By Ryan Lightfoot-Aminoff, investment trust research analyst at Kepler Partners
The growing prominence of artificial intelligence (AI) is red hot topic. Catalysed by the roll-out of ChatGPT, it has captured significant attention and increased commentary on AI’s impact on numerous industries.
Projections vary from significant productivity gains through automation to doomsday scenarios predicting mass redundancies.
Whilst debate on societal impact continues, the investment industry has primarily focussed on capturing AI’s upside potential, mostly through buying chip manufacturers like Nvidia, causing large share price rallies.
However, there are industries that will likely escape relatively unscathed. Some of these have also seen big jumps in value – though notably, many have not. There is therefore upside to be found in investors asking themselves which sectors are immune from the AI revolution.
Sport
One industry likely to navigate the AI takeover is sport. The tension and thrill of live sport is unlikely to be replaced with technology and therefore the industry is a strong candidate to survive an AI revolution.
The sector has seen significant inward investment, especially from the likes of oil-rich states into sports such as golf, tennis and football. This has contributed to a significant jump in values, especially in the likes of Premier League football clubs.
Liverpool FC, for example, were purchased in 2010 at a value of £300m by Fenway Sports Group. In 2023, Forbes estimated the club’s value at £4.3bn. This represents a gross return of over 1,300%, or an annualised rate of 18%.
This is hardly an exception. Forbes produces an annual report on the values of the world’s largest football teams. In 2023, the average value of the top 20 clubs was £2.35bn ($2.89bn), up 14% on 2022, over four times the $632m average in 2010 (about £409m based on the 2010 exchange rate).
Interestingly though, this increase has not been driven by fundamentals – revenue in 2023 was up just 2.4% on 2022. In fact, the business model of football clubs is surprisingly poor.
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They have high competition, limited competitive advantages, weak balance sheets and poor capital discipline. Price increases simply seems to reflect increased demand, with potential to endure in an AI-driven world arguably a contributing factor.
Nick Train, manager of Finsbury Growth & Income, owns two football clubs in the trust – Manchester United and Celtic – though on a slightly different thesis. He believes clubs can benefit from increased broadcasting rights revenue.
This has helped club performance over the past couple of decades, but with the likes of Apple TV+ entering the US market, he believes this can accelerate further. With devices such as Apple Vision Pro, and the potential for AI to increase leisure time, this argument is well-supported.
Both holdings were positive contributors in the latest financial year, although not quite to the levels seen elsewhere. In line with Nick’s style, these are likely to be long-term positions.
Healthcare
A less glamourous sector likely to exhibit AI immunity is healthcare. The industry – primarily the services side – requires human interaction, with empathy and care needed beyond just clinical expertise.
As such, the industry can withstand an AI revolution and even benefit from automation of low-value tasks. When coupled with the ever-increasing need for healthcare provision as global populations age, it offers sustainable growth opportunities too.
The four-strong management team at Brunner have tapped into this theme in their high-quality global equity portfolio. They have identified ageing demographics, as well as gradual income rises globally, as reasons for increased healthcare demand. They hold the likes of UnitedHealth Care and Novo Nordisk, contributing to an overweight allocation of 14%.
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Whilst the sector has underperformed broader equities over the past year for a myriad reasons, annualised long-term performance is broadly in line, despite healthcare typically being a more defensive offering.
Should the expected demand increase support future growth, it would be no surprise to see the healthcare sector outperforming, regardless of the proliferation of AI.
Housebuilders
The housebuilding sector can also offer protection from AI. The industry relies on skilled labour from a varied range of capabilities. Whilst AI may offer efficiency improvements with the planning and logistics side, it is unlikely to impact construction.
Furthermore, the industry itself, especially in the UK, is expected to see continued demand from the chronic underinvestment in new houses, as well as from improvements needed in otherwise old and draughty housing.
As such, there are attractive investment opportunities which Guy Anderson and Andrew Lynch, managers of Mercantile, are taking advantage of. They have added to several housebuilders in the past year, with Bellway currently the largest position in the portfolio.
Furthermore, the trust owns a position in Howdens Joinery, which supplies parts to the construction industry. Whilst the managers primarily own these companies on valuation grounds, these valuations are likely to be supported through future demand which is arguably not under imminent threat from AI.
Whilst the scope of what AI can do has captured the attention of the investment industry and wider population, it is fair to say there will remain some industries that will be relatively sheltered from these impacts.
In some cases, this could arguably be what is driving up valuations as high-net-worth organisations look to diversify their future exposures. For other sectors, there remain opportunities for investors to capitalise on.
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