9th November 2021
Artificial Intelligence - Investing in the Future
The term AI (Artificial Intelligence) is often said without much explanation to its meaning, so let’s define what it is before we talk about how it is changing the world. AI is the study of how to produce machines that have some of the qualities that the human mind has, such as the ability to understand language, recognise pictures, solve problems, and learn. AI essentially seeks to synthesise, automate and optimise the process of converting information into useful and actionable knowledge.
So, why does AI matter to us as investors? AI has the potential to transform rates of economic growth and boost productivity – the latter issue in particular has been a major headache for policymakers in the developed world for well over a decade now and has not gone away despite the unprecedented monetary and fiscal stimulus injected into the system since the Global Financial Crisis. AI allows dull, time consuming and repetitive tasks to done quickly and efficiency, whereas humans tend to struggle more with tasks of this nature. The ability to automate dull and repetitive tasks (such as form filling) means that humans can focus on more complex or more technical challenges, which aren’t as easily addressed by AI.
AI will also create many positive externalities, facilitating more efficient cross-border commerce and enabling expanded use of valuable cross-border data flows. Such increases in economic activity and incomes can be reinvested into the economy, contributing to further growth. Not just automation, but also working hours will be transformed. Not only can AI simplify and automate monotonous tasks, but it can also do this around the clock, without needing to stop for things like eating and sleeping! At a time of aging and falling birth rates, productivity growth becomes critical for long-term economic growth, with data from consultancy McKinsey suggesting that AI adoption could raise global GDP by as much as $13 trillion by 2030, or equivalent to roughly 1.3 percent additional GDP growth per year. The path to meaningful improvements in productivity has begun.
Perhaps the most important reason why investors should think about AI is that it has the potential to transform almost every industry in every country in the world. It is wrong to think of AI simply in terms of the companies that provide the enabling technology – this is important of course, but not the whole picture. Not all companies can engage successfully with AI, sometimes for reasons of a skills deficit, sometimes because of legacy business process issues, sometimes because of strategic ignorance. Those companies which successfully engage with AI are developing significantly enhanced competitive moats around their businesses. We’re as interested in these businesses as we are in those that develop the tools, widening the possible opportunities available to us in utilising this space.
The pharmaceutical industry is perhaps the most interesting example as AI has been a windfall thus far. A mere 13% of drugs pass clinical trial stages, with drug development costs spiralling into the many tens of millions. Machine learning algorithms aid scientists in finding the right composition of different salts in the drugs by analysing historical data related to genes, chemical reactions, and other attributes. There is a raft of evidence suggesting that the ‘average’ AI radiographer is already more effective than the average human counterpart. This is hugely significant given that demand for radiographers tends to outstrip supply as training a human radiographer takes years. AI-enabled robotic surgery is another area that could deliver significant growth, and wearable AI-enabled (and discreet) heart monitors are already saving lives. The scope for advancement is almost limitless.
In the financial sector most financial applications revolve around analysing past data to get better results. AI has wide-ranging applications for the finance industry, including across risk management, fraud detection, trading and investing, financial advisory and other areas such as accounting. Less interesting but no less important for future economic growth.
Artificial Intelligence is not without its problems, though! Of the biggest issues to overcome are the ethics and morality of machine learning. Essentially, AI is still reliant, at least initially, on the input of data from humans. If this data is corrupted, the AI will simply mirror this corruption. Morally there are issues too. Take self-driving cars, at what point does the car make a decision to sacrifice the owner/driver to save some pedestrians? How can the manufacturer morally defend selling a car designed to kill the occupants in certain circumstances? What are the legal ramifications of such decisions? Data privacy is also a concern and is a critical issue to address if AI is to reach its full potential. Europe has so far led the way in this area with the General Data Protection Regulation (GDPR) introducing more stringent consent requirements for data collection, giving users the right to be forgotten and strengthens the supervision of organisations that gather, control and process data.
At A&J we believe AI will be transformative for the entire world, with companies operating in this market set to benefit immensely as humans continue advancement into this exciting space. We have recently conducted extensive due diligence on the AI space and have onboarded the Sanlam Artificial Intelligence fund to our buy list and will be adding exposure across A&J’s model portfolios in the coming weeks. The Sanlam Artificial Intelligence fund is unique in this space, with its own proprietary AI-enabled platform aiding the portfolio managers in finding companies with exposure to the themes they wish to exploit. The fund currently holds investments in companies including Alphabet and Microsoft which are at the forefront of the AI revolution. The reality is AI is here and already changing the world around us but is still in its infancy. We believe the time is right to capitalise on this growth and anticipate other investors to soon follow.
The opinions expressed in this update are those of A&J Wealth Management Limited only, as at 9th November 2021, and are subject to change.
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