Technology’s a big sector and 2024 is poised for technological advancements, like artificial intelligence (AI), cloud computing, cyber security, and even blockchain.
The tech heavy US market was the big winner from the sector’s rally. The ‘magnificent seven’ (Apple, Alphabet (Google), Amazon, Meta (Facebook), Microsoft, Nvidia and Tesla), provided nearly all the gains in the S&P 500 last year. And a big part of this was because they’re seen as the biggest beneficiaries from the advancements in AI.
This article isn’t personal advice. If you're not sure if an investment is right for you, ask for financial advice. All investments and any income they produce can rise and fall in value, so you could get back less than you invest.
What is AI?
AI are computer systems that can perform complex tasks that previously only a human could do, like reasoning, making decisions, or problem solving.
There’s hope that AI will revolutionise businesses, helping boost efficiency while providing quicker and better services to customers.
Tom Slater, co-manager of the Baillie Gifford American fund is optimistic on where AI could go and what he thinks this means for long-term growth investors.
"We have yet to determine the limits of this technology or how quickly it will continue to improve. The applications and the impacts will get more dramatic the longer we stay on the current trajectory of progress. For the growth investor, things are just starting to get interesting."
Slater has written a full article on his views on AI which you can find here.
HL might not share the views of the fund manager.
Investment ideas for exposure to AI
The potential impact of AI is still relatively unknown and some companies and sectors could stand to benefit. Funds offer a good way to get exposure to AI without having to take the risk of buying an individual stock. They offer more diversification by investing across multiple companies in different sectors, that could all benefit from advancements in AI, alongside other companies investing in different themes.
FTF Royce US Smaller Companies manager Lauren Romeo explains her approach to gaining AI exposure in the portfolio.
"The Magnificent Seven (M7) continue to dominate the headlines while driving a disproportionate share of large-cap’s US market gains. Within the “quality company” cohort of small-cap smaller companies there is a legion of relatively unsung heroes. These are often businesses that provide essential products or services enabling the technologies fuelling the M7's growth.”
“With more attractive valuations than the M7 group, along with solid cash flow growth prospects and high returns on invested capital, these unsung heroes in the small-cap space appear to offer more compelling risk-reward propositions than the M7 while being poised to benefit from the same tailwinds.”
HL might not share the views of the fund manager.
But some investors might still want to get exposure to AI by adding just one company, or a small group of companies to their existing portfolio. This could be one or a few of the magnificent seven, who will most likely be the providers of AI, but could also be a company within the supply chain making the equipment used to create the machines.
A share idea
Investing in an individual company isn’t right for everyone because if that company fails, you could lose your whole investment. If you cannot afford this, investing in a single company might not be right for you. You should make sure you understand the companies you’re investing in and their specific risks. You should also make sure any shares you own are part of a diversified portfolio.
It’s no secret that AI excitement has led to surges in the valuation of a small handful of tech companies. We think some of that excitement is warranted.
Companies like Microsoft have exciting potential thanks to its large stake in OpenAI (the power behind ChatGPT). AI can be also embedded in most parts of Microsoft’s software and cloud products.
Microsoft Copilot helps with productivity and skills across major programmes like Word and Excel. At the same time, its cloud business, Azure, is home to applications and products that help companies apply AI.
Big technological shifts like AI tend to get stock markets hot under the collar. It’s difficult to pick individual winners at times like this – just think back to the dot.com bubble. So, we prefer companies that have a proven track record and alternative revenue streams that aren’t wholly linked to AI.
Times like this increase the risks of ups and downs and serves as a reminder to prioritise making sure you have a diverse portfolio made up of different asset types and sectors.
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2 fund ideas
Investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a long-term diversified portfolio.
For more details on each fund and its risks, please see the links to their factsheets and key investor information below.
Baillie Gifford American
The team at Baillie Gifford American aims to grow an investment by investing in businesses with big growth potential and holding them for long enough to reap the rewards. The four co-managers believe there aren’t many companies that can deliver exceptional returns over the long run. So they run a concentrated fund of between 30 and 50 stocks, which can increase risk.
The managers have identified several powerful trends, like AI, that they see across the economy. A lot of the businesses driving these trends are highly innovative and disrupt old ways of doing things. The fund mainly invests in larger companies but also has a small amount in smaller companies, which are higher risk.
The funds’ exposure to AI comes from different areas including ‘the magnificent seven’ which accounted for roughly 24% of the fund as at the end of 2023.
It’s important to remember the managers run a low turnover, highly concentrated, long-term portfolio. This means performance can be materially different to the market and can lead to periods of heightened volatility.
Annual Growth
Dec 2018 - Dec 2019 | Dec 2019 - Dec 2020 | Dec 2020 - Dec 2021 | Dec 2021 - Dec 2022 | Dec 2022 - Dec 2023 | |
|---|---|---|---|---|---|
27.52% | 122.96% | -2.29% | -50.35% | 41.55% | |
IA North America | 24.66% | 16.34% | 25.68% | -9.88% | 16.75% |
FTF Royce US Smaller Companies
FTF Royce US Smaller Companies aims to deliver long-term growth by investing in unloved US smaller companies, with the potential to come back into favour or recover in the future.
The fund’s run by Lauren Romeo who has close to 30 years' industry experience investing in the US stock market. She has a strong support network of analysts and we like her disciplined approach looking for quality companies trading at attractive valuations.
Romeo focusses on companies delivering a higher return on invested capital and return on equity than the benchmark. This has led to her investing just over 30% of the fund in industrials and little to no exposure in the lower quality utilities and energy sectors.
The funds’ exposure to AI comes mainly from investing in the supply chain of the larger AI companies. This includes semiconductor capital equipment companies like FormFactor, ONTO Innovations and MKS Instruments.
Romeo invests in smaller companies which can increase risk.
Annual Growth
Dec 2018 - Dec 2019 | Dec 2019 - Dec 2020 | Dec 2020 - Dec 2021 | Dec 2021 - Dec 2022 | Dec 2022 - Dec 2023 | |
|---|---|---|---|---|---|
25.03% | 7.71% | 26.04% | -3.72% | 16.12% | |
IA North American Smaller Companies | 25.71% | 22.53% | 16.21% | -13.53% | 10.64% |
This is not personal advice or a recommendation to buy, sell or hold any investment. If investors are not sure of the suitability of an investment for their circumstances, they should seek advice. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future and investments rise and fall in value so investors could make a loss.
This has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.