Many people believe that you should only invest in what you know. But it is wise occasionally to break this rule, to step outside your comfort zone into the new worlds like the crazy kingdom of TikTok, the Chinese video app.
You may not be enamoured of its cat videos, although you may have appreciated this week’s advice on how to stay cool in a heatwave, such as placing a bowl of ice cubes in front of a fan.
But, for the sake of your portfolio, it’s worth being interested in how this app, dubbed ‘supremely addictive’ by The Economist, has attracted 1billion users worldwide.
This is thanks to the deft, relentless deployment of machine learning and natural language processing (NLP), which are subsets of artificial intelligence.
Artificial Intelligence (AI) powers voice assistants like Amazon’s Alexa and Apple’s Siri, and the Google search engine. Its other uses – they are multiplying all the time – include crime prevention, farming, financial advice, fraud detection, weather forecasting and self-driving cars.
AI is forecast to play a huge role in healthcare, as spending constraints force the more effective allocation of budgets. Last year Microsoft paid $19billion for voice recognition firm Nuance Communications whose NLP systems enable the transcription of speech during visits to the doctor.
The Sanlam Artificial Intelligence fund holds Alphabet, Microsoft and about 30 other stocks, chosen from 20,000 candidates in a process that relies on AI early on. Fund manager Chris Ford says the long-term impact is likely to be ‘similar to that of the railways, telephone or television’.
He continues: ‘AI is a disinflationary force because it allows scarce resources to be deployed very efficiently: AI systems can work 24/7. Surging inflation and the cost of labour in the West will increase AI adoption, as companies try to contain prices.’
You may be filled with apprehension about the long-term implications of AI.
A new book, Machines Behaving Badly: The Morality of AI, by computer scientist Toby Walsh will be one of my summer reads. But I will still be looking for long-term opportunities in AI, as the recent stock market rout has slashed the share prices of companies in the sector.
Shares in Deere, the agricultural equipment group, which offers an autonomous tractor, are down 19 per cent this year.
Shares in Nvidia, the AI hardware and software group, are down by 48pc to $152 but US bank Citigroup rates the shares a buy. Given the complexity of assessing the credentials of this and other AI businesses, I will be depending on the judgment calls made by managers of specialist funds.
Some, like iShares Automation & Robotics and L&G ROBO Global Robotics and Automation, invest in the allied field of robotics, where machines work on commands or on their own memory.
Some, like Sanlam’s sister fund, Asia Pacific Artificial Intelligence, focus on that region where belief in AI’s potential and an abundance of STEM (science, technology, engineering and mathematics) graduates are powering explosive growth.
Other funds own companies that supply the essential kit for this expansion. The largest holding at Temit (Templeton Emerging Market Investment Trust) is Taiwan Semiconductor Manufacturing Company (TSMC), maker of the best AI microchips.
These can carry out parallel computations rather than just sequential ones. Andrew Ness, Temit’s co-manager says it is thanks to such chips that ‘smart devices today can capture, process, and react to information independently’. Shares in Temit are at a 14 per cent discount to the net value of its assets.
If you are venturing into AI funds, check whether you already have money in some of their popular holdings, such as Ocado, the online supermarket. Ocado uses AI ‘to make possible in seconds, what thousands of humans working together can’t’. Despite this, its shares have halved this year, highlighting that if you want to back AI, you need patience and the ability to suffer losses.
Sanlam has a stake in Tesla whose shares have also tumbled.
Anyone – like me – with money in the Scottish Mortgage Investment Trust, another Tesla backer, must hope that Elon Musk can deliver on his big promises for autonomous vehicles.
Shares in Scottish Mortgage are recovering from a slump primarily caused by concerns over the valuation of its large unlisted segment. This encompasses ByteDance, TikTok’s parent, which was hit by the Chinese state’s crackdown on tech companies.
Allocating investments to AI is a leap of faith. But this tech revolution will not be reversed, no matter how disturbing some may find its possible consequences.