The funds and investment trusts profiting from AI excitement
28th June 2023 09:37
by Kyle Caldwell from interactive investor
Kyle Caldwell crunches the numbers to find out which collective investments have fared best during the AI rally.
The hottest trend in the world of technology, artificial intelligence (AI), is the biggest theme dominating the investment landscape.
Excitement over the technology’s potential has sent share prices soaring for the ‘big seven’, namely Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Meta Platforms (NASDAQ:META), Tesla (NASDAQ:TSLA), Alphabet Inc Class A (NASDAQ:GOOGL) and NVIDIA (NASDAQ:NVDA). The latter is seen as the star stock to play the AI theme as it manufactures the computer chips that leading AI systems are developed and implemented on. These seven companies are responsible for most of the S&P 500’s gains of 13% year-to-date.
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Other companies offer routes to potential riches. Winterflood securities has outlined 18 companies set to benefit from generative AI, comprising four sub-sectors.
The first is semiconductor companies: Nvidia, Taiwan Semiconductor Manufacturing (NYSE:TSM), ASML Holding (EURONEXT:ASML), Advanced Micro Devices (NASDAQ:AMD), Applied Materials (NASDAQ:AMAT) and Intel (NASDAQ:INTC).
The second group of potential winners are search companies: Alphabet, Microsoft and Baidu (NASDAQ:BIDU).
The next batch are enterprise and productivity software companies: Salesforce (NYSE:CRM), Workday (NASDAQ:WDAY), HubSpot (NYSE:HUBS), SAP (XETRA:SAP) and ServiceNow (NYSE:NOW).
And the final group is those companies offering cloud computing: Amazon, International Business Machines (NYSE:IBM), Oracle (NYSE:ORCL) and Cisco Systems (NASDAQ:CSCO).
For fund and investment trust investors looking to gain exposure to the AI theme, there are a small number of specialist options, which will no doubt increase if the theme continues to take off. However, bear in mind that if you have exposure to a global or US fund - active or passive - the likelihood is that you will already have exposure to AI, due to most funds having exposure to the technology giants listed in the US.
Data from FE Analytics, for the period 11 October 2022 to 22 June 2023, in which the S&P officially entered a bull market having risen by over 20% during this period, shows the best-performing active and passive funds that are playing the AI theme.
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The top performer, SPDR® MSCI Europe Technology ETF EUR (LSE:ITEC), has surprisingly outperformed AI-focused funds that predominately or exclusively invest in the US. However, a quick look at its top holdings shows why it has fared well – it has 33.6% in ASML. This is a huge single-stock position. As ever, whether investors decide to go active or passive, it is important to look under the bonnet to assess the amount of risk that’s being taken. Due to fund rules, most fund managers have single-stock positions below 10%.
The second and third top performers also invest passively: iShares S&P 500 Information Technology Sector ETF and L&G Global Technology Index Trust.
Next is Liontrust Global Technology, which is actively managed. It focuses on five technology themes: digital payments, e-commerce, next gen software tools, cloud/digital infrastructure, and immersive entertainment. Its top three holdings are Tesla, Microsoft and Nvidia.
The two pure-play options to invest in AI through an active fund are Sanlam Global Artifical Intelligence and Polar Capital Automation & Artfifical Intelligence. Over the period the respective returns are 22.7% and 21.5%.
The Sanlam fund’s approach is to invest in companies that are engaged in the main activities associated with AI, such as research and development, as well as in the provision of services. It has 35 to 40 holdings.
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The Polar Capital fund describes its approach as identifying the leading enablers and adopters of AI across a diverse range of sectors. It has 56 holdings.
Both funds share three holdings in common in their top 10 positions: Microsoft, Alphabet and Nvidia.
While the AI theme has taken off over the past six months or so, both funds have been seeking to profit from this trend for much longer. Both have five-year performance records, with Sanlam having the upper hand, up 95% versus 68%.
Two other routes to play the AI theme is via Allianz Technology Trust (LSE:ATT) and Polar Capital Technology (LSE:PCT). Of the 18 companies outlined by Winterflood, the duo has 13 and 12 stocks in their portfolios. From 11 October 2022 to 22 June 2023, the respective returns were 20.2% and 17.6%.
Bear in mind that innovation and themes will change over time, and some will be more successful than others. While AI is a theme that looks like it has plenty of legs and is here to stay, 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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Shavar Halberstadt, research analyst at Winterflood Securities, says: “From software businesses to fast-food chains, there has been a barrage of company announcements indicating that they, too, are implementing AI solutions. Given the prospects for margin and market share expansion, this is no surprise.
“We have tracked developments closely, as the impact across markets could be transformative. Given the pace of technological development, significant first-mover advantages and limited pure-play options, we believe that the investment trust structure is particularly suitable to access this theme.
“Active managers have the freedom to be nimble in their stock selection as appropriate in a fast-moving environment, while the ability to invest in private companies expands the opportunity set.”
Top-performing passive strategies playing the AI theme
| Fund | Total return (%) |
|---|---|
| SPDR® MSCI Europe Technology ETF EUR (LSE:ITEC) | 33.1 |
| iShares S&P 500 Information Technology Sector ETF | 29.6 |
| L&G Global Technology Index Trust | 29.2 |
| SPDR® S&P US Technology Select Sector ETF (LSE:SXLK) | 27.4 |
| Xtrackers MSCI World Information Technology ETF | 26.6 |
| L&G Artificial Intelligence ETF (LSE:AIAI) | 26.6 |
| Xtrackers MSCI USA Information Technology ETF (LSE:XSTC) | 26.6 |
Source: FE Fundinfo. Data from 11 October 2022 to 22 June 2023. Past performance is not a guide to future performance.
Top-performing active funds playing the AI theme
Source: FE Fundinfo. Data from 11 October 2022 to 22 June 2023. Past performance is not a guide to future performance.
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