Be cautious of ‘AI tech hype’ as seven US stocks dominate returns

People often miss the rally in markets, sectors or trends and get in near the top. Kyle Caldwell explains why diversification is the best course of action for long-term investment success.  

The hottest trend in the world of technology is the biggest theme dominating the investment landscape at the moment – artificial intelligence (AI).

AI, for those not familiar, is technology that can mimic the human mind by solving problems and making decisions. It is predicted to shake up various industries, including healthcare, marketing and transportation.

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The theme has been talked about for a number of years, but there’s been a lot of excitement over the past six months or so since ChatGPT, a chatbot that can provide intelligent text and information in seconds, was launched at the end of last year.

ChatGPT is backed by Microsoft (NASDAQ:MSFT), while Google-owner Alphabet (NASDAQ:GOOGL) has launched Bard, its own AI chatbot. Facebook-owner Meta Platforms (NASDAQ:META) is rumoured to soon follow suit with its own chatbot.

In response, companies perceived to be the AI winners have seen their share prices bid up, with NVIDIA (NASDAQ:NVDA) leading the way. The company, which manufactures the computer chips that leading AI systems are developed and implemented on, has seen its share price rise by 162% year-to-date (to 8 June). Chris Ford, fund manager of Sanlam Global Artificial Intelligence, described Nvidia as the most important company in the AI space.

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The big technology giants, at the forefront of AI innovation, have also seen their share prices boosted, namely Apple (NASDAQ:AAPL), Microsoft, Amazon (NASDAQ:AMZN), Meta, Tesla Inc (NASDAQ:TSLA) and Alphabet. Along with Nvidia, these seven stocks account for around 90% of gains on Walls Street’s S&P 500 this year. The index is up around 10% year-to-date.

Nigel Green, CEO and founder of deVere, cautions on the “frenzy” of the so-called Magnificent Seven stocks. He says: “This hype is dangerous as it could lead investors to assume that these stocks are a silver bullet to build long-term wealth – and they are not, at least not on their own.

“While I believe that exposure to these mega-cap tech stocks should be part of almost every investor’s portfolio, as they have robust fundamentals and are future-focused, especially in AI, they should not be exclusive.”

Mike Seidenberg, fund manager of Allianz Technology Trust (LSE:ATT), which according to research by Winterflood Securities has 37.6% exposure to the AI theme, also urged caution in the short term.

In a recent episode of our On The Money podcast, Seidenberg said he would “encourage investors to be cautious, as Wall Street tends to get really excited about things and really upset about things”.

He also said: “I would approach it with a cautious view near term because there’s so much excitement, but it is definitely a real theme and you’re going to see billions and billions of dollars spent as companies learn to implement it and use it to their competitive advantage.”

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When it comes to exciting investment themes, and when stock markets are in a rich vein of form, such as Japan right now, with its market at a 33-year high, there’s always the danger of buying in too late or at a peak.

To reduce risk, a well-diversified portfolio is the best way to give your investments ample opportunity to grow, while guarding against serious short-term losses, such as buying at a red-hot valuation that will ultimately prove to be unsustainable.

Diversification is achieved by investing in different assets – mainly shares, bonds and property; as well as different regions and different investment styles, such as value and growth. You could also include some commodities, such as gold.

People often miss the rally in markets, sectors or trends and get in near the top. By being diversified your portfolio is positioned to benefit over the long term when a country or theme has its moment in the sun.  

In the case of themes, such as AI, for those investors considering direct exposure, either by picking shares or a fund that solely invests in the potential winners, it is important to limit exposure to keep risk in check. Any theme should not form the main part of a portfolio.

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Andy Merricks, who manages a thematic fund at 8AM Global, points out that it is not always the right time to invest in themes, with 2022 a case in point.

However, Merricks says that over the long term it makes sense to have some exposure to themes that appear to have relevance to our future.

He notes: “It was a terrible year for thematic funds such as the one I help to run – an absolute stinker. Do I retain belief in what it does and invests in? Certainly. Do I believe that now is a better time to consider investing in themes than it was 18 months ago? Without doubt. Do I believe that the market has bottomed and has either begun, or is about to begin, the next leg of a bull run? I have no idea.

“I do believe that to invest everything into themes is bordering on insanity. By the same token, it seems equally peculiar to dismiss at least having some of a portfolio exposed to the themes that are going to drive tomorrow.” 

The latest On The Money podcast focuses on AI, including examining the companies leading the charge, and highlighting the funds and investment trusts backing this big theme.