A traditional investment portfolio alone will not sufficiently capture the cross-industry impact of new and disruptive trends such as technological innovation, according to Rahul Bhushan, global head of index at ARK Invest Europe.
“It is important for investors to think both about the opportunities within the vertical but also the horizontal – this is especially true of technology and the progression of artificial intelligence (AI),” he said.
As an example of horizontal thinking, he pointed to Elon Musk’s attempt to introduce a Tesla diner – a place where consumers can both charge their Tesla vehicles and purchase food and drink. One such diner exists so far and, if successful, Musk has plans to build Tesla diners across the US and beyond.
“On the one hand, there is profiting on disruptive technology itself, but on the other it is about trying to understand and capture how companies are going to leverage these technologies to create and build new markets,” Bhushan said.
Horizontal thinking is hard to anticipate. After all, “nobody anticipated that Musk would build a diner”, he said.
On a broader scale, several US-based tech giants, including Google and Microsoft, recently pledged to pour money into AI development in the UK. Nvidia CEO Jensen Huang claimed he believed the UK would be an “AI superpower”.
This opens the door to some “pretty phenomenal growth opportunities” that would have been hard to predict six months ago, according to Bhushan.
An active, thematic approach could give investors more manoeuvrability – when compared to traditional sector or index-based approaches – to capture the horizontal waves of disruption from future-focused themes like AI, robotics, energy storage, public blockchains and multiomic sequencing, he argued.
Thinking about the AI value chain is also only half the job, according to Bhushan.
“The other half is actually revisiting the assumptions you may have about the size of the pie, because what we learn practically every single month is that the pie is bigger than we thought,” he said.
For example, when ChatGPT was first launched in late 2022, it was just a consumer application. Today, it is an enterprise application with over 700 million active users.
“We have to recognise that AI is growing at seven to eight times relative to the things we are used to,” said Bhushan. “Given the size of these growth rates, either the AI revolution is going to happen faster than expected or we are all underestimating the size of the future market. This is why we are seeing so many companies make enormous investments into this area to make sure they have a place in an AI-run world.”
Thematic vs core
Thematic approaches to investing are already tried and tested and in active circulation, although Bhushan admitted he “doubts thematic strategies will fully replace core allocations [or the 60/40 portfolio] just yet”.
He further acknowledged that the development of a wholly thematic portfolio “requires a level of research and understanding of the market that most investors do not have the time for”.
A common portfolio strategy is a hybrid approach where investors pair a core holding – such as a broad market index – with a satellite allocation to a thematic exchange-traded fund (ETF) that targets a specific area of growth, serving as a medium through which to express the investor’s high-conviction views or capture themes they believe are underrepresented in the core.
However, Bhushan argued that the 60/40 portfolio structure has “done a great disservice to investors over the past 10 to 15 years”, noting it is a “backward-looking model in a world where fixed income has just not performed well enough”.
In particular, he questioned whether it is time to rethink what multi-asset looks like.
“Ultimately, investors want a diversified mix of different assets. Alongside equities and fixed income, we are increasingly seeing commodities, alternatives and private markets – in some quarters, cryptocurrencies could also form part of a well-diversified portfolio,” he said.
Going beyond the benchmark
However, many passive and active thematic funds focused on AI often fail to look beyond the more obvious names in the benchmark to find companies genuinely benefitting from AI, Bhushan said.
“Many of these funds track or replicate the S&P 500, yet there are many companies in the index today that are massively underinvesting in AI or do not know what kind of investments they need to be making,” Bhushan said.
Of course, the opposite could also be true, with companies that have been “hidden away” in the benchmark for a long time suddenly resurging due to successfully utilising AI.
While reducing volatility relative to the benchmark, closely tracking the benchmark will also not allow an investor to fully capitalise on the innovators and avoid those falling behind, according to Bhushan.