What is AI and how can I invest in it?

Artificial Intelligence (AI) has firmly embedded itself in our everyday lives. From helping us shop to movie blockbusters, AI technology has been around for decades.  

As early as 1968, Stanley Kubrik's classic movie 2001: A Space Odyssey, brought the concept and power of AI into the mainstream. This movie is often cited as one of cinema’s earliest depictions of a rogue AI system. Since then, it’s been a popular topic in science-fiction that has captivated audiences, including the 1984 movie The Terminator. In this movie the computer system, Skynet, developed its own thinking and determined humans were a threat to its survival and eradication was the only option. 

Outside of fiction, when most people think about AI today, they’re referring to the catchall phrase that describes the technology that powers machine learning, where a computer programme improves automatically through experience. But what is AI and how is it shaping the investment world?  

What is AI? 

AI is widely regarded as the next big thing. Without getting too technical, AI is where tasks are performed using the intelligence of machines or software, as opposed to the intelligence of humans. Examples include generating pictures or written content, self-driving cars, or marketing chatbots. 

AI is touted to become one of the biggest commercial opportunities. It is already essential across many industries – including healthcare, banking, retail and manufacturing.  

Companies developing AI solutions include EliseAI, which has designed an AI-powered assistant to improve business efficiency and free-up time for marketing teams. Within healthcare, Atomwise is a pharmaceutical company using AI technology to transform drug discovery, speeding up the work of chemists. In investments, AlphaSense helps investment firms with its AI-engine, which scans millions of data points to save investment analysts hours of manual work.  

How can I invest in AI? 

Consumer investing in AI solutions has taken off following OpenAI’s release of ChatGPT in November 2022. From this point, consumers have poured money into companies associated with AI technology, pushing up their share prices. Despite a recent pullback, global share markets have enjoyed a strong period, up around 10% for the first 9 months of this year. However, it has been technology stocks associated with AI that have been the driving force behind this return. The 7 largest technology stocks in the US’s S&P 500 Index, are known as the Magnificent 7 (Apple, Microsoft, Alphabet, Amazon, Meta Platforms, Tesla and NVIDIA).  

The share prices of these companies, which all use elements of AI, are up on average almost 100% for the year to 6 October 2023. This compares with just ~12% for the S&P 500 Index as a whole. Two of the leading Magnificent 7 companies are Tesla and NIVIDIA. Tesla’s share price is up 140% over this time period and is well known as a leader in autonomous driving. While not a household name, investors in NVIDIA have been the big winners this year, as its share price is up over 200% for the same period. The US company develops computer chips, which are used in everything from electronic gaming consoles to cryptocurrency mining. The company dominates the high-end chipmaking market, which provides the processing power needed to run advanced AI applications.  

There are many ways to invest in the AI theme, and as it becomes more mainstream, the opportunities for investments continue to expand. There are, however, few publicly listed companies on the market that specialise solely in AI technology. Many companies involved in AI are large multi-national conglomerates, meaning AI is only a part of their business model. Investors can choose to invest directly into companies that develop AI technology or invest in companies that stand to benefit from its adoption. The different ways to invest in AI today include:  

1. Buying individual shares of publicly listed technology companies involved in AI. Examples of these are Tesla, Microsoft and Nvidia. Buying shares in a company means you become a part owner of the company. This gives you the right to vote at company meetings. These shares can be bought and sold through brokers on stock exchanges around the world.  
   
   
2. Exchange Traded Funds (ETFs) that invest in AI companies are now available. An ETF is a basket of securities that trade on a stock exchange, just like shares in a company. When you buy an ETF, the money is used by investment professionals to determine how to invest according to the objectives of the ETF, buying investments like shares, bonds or commodities. An AI focused ETF will buy investments in AI companies, giving you exposure to more than just one company. If you are investing in an ETF that holds publicly listed shares, you do not have voting rights like you do when holding individual shares, that right is given to the ETF provider.  When investing in ETFs, it is important to consider the track record and assess the level of fees. One example of an AI ETF is the ROBO Global Artificial Intelligence ETF, which holds around 60 companies at the forefront of AI.  
   
   
3. Buying a diversified fund that has exposure to AI. While the first 2 options in the list above have substantial upside potential, they do come with significant concentration risk if invested in isolation. Limiting the exposure of your investments to the fortunes of 1 or 2 companies, or a single sub-sector like AI, can introduce a great deal of volatility to your returns. Especially given AI is such a dynamic, evolving industry, it’s hard to pick individual winners. A less risky alternative is to buy a well-diversified fund that has exposure to AI as well as other market segments.  

Why should I invest in AI? 

There are many reasons to invest in AI. It is the leading-edge technology and has the power to transform industries and create new ones. An investor’s dream is one with exponential growth, the question is how much growth is already factored into the price. According to Grand View Research (1), the AI market is projected to reach US $1,811 billion by 2030, expanding at a compound annual growth rate of 37% from 2023 to 2030. The advantages AI will bring to organisations are significant, from improving efficiency to accelerating research and development.  

What are the risks of investing in AI? 

While the upside of investing in AI is obvious, there are a number of risks that you should be aware of. As an emerging technology, the AI market can be volatile, and subject to changing market sentiment. As AI technology is still developing, there is always the risk that some innovations might not live up to the hype, or today’s new idea is replaced by tomorrow’s breakthrough. This can rapidly change the fortunes and profitability of the companies involved. There are also ethical concerns with AI technology; job displacement and privacy concerns may cause advancements to slow down. 

How does MAS invest in AI? 

While MAS does not have a dedicated fund devoted to AI, it does invest in the AI theme more broadly through the multi-sector funds in the MAS KiwiSaver Scheme and MAS Retirement Savings Scheme. Through the international equities asset class, the Schemes have exposure to a Global Themes Portfolio which is dedicated to investing in global themes with strong growth potential. This Global Themes Portfolio offers members exposure to a range of medium-term investments based on attractive investment themes. While it is hard to deny the importance of AI as a driver of growth, the Global Themes Portfolio invests in a broader, more diversified way. As a result, the Global Themes Portfolio currently has a broader tilt towards technology companies, which are involved in AI. These include the themes of cybersecurity, robotics and automation, and US technology. 

Is AI a trend or the future?

The AI benefits we are enjoying now are a result of decades of study and advancements. Today AI is everywhere. It drives innovation, fuelling many industries. Without even realising it, we are all benefitting from its development – from fine-tuning our search results on the web to detecting fraud to protect our savings. It is not the next big thing; it is here and now. As a developing theme, investment opportunities continue to expand. It is important, however, that when deciding how to invest you should consider the risks as well as the upside potential. 

As an example of AI at work, we asked ChatGPT to rewrite the summary above in a more compelling way. This is what it produced “The fruits of decades of relentless research and progress in the field of artificial intelligence are all around us, shaping our world today. AI's omnipresence fuels innovation across diverse industries, touching our lives in myriad ways. Unbeknownst to many, we reap the rewards of AI daily, from refining web searches to safeguarding our finances by detecting fraudulent activities. AI isn't the future; it's our present reality. As a burgeoning force, investment prospects multiply, yet, prudence dictates we weigh both the alluring potential and associated risks when venturing into this transformative realm. The AI wave has surged, and it's time to ride its currents wisely.” 

We’ll let you be the judge as to which one you prefer. 

(1)  Grand View Research website: Artificial Intelligence Market Worth $1,811.75 Billion By 2030 (grandviewresearch.com)