With an estimated 30 billion devices set to connect to the internet within the next few years, now could be a good time to get exposure to the companies tasked with analysing all the data that will be produced, according to WisdomTree’s Christopher Gannatti.
Gannatti (pictured), WisdomTree’s head of research in Europe, said that the so-called ‘internet of things’ will generate a huge amount of data and open up a number of investment opportunities.
“These devices will include thermostats, refrigerators, cars, cell phones, computers – all collecting data all the time on all sorts of different things,” he explained.
This data will require analysis, which is where WisdomTree believes one of the next big investment trends is likely to occur with a growing number of companies in the field of artificial intelligence (AI).
AI, the branch of computer science that deals with the ‘intelligent’ behaviour of machines, is at the heart of the so-called ‘fourth industrial revolution’ and is about programming machines to simulate human behaviour and conventional response patterns.
The only way to make sense of the data being collected by billions of new devices connecting to the internet in the next few years will be through AI, said Gannatti.
“The world has decided that it’s moving in the direction where data is of the utmost importance,” he explained. “The toolkit needed to be able to make sense of data is AI.”
The “toolkit” that AI provides, said Gannatti, will be able to find patterns and come up with reasonable interpretations of the huge amounts of data that grows daily.
One example of where AI is being applied today can be found in autonomous vehicles.
“That doesn’t mean we’ll look out the window and see cars driving around without drivers in them,” he explained. “But you have companies like Tesla providing a better auto-pilot system than the world has ever seen before.”
In the process of doing the research and development that enables them to do that, Gannatti added, there are new microprocessors, computer chips, semi-conductors that get developed, as well as new types of sensors enabling the cars to know what’s going on around them.
All this is going to fuel development in other areas, not just self-driving cars.
“In financial services, there’s a discipline called ‘robotic process automation’, which provides software that can copy the patterns of behaviour of people performing repetitive tasks in back offices again and again,” said WisdomTree’s Gannatti.
Such applications are now being used in insurance companies and customer service centres.
“So, if a driver gets involved in an accident, with a picture taken on a cell phone, an image recognition software could compare that accident with all the accidents in the insurance company’s database to determine, for example, the amount to be awarded for the claim,” he said.
Nevertheless, as a sector is in its infancy, there will still be a number of risks for investors.
These risks are likely to be seen in short-term volatility of the sector, according to the WisdomTree European research head.
“The short-term performance is probably going to be volatile and there could be a risk of negative performance in the short term because of government policy interventions,” he said.
However, the value society has put on data is here to stay, said Gannatti, adding that this is a field for long-term investors.
“The longer-term story of why someone should be thinking about this specific theme should be well intact no matter who, in 2020, wins various elections or other things,” he added.
WisdomTree’s launched its ETF (exchange-traded fund) strategy for AI, the WisdomTree Artificial Intelligence, at the end of last year, designed to capitalise mainly on “pure-play” AI companies, those depending mainly on selling AI solutions.
The ETF tracks the Nasdaq CTA Artificial Intelligence index, designed in partnership with the Consumer Technology Association (CTA), which tracks the performance of companies engaged in the AI segment of the technology, industrial, and medical and other economic sectors.
Performance of the CTA Artificial Intelligence Index
Source: Tradingview
“Our focus has always been on the purity of exposure to AI. There are other strategies available elsewhere that mix robotic, or automation, or digitalisation,” Gannatti said. “We cater to investors who are only interested in AI, we want to give those investors a tool to access the theme.
“The expert judgment that the CTA is bringing, allows us to go company by company and understand what is the direct service being provided, how is AI central to the business model of the company,” Gannatti said. “Once we understand that, we can decide whether or not a business should be in the portfolio.”
The first category of holdings found within the ETF relate to 17 companies, known as ‘engagers’ or companies mainly focused on AI.
A second category consists of 18 companies known as ‘enablers’, such as US firm Nvidia, which provides essential processing power to AI firms. These are facilitators that help other companies in the space succeed.
The third category of companies in the fund, are the ‘enhancers,’ are involved in AI but derive the bulk of their revenues from other activities. They are 17 in total and include companies such as Amazon, Google, Microsoft, and Tesla.
“We don’t give much weight to companies like Google, Amazon, and Microsoft, because investors can find those companies in tech sector funds, they can find them on an individual basis,” he said.
“While we would reduce exposure to such companies, our highest weighted category would include a company like Blue Prism in the UK, which is very focused on delivering robotic process automation.
“We still want a company like Amazon, because it invests an awful lot of money into the space, but we’re going to scale down the weight,” Gannatti concluded.
Performance of fund vs sector since launch
Source: FE Analytics
The $22.7m WisdomTree Artificial Intelligence UCITS ETF has returned 26.68 per cent since its November 2018 launch, compared to 14.36 per cent for the average Global ETF Equity – Tech Media & Telecom peer. It has a total expense ratio of 0.40 per cent.