How to invest in Artificial Intelligence

Artificial Intelligence (AI) is a rapidly evolving technology with a growing influence. Simple examples of AI are already embedded in the devices we use every day including voice-activated personal assistants, self-driving features in cars, and websites suggesting films or songs we might like based on previous choices.

While this ‘traditional’ AI recognises objects and words, new, more powerful technology takes things a stage further. It understands the structures behind them and can respond to prompts to create text on a given subject in a certain style, or even computer code to complete specified tasks.

The most well-known example of these large language models (LLMs) is Chat GPT, the hugely popular chatbot developed by OpenAI. Freely accessible to anyone, a remarkable 100 million users signed up in its first two months. Most people who have used Chat GPT have been impressed with its ability to quickly produce long form answers according to complex instructions. It’s also fun. Want to generate a Shakespearean sonnet on the subject of investing? No problem. Yet the serious business of AI represents tremendous progress. As well as following instructions and generating text, LLMs have the ability to generate plans for other systems and command them what to do.

Why AI is an important investment theme

The huge processing power computers are now capable of, as well as the vast and increasing amounts of data that is being generated and stored has been the catalyst for an AI revolution. Crunching this data in more intelligent ways lowers the ‘cost of prediction’, leading adopters to increase productivity. AI is therefore poised to reshape our economy, shaking up entire industries as well as changing the way we work and live. Techniques are now being implemented to advance numerous fields, including finance, healthcare, education, transportation and more.

For instance, if retailers know what customers will want to buy and in what amounts, they can lower the costs of holding inventory and better use dynamic pricing to extract maximum value. In healthcare, improved forecasts can pinpoint the causes of disease and identify cures, as well as possible risks faced by patients through combining historic patient data with their particular medical tests. Another important industry set to benefit is agriculture. More precise predictions of temperature, rainfall, pests and other factors can maximise yields in changing conditions.

Some of the many other uses of AI include:

• Marketing and sales – better targeting prospective customers
• Customer service – improving customer experience and reducing waiting times
• Industrial – predicting when a machine may fail and recommending preventative maintenance
• Finance – improving underwriting and advancing fraud detection
• Cybersecurity – anticipating and detecting breaches

As well as opening up new avenues of growth and wealth creation, it has the potential to render some business models less relevant and profitable, or even obsolete. It is an important structural trend for all investors to be aware of regardless of whether they are targeting the area thematically.

Which companies are involved in AI?

Tech giants such as Microsoft, Alphabet and Amazon are already pioneering and harnessing AI. Narrowly defined AI, the ability to search and write in response to queries, will probably continue to be mainly developed by existing tech leaders. There is also an ecosystem of hardware providers, such as chip developers, as well as companies providing software and other essentials for the AI ecosystem that could benefit.

More broadly, AI can be utilised by all kinds of companies to enable greater productivity and growth. In addition, there will likely be a host of entrepreneurial firms, challengers in a range of fields, perhaps some that don’t even exist yet, who will do well out of seeing ways to formulate services and products that will change lives and businesses for the better.

As such there are relatively few businesses that represent pure exposure to AI, at least ones that are currently listed on the stock market. The specialists that are available to investors tend to be smaller companies that come with high growth potential but also sizable risks. More often, AI is a part of a larger tech business, or it is more broadly a catalyst for change within any company, enhancing products and services and driving efficiency.

AI investment options

Investing in a single AI-related stock is risky, but there are ways to spread an investment over a number of companies, sectors and geographies so you aren’t dependent on the fortunes of one firm.

As well as broader technology funds with exposure to mainly larger companies, there are a handful of ETFs (exchange traded funds) investing in leading AI companies including those from WisdomTree and Legal & General, which take a passive approach of investing in a range of businesses with exposure to the theme. Each tracks a custom index, and top-ten holdings common to both are advanced chip maker Nvidia and gene-sequencing specialist Illumina.

There are also actively managed options such as Sanlam Global Artificial Intelligence Fund, which takes a more concentrated approach to targeting companies exposed to and harnessing AI that can increase risk. All of these products can be accessed via an ISA, SIPP or investment account with Charles Stanley Direct.

Risks of Artificial Intelligence investment

A word of warning, this is a narrow, niche area of investing and we would expect funds specialising in it to experience more volatility (greater ups and downs) than a typical fund. The high growth potential, and risk, of many of the companies in the area could result in their share prices being more exposed to changing investor sentiment.

There are also the broader issues to consider of ethics and regulation. It is unclear, for instance, the extent to which governments might seek to slow down the pace at which AI is deployed as there may be considerable and rapid changes that affect the nature of employment. This could ultimately affect industry trends and investment returns.

Due to their specialist nature, none of these funds have been considered for the Charles Stanley Direct Preferred List of investments across the major sectors and, if used at all, they should only represent smaller, ‘satellite’ positions in a diversified portfolio.