How to invest in Artificial Intelligence

This powerful trend could shake up entire industries, but how can investors access it?

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  1. Rob Morgan

Artificial intelligence (AI) is a rapidly evolving technology with a growing influence. Everyday examples include voice-activated personal assistants, self-driving features in cars, and websites suggesting films or songs we might like based on previous choices. This is just the beginning, however. AI could entirely reshape our economy, shaking up entire industries as well as changing the way we work and live.

Leading AI scientists have been developing programs that can learn to solve complex problems without needing to be taught how. Although it’s still relatively early days for the technology, there are expectations these techniques will be used to advance numerous fields, including finance, healthcare, education, transportation and more.

The catalyst for the AI revolution is the huge processing power computers are now capable of, as well as the vast and increasing amounts of data that is being generated and stored. Crunching this data in more intelligent ways lowers the ‘cost of prediction’, leading adopters to increase productivity.

For instance, if retailers know what customers will want to buy and in what amounts, they can lower the costs of holding inventory and better use dynamic pricing to extract maximum value. In healthcare, improved forecasts can pinpoint the causes of disease and identify cures, as well as possible risks faced by patients through combining historic patient data with their particular medical tests. Another important industry set to benefit is agriculture. More precise predictions of temperature, rainfall, pests and other factors can maximise yields in changing conditions.

As well as opening up new avenues of growth and wealth creation, it has the potential to render some business models obsolete. So even if you are not interested on investing in AI, it is an important structural trend to be aware of as it could affect existing investments.

Which companies are involved in AI?

Tech giants such as Amazon and Alphabet are already profiting from AI through the provision of cloud services to hold data. There is also an ecosystem of hardware and software providers, such as chip developers Taiwan Semiconductor and Intel, as well as companies providing other essentials such as sensors, such as Japan’s Denso in the case of automated cars, and data transport.

There are relatively few businesses that represent a ‘pure play’ on AI, though. Often it’s just a part of the business, albeit a fast growing one. Purer exposure tends to comes from AI ‘providers’ such as Pegasystems, Nice and the UK’s Blue Prism, which typically service the needs of certain industries or sectors through AI-powered solutions such as ‘robotic process automation’ – automating and scaling repetitive tasks such as customer on boarding or accounts reconciliation.

Then there are the users of AI. This could encompass any company in any industry aiming to enhance and improve their product of efficiency. For instance, online supermarket Ocado uses AI in a number of ways including forecasting the demand for 50,000 items, managing flows and optimising the routes of warehouse robots. It has built up considerable intellectual property in the area and has the ability to licence its technology.

Ways to invest in AI

Investing in a single company involved in AI is risky, but there are ways to spread an investment over a number of companies, sectors and geographies so you aren’t dependent on the fortunes of one firm.

As well as wider technology funds that would encompass the theme, there are a handful of ETFs (exchange traded funds) dedicated to AI including those from WisdomTree and Legal & General, which take a ‘passive’ approach of investing in a broad range of companies with exposure to the theme. There are also actively managed options such as Smith & Williamson Artificial Intelligence Fund, which takes a more concentrated approach that can increase risk.

A word of warning though, this is a niche area and we would expect funds investing in it to experience more volatility (greater ups and downs) than a typical fund. The high growth potential, and risk, of many of the companies in the area could result in their share prices being more exposed to changing investor sentiment. Presently, for instance, the trade war between the US and China has the potential to disrupt supply chains and the progress of certain businesses. 

Due to their specialist nature, none of these funds have been considered for our Foundation Fundlist of preferred investments across the major sectors.

Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

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