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How Scottish Mortgage and other trusts are playing the AI revolution

18 May 2023

Investment company specialists explain how they are investing for the boom in artificial intelligence.

By Jonathan Jones,

Editor, Trustnet

Artificial intelligence (AI) has been thrust into the spotlight in recent months with investors and analysts all keen to harness the potential of the new technology.

Perhaps the most well-known iteration of this is ChatGPT, a chatbot that scours the internet for knowledge before providing answers to an infinite range of questions.

So popular has the new technology become, companies from all industries are questioning if it can be incorporated into their operations, with many fund managers asking portfolio holdings how they are making use of the technology.

Earlier this month, Stephen Yiu, who runs the LF Blue Whale Growth fund, claimed ChatGpt has made internet giant Alphabet uninvestable. While it was once a top-10 position in his portfolio, he feared the former tech disruptor could itself be under threat.

“The software is based on an algorithm that requires little to no user input – all the information that it needs is already on the internet and it can train itself to come up with sensible answers to most queries,” he said. “This means that anyone with a couple of data scientists can now start a search engine.”

Below, managers of investment trusts including Scottish Mortgage, Augmentum Fintech and Polar Capital Technology explain how they view the burgeoning technology.

 

AI has the disruption potential of the internet, smartphone or the email

Harry Raikes, manager of Schroders Capital Global Innovation Trust, said the magnitude and speed at which AI is being adopted is “remarkable”.

“Our belief is that AI, most recently focused in the field of generative AI enabled by the advent of large language models, has the potential for innovation and disruption on a scale comparable to the introduction of email, the internet and the smartphone,” he said.

However, he warned that there are unknowns that come with any new technology, such as whether society will fully embrace the technology and the longer-term implications that it may have.

Raikes added: “For example, will the widespread use of AI ultimately foster greater creativity and intelligence or will it stifle them? Will it enable better knowledge sharing or fuel rampant misinformation?

“Most significantly, will it mitigate social inequality, or will it exacerbate the concentration of power and wealth among a select few?”

Overall, he was “cautiously optimistic” on the technology as advancements generally improve society and boost productivity, rather than fulfilling the sci-fi fears of technology “ruining lives”.

 


It will overtake the cloud and mobile internet as the next great tech boom

Opportunities resulting from advances in AI range from infrastructure to software developers and big data, according to Alastair Unwin, fund manager in the Polar Capital Technology team.

“AI is set to be the next major secular technology trend driving the technology sector’s growth, taking on the baton from the cloud and mobile internet. The early beneficiaries of AI largely reside in the technology stack which powers the training and inference operations of large language models, particularly semiconductors,” he said.

 

Investors are scrambling to learn more

Claire Shaw, portfolio director of Scottish Mortgage, said companies and investors are “scrambling to understand the ecosystem that is developing around this area”, and trying to work out who will be the winners and losers.

One seemingly safe bet is the makers of graphic processing units, as generative AI systems need knowledge to create content which is not something traditional computer hardware can handle.

Two companies she expects to benefit from the sudden burst in usage of artificial intelligence are chipmaker Nvidia and ASML.

Scottish Mortgage has owned the former since 2016. It dominates the design of chips with around 90% of generative AI programmes using those produced by the company.

“Against that backdrop, NVIDIA is likely to be one of the foundational companies in this ecosystem,” she said.

“Another long-standing Scottish Mortgage holding, ASML – the dominant manufacturer of the lithography equipment used to make chips – is also set to be a beneficiary of the rapid adoption of generative AI and machine learning technologies given its unparalleled competitive advantage in this field.”

 


A huge opportunity that cannot be ignored, but regulation should be welcomed

While there are always merits to preaching caution, there is a huge opportunity in the coming years with AI, according to Tim Levene, chief executive officer of Augmentum Fintech. He said that even non-generative AI models used today should not be overlooked.

“Lots can be achieved with AI models that are relatively simple when compared with the large language models and generative AI that are grabbing the current headlines,” he said.

However, a “robust regulatory framework” will be needed to address ethical concerns – something that lawmakers in developed countries such as the UK and US have already begun planning.

“Overall, we welcome regulation and scrutiny of the industry, and believe the opportunity remains extremely compelling,” said Levene.

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