Is it too late to invest in AI?

In 2020 and 2021, funds related to the broad theme of environmental, social and governance considerations were the theme du jour, but as 2023 gave way to 2024, demand for those products has fallen, and the topic with which fund professionals are scrambling to be associated with is artificial intelligence. 

The growth in demand for such investment has not only pushed up the valuations of companies, somewhat nebulous in nature, that always benefit from the start of what Tim Levene, manager of the Augmentum Fintech investment trust, calls a “hype cycle”; very established technology companies such as Alphabet and Microsoft have also seen their share prices boosted by association with the trend.

But is it too late to invest there, and should one ever allocate client capital to a theme that has already become deeply fashionable?

Bigger picture 

Ben Seager-Scott, head of multi-asset funds at Evelyn Partners, says one should always be sceptical about the investment case for major themes, even if one believes in the significance of the theme. 

He says: “I tend to be highly sceptical of thematic investing and AI is no exception; that’s because I see a big risk of falling in to the narrative fallacy, buying into the great story behind the idea but not then thinking through valuations and the ‘boring’ investment technicals.

"There is a well-known saying that investors tend to overestimate its importance in the short-term and underestimate it in the long-term. I think that is probably true here, and just because AI could cause big changes in the way the world operates, which I believe it has the potential to do, doesn’t mean it’s straight-forward and obvious how to make a reasonable investment return from it."

Not every company can be transformed by AI, there have to be losers as well as winners.Ben Kumar, 7IM

Ben Kumar, head of equity strategy at 7IM, does construct portfolios based on sector or particular industries, but says he is “sceptical” about investing in themes. “Unless the current price is so compelling that the theme itself is largely irrelevant," he adds.

"Take biotech/healthcare innovations, for example. We have had an allocation to healthcare stocks for nearly five years; more of a sector view than a thematic one, although long-term healthcare spending is a key part of the case.

"But in 2022, following a sharp decline in the value of the more innovative healthcare stocks, once the thematic post-Covid momentum/excitement had vanished, we saw an opportunity to invest in a decent bunch of companies, in a sector we liked, at very low prices.

"On AI, we’d be in the same camp. It’s probably revolutionary for the way the world works. Maybe even more so than the internet. But just as piling into Pets.com and Yahoo in 2000 was a mistake, we think there are probably lots of mistakes being made today too. Not every company can be transformed by AI, there have to be losers as well as winners.”

Levene says around $30bn (£23bn) globally was invested into AI-themed companies in 2023, occurring at a time when investments into other early stage technology companies were cut.

Disrupting the big players?

But while he notes we are in the teeth of a hype cycle around AI, he says one factor that is different this time is that both venture capital funds and what he calls “strategic” investors – by which he means very large technology companies such as Meta and Alphabet – have also been investing in AI.

He says: “If you look at the levels of capital being raised, it is as though we are back to 2021 when all of tech was able to raise capital. But now it is concentrated in AI, and the thing that is driving it is the investments by the big technology companies.

"For them, it is to a large extent a defensive move, Alphabet (the parent company of Google) are worried about the impact of AI on their search engine business, and for that reason an 'arms race' has developed in terms of AI funding and it’s a race Google cannot afford to lose.” 

Levene's view is that the first wave of AI innovation involved “the ability to give customers a better experience, but the next phase will be about reducing costs.” 

They are too early at this stage for me to invest in but we are watching them.Tim Levene, Augmentum Fintech investment trust

James Dowey, who runs the Liontrust Global Technology fund, says that while Google’s investment in AI businesses may be regarded as defensive, for many of the other large technology companies piling cash into AI, "they see it as an opportunity rather than a threat".

"The thing with technology is it moves in cycles, we had the internet, and then smart phones and then the cloud. And each of those were standing on the shoulders of giants in terms of building on what went before. And that is what’s happening now with AI."

Dowey adds: "I think of AI as developing in three ways; the first is infrastructure, then you have AI models and finally the applications. There are many well-established companies in each of those areas, companies such as Netflix and AirBnB are beneficiaries of these trends."

Levene’s fund is focused specifically on financial technology investments, and he says this is one area the waves of capital seeking exposure to AI have yet to penetrate.

He has been generally sceptical about the merits of investing in AI in his particular part of the market as he feels many of the opportunities are too early stage, "and we feel we need to be able to understand a company before we can invest in it".

"I would also say, some of the valuations around are not attractive, a company recently raised more than $100mn and it isn’t actually sure what its product will be yet.” 

Levene says he regards wealth management as being one of the areas where AI will have a substantial impact that will create an investment opportunity.

He previously told FT Adviser that he was sceptical of the investment case for some of the robo-advisers that came to the market, but says there are now “tens” of firms he believes will disrupt the wealth management market – “they are too early at this stage for me to invest in but we are watching them,” Levene says.

I tend to be highly sceptical of thematic investing and AI is no exception.Ben Seager-Scott, Evelyn Partners

Seager-Scott says one should not dismiss thematic investments entirely, but instead be conscious of the risks.

He says: “That’s not to say I dismiss thematic investing out of hand, I just think one has to be wary of mistaking a great story for an investment opportunity. As for how to buy it, I don’t think there’s a definitive answer, and it is important to look at a portfolio overall.

"If you invest through funds that already look to tilt towards themes such as AI, then you probably don’t want to over-concentrate with a specialist fund.

"However, if your managers are sticking-to-their-knitting in other styles and you believe there is long-term investment scope, then adding a specialist fund is probably a reasonable approach – but be prepared for some hype-driving volatility, which may not be in the direction you would like.”

David Thorpe is investment editor of FTAdviser