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I’m trimming the AI leaders amid the hype, says Rathbones’ Coombs

15 June 2023

Investors poured billions into a small number of AI leaders this year, but David Coombs is reducing exposure before share prices come crashing down.

By Tom Aylott,

Reporter, Trustnet

Investors have become overly excited about artificial intelligence (AI) and put big technology names in a risky position, according to David Coombs, head of multi-asset at Rathbones.

While many have invested heavily into AI leaders, Coombs has cut exposure to them in the Rathbone Multi-Asset Portfolio range due to fears that their share prices will collapse once the hype dies down.

“When you get those kinds of big moves, it made us a bit nervous there's a pile-on happening so we wanted to take a bit of short-term profit,” he explained.

Companies such as AI software provider Nvidia have been hugely popular amid the AI rally, with its share price soaring 186.6% this year, making it the fourth biggest stock in the S&P 500 index.

Share price of NVIDIA in 2023

Source: Google Finance

Coombs has held the shares in the company since before the rally but trimmed exposure across his funds this year as retail money swelled the share price to alarming levels.

This was also the case with Comgest Growth America manager Justin Streeter, who told Trustnet yesterday that he avoids customer-facing companies for this very reason. Well-know businesses such as these attract large amounts of money from retail investors, which adds a higher level of volatility.

“The hype has been overdone,” Coombs said. “You’d think AI just got invented last week but this is not new - AI has been around for ages. Why this sudden exponential excitement? I don’t think there’s a logic to that.

“The impact of AI learning is increasing and becoming more powerful of course, but that's been happening across tech for years, so it’s not particularly surprising. I think ChatGPT just captured the zeitgeist.”

Indeed, Coombs credited the surge in interest around AI to ChatGPT. Although it was released in November 2022, the tool did not enter mainstream conversation until March this year.

Google searches for ChatGPT in the UK over the past year

Source: Google Trends

Coombs said: “Companies have been telling us how they’re using AI to improve productivity for years, but you take it for granted, a bit like the plumbing.

“I think what ChatGPT has done is made it a topic people are now talking about. I too have read into it thought about it a lot more in the last three months than I had before.”

One of the main issues to rise from this surging interest is that investor’s wanting to capture the hype have piled into a concentrated few names.

Russ Mould, investment director at AJ Bell, pointed out that just six stocks (one of which is Nvidia) accounted for 88% of the $3.8trn gain made by the S&P 500 this year, leaving him “feeling a little nervous about the US market”.

He said those stocks “could bring dangers in terms of valuation” as a sharp drop in one could have a big impact on the market as a whole.

It is for this reason that Coombs also reduced exposure to other AI leaders such as Amazon, Alphabet, Microsoft, Apple, Adobe and Shopify this year to bypass some of that volatility.

While he attempted to avoid short-term risk, Coombs still maintains positions in all those companies as AI is likely to be a strong driver of growth over the long-term.

“I do think the increasing power of AI will be a big step change,” he said. “I couldn’t tell you when that step change is coming though.

“Like any step change in technology, there are big losers and there are big winners. I think it's really important that we get away from the shedload of hype that’s out there because I don't think people understand it properly.”

QuotedData analyst Richard Williams was also excited about the new opportunities that could arise from AI, stating that “an inflection point is close to being reached”.

However, he was less pessimistic about the recement boom in interest than Coombs. Williams said investors are right to be enthusiastic about opportunities in the space.

“The potential of AI is enormous and somewhat incomparable, and certainly not a ‘hype cycle’ that has seen the clamour around previous tech cycles being massively overdone,” he added.

“Major improvements in output and rapid adoption make the likelihood that it will become a general purpose technology – technologies that can affect an entire economy, like the computer and internet before it – and impact on all parts of everyday life an inevitability.”

Investors who don’t want to run the risk of buying individual AI stocks themselves but still want exposure to the space might want consider the Polar Capital Technology trust as manager Ben Rogoff is bullish on the theme, according to Williams.

Share price of trust vs sector in 2023

Source: FE Analytics

Nevertheless, Coombs said picking the future winners of AI will be a difficult task at this early stage. Most investors are focusing on a few companies developing the technology, but the main beneficiaries will be the unrelated companies that use AI to boost their own efficiency.

Coombs said: “Most of the companies that created the internet went out of business and don't exist anymore. The big winners were those companies enabled by the technology and that will be the case with AI.

“The fun and exciting companies from AI could be in a really boring space that could be suddenly transformed by this technology. A lot of the market will miss them, so you'll have to be smart, clever or lucky enough to catch them.”

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