Successful investors look to tomorrow rather than focus on today, and one of the most exciting future trends is artificial intelligence (AI). According to PwC, artificial intelligence could contribute up to $15.7 trillion to the global economy in 2030, more than the current output of China and India combined1.
The best way to capitalise on a future trend is to invest early, when prices are cheap and valuations are reasonable. But that’s tricky to do when a technology is nascent. While artificial intelligence has plenty of future promise, current adoption rates are low with only one in 20 companies currently using AI2 .
How can investors position themselves in an efficient way on this mega-trend?
Adapting AI to each business starts now
Over time, every industrial sector and most companies will incorporate AI into their business. According to the International Data Corporation, the global compound annual spending rate on AI will be more than 50% and reach a total of $57 billion by 2021.
Machines will take over many of the tasks performed by humans today. The applications are wide-ranging and likely to be specific not only to each sector but each company.
For example, AI already enables retailers to improve stock management and customer experience. Robots which scan rows of products can keep track of inventory while facial recognition could recognise when customers are unhappy.
Farming is also seeing the benefits of AI. Researchers from the University of South Australia recently developed a system which uses drones to detect areas which require additional irrigation.
This allows farmers to plan how much water will be needed on a particular day. It can improve crop health and free up farmers’ time to allow them to devote more attention to more important issues.
Investing in AI is more complex than investing in mobile phones or social media platforms. This is not a product – it cannot be bought off-shelf like a software package. It will be tailor-made not only to each industrial sector but also to each individual company.
In other words, it will be bespoke to each and every firm. And that means for companies to be successful in the future, they have to invest today. Companies cannot underinvest now and then buy their way back to success with a future cash injection.
Capturing the future potential of AI
Just as companies need to invest in AI today, so too do investors. They need to allocate capital now to get the best benefits of this technological trend.
That’s why Amundi has partnered with Stoxx, a leading index provider, to launch Amundi Stoxx Global Artificial Intelligence UCITS ETF.
One of the major challenges for Stoxx to overcome when forming this index was to determine how to rank each stock’s contribution to AI, given it is such a nascent trend.
From a broad Developed and Emerging Total Market Index universe, stocks are ranked according to which firms are most likely to be at the forefront of this technological wave.
One way to identify the firms most likely to benefit from AI is to select those with the highest R&D spend. But there is no guarantee that spending significant sums now will translate into future earnings and cash flows.
A more intelligent way to select those companies with the best prospects is to evaluate companies with the most AI patents. Numbers alone are not sufficient. The exposure a particular company has to AI as well as their contribution must be determined.
The first metric is found by looking at the number of AI patents granted to a company compared with the total number of patents granted to that company: AI Exposure. This identifies those companies which are significantly translating their R&D spend into the creation of new systems and products.
A company’s AI contribution is measured by counting the number of patents granted to the company relative to all AI patents given to all companies in the reference universe. This helps to determine the relative importance of one company’s contribution to the development of this new technology.
Those companies which fall in the top 25th percentile for both metrics form the STOXX AI Global Artificial Intelligence ADTV5 Index.
Avoiding behavioural bias and concentration risk
To remove some behavioural biases that might afflict a qualitative approach, an equal contribution weighting scheme is favoured, because a company’s size is no guarantee it will outperform its peers.
This helps to remove concentration risk and ensures the fund has not ‘doubled-down’ on one great story. This will produce a better risk-return profile.
A truly global trend
Taking a closer look at the constituents of the AI index underlines the importance of this technology for all regions of the world, across every industrial sector and for all company sizes.
This Amundi ETF is a powerful tool for investors who want to take advantage of one of the most interesting current mega-trends. This fund allows investors to add a thematic strategy to a core portfolio of more traditional assets.
1 Source: “What’s the real value of AI for your business and how can you capitalise?” PWC - 2017
2 Source: “Putting Artificial Intelligence to work” BCG – September 2017
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