Investors looking for the next big trend in one of the best performing sectors of recent years should make sure they have an allocation to artificial intelligence in their portfolios, according to Liontrust Asset Management’s James Dowey.
Technology stocks have led the equity bull market in recent years with so-called FAANG– Facebook, Amazon, Apple, Netflix and Alphabet (Google) – and BAT (Baidu, Alibaba and Tencent) companies among some of the global market’s best performers.
“Technology is the way forward and I have the highest weighting in the entire [IA UK Equity Income] sector at 20.2 per cent,” said Robin Geffen, manager of the £347.1m Liontrust UK Income fund.
“There are very strong structural drivers, very high margin businesses, cash generating, strong models and great shareholder returns.”
And funds specialising in technology have produced some of the strongest returns, with the average IA Technology & Telecommunications peer up by 345.31 per cent in the 10 years to 31 January 2020, compared with a 125.64 per cent gain for the average UK equity income fund.
Performance of sectors over 10yrs
Source: FE Analytics
Geffen added: “Technology is where the future is and that’s very important to us.”
And colleague Dowey (pictured) – who manages the £160.5m Liontrust Global Equity fund – said there is one specific area that the team has been increasing its focus on.
“We believe that understanding technological change will be absolutely key over the next decade, investing in companies on the right side of new technologies and avoiding those on the wrong side," he argued.
“No technology will be more important in this regard than artificial intelligence.” 
“AI has been a long time coming, with many disappointments along the way,” said Dowey. “But from here we believe that its impact could come sooner than many people expect.
“There are two basic reasons for this. Firstly, the rates of adoption of big new technologies once they become economically viable have sped up a lot over time.
“About a century ago, it took the radio 31 years to diffuse to 25 per cent of the US population; a couple of decades later it took TV 26 years.
“But recently it’s been much quicker: the internet only took seven years, social media took five years and tablet devices [took] two years.
“There’s something different about the economy today and we believe AI can spread quite quickly.
“Secondly, in terms of economic viability, AI has recently surpassed some key thresholds.”
One example of this, said the Liontrust manager, was the significant improvement in image recognition error rates, which are now lower than those for humans.
Another investment implication of AI is the impact it could have on economic growth.
“We’ve become very accustomed to painfully slow economic growth over the last decade, partly as a result of this economists today are pretty gloomy about the prospects for growth over the next decade,” said the Liontrust manager.
“But we believe that economic history has a very important lesson for us to learn right now and is very much underappreciated, and that is when a big new technology comes along it just speeds things immensely.”
Dowey said there were two key decades where this was seen: in the 1920s with the electrification of the US economy and the 1990s with the rise of personal computers.
Investors should also not be put off by any potential regulatory headwinds to the growth of AI, said the manager, as they are rapidly becoming tailwinds to growth of the sector.
“The headwinds story concerns domestic politics which are anti-AI because it threatens jobs,” he explained. “We agree with the basic logic but note the following observation that IA happens to be arriving on the scene at a point in time with an employment rate at historically lows levels.
“So, the political forces and resistance may well be relatively weak right now and the door is somewhat ajar for AI.”
In addition, AI is viewed as a key strategic asset by some countries.
“The AI arms race is really heating up right now, particularly between the US and China,” he explained. “In 2000, 40 per cent of the all the top scientific research in the field of AI was written in the US and 1 per cent was written in China. Today, 20 years later, it’s at level pegging.”
The low interest rate environment will further magnify the impact of AI as structural factors continue to play a bigger role in returns over the longer run, driving share prices forward as companies are able to make better use of cheaper capital.
Finally, the manager said AI is likely to increase the advantages of the best companies that have track records of having picked up new technologies and used them to improve their business models.
“This is interesting for us when we look at AI because we see it primarily as an extremely powerful productivity-enhancing technology and we believe that the best companies have already proven those capabilities and made the most of it.”
Performance of fund vs sector & benchmark since launch
Source: FE Analytics
Since launch, the Liontrust Income fund – formerly known as Neptune Income – has made a total return of 343.67 per cent under Geffen, ahead of the FTSE All Share benchmark’s 301.78 per cent gain and a return of 286.21 per cent for the average IA UK Equity Income peer. It has a yield of 3.98 per cent and an ongoing charges figure (OCF) of 0.89 per cent.