Investors are thinking about artificial intelligence (AI) too narrowly and not taking advantage of the broader opportunities it creates, according to Smith & Williamson’s Chris Ford.
Ford, manager of the recently launched Smith & Williamson Artificial Intelligence fund, said people were fundamentally misapprehending AI in a number of different ways.
“Firstly, they are misunderstanding the breadth of AI, they are thinking about it in a very narrow context largely through the medium of the tech sector,” he said.
“We are beginning to see AI platforms crop up in a number of different industries all the way across the world, so this is not something that is limited to the tech sector at all. We believe this is beginning to revolutionise business models right across the economy.”
Indeed, his fund, which aims to invest in companies that offer what the team regard as ‘purity of AI revenue’ is 50.3 per cent invested in technology stocks, with others from sectors such as healthcare, industrials and financials all fitting into the AI category.
Table of sector weightings in fund
Source: Smith & Williamson
“Right across the economy those companies that understand the benefits of AI platforms and what insights it can deliver for their businesses are going to be in a significantly enhanced position to compete in their markets relative to more slow-moving competitors,” Ford said.
One key misunderstanding investors have when it comes to AI is the idea that artificial intelligence is similar to robotics – although the two are fundamentally different.
“Very often robotics is an ill-defined term thrown around without due consideration as to what it actually means,” he noted.
In the 1970s, companies installed robotics systems, such as production lines in areas like the automotive industry, but there was nothing intelligent about these systems.
The main benefit brought by the robots was the ability to perform repetitive tasks very quickly but, since then, times have changed.
“I think we need to be a little bit careful when we talk about robotics. This is why our fund looks very different from a robotics fund. We are not looking to provide disproportionate exposure to that in particular,” he added.
Another thing investors get wrong within the AI space is the idea that most – if not all – of the innovation in the sector comes from the US.
“We have all been conditioned over the course of the last 20 years to view tech as being something that happens in North America with an honourable mention for the odd company that survives as almost a relic in other parts of the world,” Ford said.
“We as investors view the world through the prism of the last two or three tech cycles and we’ve been conditioned to look in that market for innovation.”
What he is seeing now is a “proliferation of endeavour” in AI around the world. But there remains an unwillingness on the part of investors to look at further afield markets such as the Asian markets for new AI platform innovation.
This is despite the fact that – in many cases – the technology available from large companies such as Baidu is every bit as well-developed and sophisticated as the tech that come out of North America, he noted.
Chart of country weightings in fund
Source: Smith & Williamson
As such, while the fund has a high weighting to the US (53.3 per cent), areas including the UK (7.7 per cent), Germany (7.4 per cent) and China (6.7 per cent) make up the other half of the portfolio, as the above chart shows.
The final thing investors are not recognising in the AI space is the unusual implementation of technology in different industries.
For example, online entertainment provider Netflix is among the top 10 holdings of the fund despite being seen by many investors as a more traditional technology stock.
“If you think about Netflix, this is a business that does some very interesting things in terms of the functional way that it delivers its rich media content over the internet, using AI to dictate where the media is stored and the way the content is delivered to drive efficiencies,” Ford said.
“But what really interests us is the way Netflix is using intelligence to help drive engagement with content and then subsequently drive the direction of content generation to in turn push engagement levels higher.”
He noted that more than 70 per cent of viewing on the Netflix platform now comes from content that recommended to the viewer by Netflix’s internal smart recommendation system, which learns from experience to decipher what the customer likes to watch and when.
“That’s pretty smart but what also intrigues us is how Netflix as a content producer is able to take those insights and use that to inform the type of content it provides,” he said.
“If it understands what type of content its viewers want to watch, it can make more of that kind of content so it can cater to consumer tastes much more rapidly than a traditional media company would be capable of.”
Ford runs the £41.2m Smith & Williamson Artificial Intelligence fund alongside deputy manager Tim Day.
“This fund is about giving our clients exposure to the economic benefits of AI platforms wherever we can find them,” Ford said.
“Of course, the most obvious benefit is the companies selling the picks and shovels – the AI tools – but at the moment there are relatively few of those though there are more and more of them coming all the time.”
As such, he is focusing on companies whose businesses are wholly built on AI platforms and those that without the AI platform would find that their business models just wouldn’t work.
Additionally, Ford said there are opportunities in the companies that have been “in the vanguard of the deployment of these systems”.
“Management teams have the opportunity to derive very significant competitive benefits and we think it is absolutely appropriate that we provide our clients with exposure to each of those three elements of the AI world,” he said.
Performance of fund since launch
Source: FE Analytics
Launched in June this year, the fund has made a strong start with a gain of 9.74 per cent since inception, as the above chart shows. The fund has a clean ongoing charges figure (OCF) of 0.95 per cent.