While artificial intelligence (AI) is likely to be a long-term investment theme, problems with how the data sets that the systems rely upon are valued need to be resolved, according to Smith & Williamson’s Chris Ford.
Ford, who manages the £129.5m Smith & Williamson Artificial Intelligence fund alongside Tim Day, said many investors could be missing out on the companies that already use artificial intelligence in their businesses, which he noted many call the ‘oil of the digital era’.
“The value of oil is in the balance sheet but the real problem with artificial intelligence for the next 20 years is that if we can’t value data then the value of those assets is not accounted for,” Ford said.
“We have to find a way to figure that out because we can’t look at the asset base of these companies appropriately.”
One such example, he said is Alphabet’s AI-enabled disruptor Google, which, despite its size and pace of growth, can still be bought at a relatively attractive valuation that doesn’t reflect the company’s real value.
Performance of Alphabet YTD
Source: FE Analytics
He said not only is AI coming to the fore across a broad range of sectors including finance, healthcare and industrials but will have increasingly profound implications for a range of other industries.
The Smith & Williamson manager also warned that companies failing to embrace it could eventually become extinct.
“Companies failing to engage with AI could face existential risks in the longer term,” he explained. “To be frank, there is a group of companies which understands the implications of artificial intelligence, cloud computing and other advancements, and there is another group which does not.
“The ones who have grasped the benefits of AI are growing much faster than competitors, and that same technology is enabling them to keep extending their lead.”
According to Ford, there is evidence of this across many sectors, including the automotive industry –– where it takes the incumbents around seven years to get a vehicle from the design studio to production versus three years for electric car manufacturer Tesla – or the advertising market – where advertising agencies are being usurped by AI-enabled disruptors such as Google.
“Incumbents in large parts of the economy will not be able to change their business models to counter this, and while investors may refer to such companies as value stocks when they underperform, these businesses will likely stay as value stocks because the business model has limited longevity,” he added.
Kasim Zafar, investment portfolio manager at EQ Investors, said the best-performing businesses of the future would be those engaged in the development or production of AI systems and products or those that develop or deliver products that have an artificially-intelligent component which can enhance an existing product or service.
“There is an element of investors recognising that this is something going on,” he said. “Artificial intelligence is not a product, it is a way of doing things, of improving inefficiencies or develop of new ideas based on massive data sets.
“So, for us we don’t think about it as a tech product or a tech investment as such. It is more about getting exposure to companies that are improving their own inefficiencies and bringing up new businesses ideas.”
He added: “I need to check myself every now and again to not get too excited about it because I think AI could be the answer to one of the questions we have been asking ourselves for a long time: the productivity question, where we have had stagnant productivity for incredibly long periods of time.
“We finally got the power computing and data warehouses there and the data science to be able to put those two together to do something with it, could this be a productivity inflexion?”
He noted the number of companies that are implementing AI techniques is growing, with technological processes going to places that are not necessarily technology firms.
One example of businesses that didn’t use to engage in artificial intelligence some years ago but now are embracing these advancements is supermarkets.
“Supermarkets for example didn’t use AI, they used their sales and marketing people. However, they have huge volumes of transaction data and what they do now is they start using weather forecasting data to recognise when they are going to sell more ice creams,” he said.
As such, Zafar said having fund managers able to recognise which companies have the data sets and which ones are investing to capitalise upon those data sets.
“Repositories of data are something for companies to recognise they have in the first place and, once they do that, then they can start spending money on technology, to capitalise on that,” he explained.
This, according to the EQ Investors portfolio manager means they know which companies are more likely to continue to grow rather than falling behind, a key for outperformance.
“I would have an easier life if certain funds such as Smith & Williamson Artificial Intelligence weren’t called ‘artificial intelligence’ as, for me is about these being global funds and global growth style fund,” concluded Zafar. “I would think of this fund as a possible replacement to a global growth fund as opposed to being a niche strategy.”
Performance of fund vs index since launch
Source: FE Analytics
Smith & Williamson Artificial Intelligence is up by 24.66 per cent since launch in July 2017. It has an ongoing charges figure (OCF) of 0.92 per cent.