has the potential to be one of the biggest things in decades: potentially bigger than the internet in terms of how companies work and its impact on efficiency,” he says.

However, in terms of the current hype around it, there are parallels with the dotcom bubble of 1999/2000. “Anything remotely linked to the internet went through the roof, then there was a big bust 12 to 18 months later when people realised that while the internet was a game-changer, most of these companies were not making any money out of it.”

Gray says it took the best part of a decade for it to become clear who the real internet beneficiaries – essentially the FAANG stocks – were, although he expects the timescale around AI winners to be more compressed. “Share prices are reflecting the changes that could come, but we need to guard against euphoria and not get too far ahead of ourselves,” he counsels.

While there are few pure-play AI investment opportunities, Gray says the greatest exposure is probably to be found in semiconductor companies ASML, TSMC and Nvidia, all of which have near-monopoly status in their particular niches in the chip supply chain. “Given their dominant market positions and technological advantages, these companies will be very geared into the adoption of AI.”

Next up are Microsoft and Alphabet (Google), which are embedding AI capability into existing systems in order to offer productivity gains. Gray sees the cloud computing and enterprise software names as less directly geared into the AI ‘revolution’, although they will still be able to use the technology to develop.

“At present there are not many companies that are clearly AI leaders,” says Gray. “It will take a while for the rest of the market to embed AI, so at the moment it is the chip companies that are flying in terms of their share prices. It will take longer to figure out who are the winners in terms of actually using AI.”

An interesting point to note on Alliance Trust is that its underlying portfolio managers or ‘stockpickers’ cover the whole range of investment styles from growth to quality and deep value, yet exposure to Winterflood’s list of AI stocks is by no means confined to the growth managers. “All of our managers are researching and thinking about how AI impacts their portfolio,” says Gray. “We aren’t trying to play a theme, but there are some great businesses available at sensible prices for long-term investors.”

Investors should perhaps be mindful of the analogy with the dotcom bubble – as Mike Seidenberg, manager of Allianz Technology Trust, says, “Wall Street tends to get really excited about new technologies and then really upset” – and the fact that it is not yet possible to get a clear picture of the real winners in AI.

However, given the household-name status of many of the names on Winterflood’s list, many of us will already have some exposure to these potential winners. Time will tell if AI really will be game-changing for them.

Source: AIC/Winterflood Securities