AI: The new frontier of investing

Artificial intelligence (AI), the technology where computers and other machines attempt to simulate human intelligence – often for problem-solving purposes – has turned the investing landscape on its head over the past year or so. 

While AI is not new, its extraordinary rise – best exemplified by Open AI’s ChatGPT release in 2022 – has companies scrambling to integrate the technology in various ways. According to FactSet data, of companies that conducted Q2 2024 earnings call from 15 June through 13 September 2024, 210 cited the term ‘AI’ – well above the five-year average of 88. Factset added 210 is “the second-highest number of S&P 500 companies citing ‘AI’ on earnings calls going back to at least 2014"¹.

With companies deploying more and more capital to AI, we breakdown some of the key areas that could define its role and how it could shape investing decisions. 

While technology and communications services appear to be the early winners of the AI boom (notably the ‘Magnificent Seven’), other sectors are making strides and the use cases for AI among them are growing. 

The financial services industry has a leg-up through its access to a plethora of customer data. Using AI technology, these firms can undertake functions such as fraud detection, eliminating manual processes, and other tasks that enhance productivity. 

Data centres are uniquely positioned to benefit from AI-related applications. Given the vast amount of computing power and data storage required by many AI applications, data centre functionality is fast becoming one of the biggest growth areas for capital investment.

During the first quarter of 2024, Microsoft, Amazon and Alphabet (the parent company of Google) announced billions of dollars of capital investment in data centres to support the growth of its AI operations. 

It’s one thing to invest in companies that could benefit from the expansion of AI into various sectors, but another way we see AI integration is in the investment process itself – how investment managers use the technology to better improve outcomes. 

In research, AI’s capacity to gather, sort and analyse droves of data – and eliminate human error at the same time – will be an integral tool for investment managers. AI can summarise data, spot trends and anomalies that the human eye cannot. This by no means removes human capabilities and intuition, but it serves as a tool to complement the existing frameworks investors use in decision-making. Moreover, data is an important instrument for eliminating bias – something that all humans possess.  

As AI-generated tools evolve, they could improve the trading process itself through lowering execution costs and rebalancing portfolios in real-time. 

The speed at which AI is becoming ubiquitous in our everyday lives raises concerns about its impact on individuals’ rights, which is why regulation is set to be an integral part in the coming months and years. 

The European Union (EU) has been the first to move, passing its AI Act in March 2024, which is a broad framework that classifies different use cases by risk category – unacceptable, high, limited and minimal. 

“The EU regulatory framework may constrain the timing of introducing new AI-based innovations but doesn’t appear to significantly impact the available opportunity,” said our international fund manager, Vontobel. “It’s also possible that higher regulatory burdens will favour more established companies, but it is too early to say at this point.”

The regulatory situation in the US is a little more opaque, largely due to the litigious nature of corporate America, where many court cases slow proceedings.

As we watch the surge in share prices of the major AI players, and the investment companies are making in AI technology, it may seem like a sure thing. However, there are risks worth highlighting.

Companies may find that the financial returns do not warrant the size of the investment. This would likely weigh on sentiment and share prices, given the steep valuations some of the AI beneficiaries are trading at.   

Secondly, and more importantly, is understanding the social impacts of AI. One of the narratives is “AI will replace humans”. If this is the case – even if on a small scale – then we need to start thinking about social safety nets and protocols in place to reskill and retrain workers.   

Despite these risks, there’s no doubt AI is here to stay. While the landscape may seem crowded, dominated by a handful of companies, we believe that as AI evolves, the use-cases for it will grow, increasing the opportunities to benefit from this technology. 

As an active manager, it’s our job to stay on top of this ever-changing technology. As things evolve, we will ensure to keep our investors informed of how we approach the technology.