Throughout our 135-year history, the Bankers Investment Trust Plc has been successful in recognising the early signs of a structural shift and re-positioning the portfolio to benefit.
It has been clear for some time that advances in Artificial Intelligence (AI) have the potential to spark a new industrial revolution and while still a relatively nascent technology, we are already witnessing the early signs through groundbreaking software such as Chat-GPT. We feel that AI could represent a leap in the level of productivity that technology can offer to businesses and consumers in future.
However, at this early stage in its development, many questions remain about how this technology can integrate with our current working practices. For example, early demonstrations of use-cases have suggested that AI may perform certain tasks much faster and to a higher accuracy level than previous systems, but there remains a gap in overall precision that will need to be bridged.
As long-term investors, we recognise the advent of AI as another structural shift and one that we wish to gain exposure to within the portfolio. We also are cognisant of not being ‘too early’ on what is still a developing technology and mindful of our commitment to grow the Trust’s dividend and deliver long-term capital growth.
To bridge the gap, we have narrowed our criteria in this area so that we specifically invest in companies that may be early beneficiaries of the adoption of AI but are also well run, cash-generating businesses that have the capital necessary to advance this technology while generating strong margins from their core businesses.
With this in mind, the Trust then draws upon the local knowledge from within its six regional ‘sleeves’ (UK, Europe, North America, Japan, China and the Pacific), each of which have their own fund manager who select the stocks for that region, as well as the sector specialist analysts (e.g. technology sector) at Janus Henderson to inform its approach.
Below are five key holdings we have identified to grant us early access into the sector, while enabling us tofulfil the Trust’s objectives and continue delivering yield to our investors:
Microsoft
With its strategic ownership stake in OpenAI, the company behind Chat-GPT, Microsoft has begun incorporating Generative AI into its offerings and is on course to generate $1bn in AI-related revenue this year. This will come predominantly from incorporating a “Co-Pilot” functionality in tools such as Excel (for office work) and GitHub (for developers writing code). Microsoft’s leadership in cloud, software and gaming industries should drive healthy growth for the business which will be further augmented by its early lead in AI.
TSMC
The training of machine-learning systems requires the latest GPU technology. The company at the forefront of designing these is Nvidia, and their manufacturing partner is TSMC. While AI-related chips today form a small percentage of TSMC’s sales, the division focusing on AI-related chips could become the fastest growing division within the company – with expectations to double in size by next year and further growth beyond that to facilitate progress in the AI field. After a year of cyclical slowdown the stock is trading at a very attractive valuation which has yet to factor in the benefit the company can expect from AI and other growth areas within technology.
ASML
The development of advanced semiconductors needed for AI infrastructure requires the latest equipment to help produce them. ASML is one of the global leaders in lithography tools which enable the manufacturing of highly precise semiconductors (smaller than five nanometres) today. The advancement of AI systems depends on the continual performance improvement in chips. This is where ASML’s design work is essential. The holding was initially bought as a way to benefit from the proliferation of semiconductors in multiple industries, but now has the added benefit of being squarely exposed to investment in AI.
RELX
While most of the focus in Bankers today is on the picks & shovels side of AI, RELX represents an example of a data-driven business that can benefit from the increasing adoption of AI. With a wealth of proprietary data in the legal and insurance industries, coupled with their recent focus on developing generative AI tools, the company should be able to assist its clients derive significantly improved productivity.
Accenture
Many major corporations such as Walmart and General Motors have voiced their desire to harness the power of AI to improve their profitability and employee experience. Accenture is well positioned to assist non-tech companies understand how best to deploy this technology and implement it into their existing infrastructure. Beyond AI the company is also critical in helping clients understand how to deal with issues like migrating into the cloud and implementing cybersecurity.
In summary, while undoubtedly a key component of our future, we feel it is still early in the lifecycle of AI as a technology and further research in the field may unlock how we can best use it.
With this in mind, we are not investing in startups or unprofitable businesses in this area, and instead prefer to gain exposure through established industry leaders that are prudently investing in use cases that can be monetised.
This is an investment for tomorrow, with today in mind.
Glossary
Cyclical stocks – Companies that sell discretionary consumer items, such as cars, or industries highly sensitive to changes in the economy, such as miners. The prices of equities and bonds issued by cyclical companies tend to be strongly affected by ups and downs in the overall economy, when compared to non-cyclical companies.
Yield – The level of income on a security, typically expressed as a percentage rate. For equities, a common measure is the dividend yield, which divides recent dividend payments for each share by the share price. For a bond, this is calculated as the coupon payment divided by the current bond price.
Disclaimers:
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