ChatGPT has inspired wonder and panic in equal measures. It is now the fastest-growing app of all time: launched in November, it had 100 million users by January, beating TikTok (nine months) and Instagram (two and a half years). It is a testament to the disruptive power of artificial intelligence, but how much interest should it hold for investors?
There are some big claims made for artificial intelligence. In a report released in early April, Goldman Sachs said advances in natural language processing could drive a 7% (or almost $7trn) increase in global GDP and lift productivity growth by 1.5 percentage points over a 10-year period. It has been seen as a solution to some of the most significant problems facing the world today, from the climate crisis, to food shortages, to intractable health problems.
There is certainly a lot of money sloshing around the sector. Research from Deutsche Bank showed that total global corporate investment into AI has grown 150% since 2019 to nearly $180bn (€164bn), and nearly 30-fold since 2013. It found that there were 350,000 public AI projects by the end of 2022, with more than 140,000 patents filed for AI technology in 2021.
To date, it has been a reasonably successful investment area, though has not managed to transcend the ebb and flow of the wider technology sector. There are now 14 dedicated artificial intelligence funds, whose three year performance ranges from -0.4% to 61.4%, and whose one-year performance ranges from -19.1% to 3.6%. To put this in context, the average technology fund has fallen 1.2% over the past 12 months and risen 39.6% over three years.
The top three funds over three years are all ETFs – from WisdomTree, Xtrackers, Global X. The two active funds with the strongest performance records are the Sanlam Global Artificial Intelligence and Polar Capital Automation & Artificial Intelligence funds. However, none have yet made a compelling case for a dedicated artificial intelligence fund over a more diversified technology fund.
Columbia Threadneedle’s Harry Waight, a portfolio manager in its global equities team highlights one of the problem with dedicated AI investment: “As investors, it is incredibly difficult to know which of these start-ups will become the great businesses of the future, and which will end up in the graveyard of corporate endeavour, or even whether AI technology will become commoditised and ubiquitous, with no one able to charge for it at all.”
Equally, there is a danger that governments will be spooked by the power of AI and take steps to rein back its use. The Goldman Sachs report said: “Our economists estimate that roughly two-thirds of US occupations are exposed to some degree of automation by AI. They further estimate that, of those occupations that are exposed, roughly a quarter to as much as half of their workload could be replaced.” Governments may not want to risk a social backlash.
On the flipside, disruption is not unusual. Economist David Autor found that 60% of today’s workers are employed in occupations that didn’t exist in 1940. Goldman Sachs adds: “This implies that more than 85% of employment growth over the last 80 years is explained by the technology-driven creation of new positions.” Nevertheless, artificial intelligence presents a new and potentially vastly more disruptive proposition.
Waight’s view is that in any gold rush, investors can do well from selling shovels, even if nobody ends up striking gold. He says AI will continue to drive greater computational intensity, and greater need for semiconductors. The computational power used to train the largest AI models has doubled every 3.4 months since 2012. He adds: “Nvidia, Google, Apple and others will pour enormous amounts of money into developing sophisticated chips to underpin this accelerating compute power.”
Nevertheless, Mike Seidenberg, manager of the Allianz Technology Trust, says investors can’t dismiss the potential power of AI: “There’s a real willingness and desire by companies to take a look at it and embrace it. It’s early days, but it could be a seminal moment for this technology and what it means for companies.”
Polar Capital has also talked about an inflection point as the technology becomes more sophisticated and capable of delivering greater insights. Companies are experimenting with ways to use artificial intelligence.
There is also the importance of looking at the disruptees as well as the disruptors. If artificial intelligence has the impact many predict, businesses will be left behind. Goldman Sachs believes the legal, architecture and engineering, life and physical sciences and business and financial operations segments are likely to be the most vulnerable. AI has been an important force in disrupting the car industry in recent years. In reality, it has the potential to disrupt almost any sector.
There will be businesses on the right side of disruption. Any company that relies on a large and expensive human workforce to perform manual tasks that could be performed more cheaply and accurately by a ‘robot’ stands to benefit. ‘Smart’ factories, for example, or agricultural businesses are likely to be vastly more efficient. A good AI portfolio will invest in the beneficiaries as well as the producers of AI, while avoiding those companies on the wrong side of change.
Valuation is likely to be the final consideration for investors. AI is an exciting, fast-growth area, but its potential will not have escaped the notice of many investors. That leaves it vulnerable to bouts of over-exuberance, as was seen during the pandemic. While AI may be gathering a lot of headlines, that does not necessarily translate into a compelling investment opportunity. There will be winners from this revolution, but investors need to tread carefully.
