AI: from science fiction to an attractive investment theme

06/04/2017

Download

Advances in computing power, the volume of data available and the speed and falling cost of data analysis have propelled artificial intelligence (AI) to the next paradigm shift in technology. Alison Porter, Richard Clode and Graeme Clark, portfolio managers in Henderson’s Global Technology Team, discuss this investment theme, its strong potential and where they believe the best opportunities lie.

The Henderson Global Technology Team’s long-standing investment thesis is that technology will continue to be disruptive and take market share in the global economy. We have seen this play out through the advent of personal computing, the internet age, smartphones and more recently the move to cloud computing. The team believes artificial intelligence is the next major transformative force in the evolution of technology.

What is artificial intelligence?

AI can be loosely defined as the ability of machines to ‘think’. This ranges from more basic pattern recognition mimicking human responses through machine learning using human reasoning as a guide, to more independent thinking. This is enabled by deep learning and neural networks1 that allow machines to write their own code and self-teach with less human intervention.

We are now at a stage where AI is being more widely applied in search algorithms, language translation, robotics, autonomous driving, as well as voice and image recognition. AI is not just about robots defeating humans in high profile games like ‘Jeopardy’ and ‘Go’ but about how computing and data are being utilised and opened up – democratised - so that algorithms can be created generating efficiency gains and breakthroughs in fields as wide ranging as healthcare, banking, agriculture, retail and transportation.

Current drivers of AI

The opportunities and challenges of AI have long been debated in popular fiction from Isaac Asimov’s novels (1940s) through seminal Hollywood films such as Blade Runner (1982) and The Terminator (1984). While the technology has been around for a long time we have only recently seen a turning point in both AI capability and investment. While it took more than 60 years for the television to be adopted by 80% of households it took the internet just over ten years. The pace of adoption of technology is accelerating and for AI in particular we believe this is happening due to a confluence of two main factors.

Chart 1: cost of data analysis is falling sharply

Source: IBM, Cray, Sony, NVIDIA, press reports, Goldman Sachs Global Investment Research, at November 2016.

Note: FLOPS (Floating-point Operations per Second): a measure of compute performance speed; 1 GFLOPS equals 109 FLOPS.

Firstly, there is vast amount of data available created by the internet age and pervasive smartphones. Secondly, the ongoing collapse in the cost of compute, enabling data to be analysed at a faster and cheaper rate than ever before (chart 1). IBM estimates that 90% of the world's data was created in the last two years while a gigaflop (a measure of computer performance, eg by an algorithm or computer hardware) of compute now costs only 8 cents compared to $1.4 trillion back in 1961.

Strong potential for AI

We are still in the early stages of the evolution of AI technology. The pace of adoption is being accelerated by the application of cloud infrastructure (also a key theme within the Global Technology Strategy, which refers to the management of IT remotely; ie. buying, computing and storing technology from specialised service providers over the internet), and Moore’s Law2. While we have seen a turning point in deep learning, AI use cases3 today remain niche and limited to specific narrow problem solving.

Chart 2: brainpower is getting cheaper

Source: Henderson Global Investors, Time Inc. at December 2016.

However, the continuation of the exponential Moore’s Law curve and the development of cloud infrastructure technology are driving costs down so while $1,000 bought the brainpower of a mouse in 2016, by 2023 the same $1,000 will be able to purchase the brainpower of a human, and by 2045 it will be able to buy you the brainpower of the entire human race (chart 2). Combined with even more available data to learn from, this creates strong potential for the future capabilities of AI.

Investment opportunities in AI

Chart 3: investment areas in AI

Source: Henderson Global Investors

Like mobile phones in the early part of the millennium, AI today is a new developing market but the infrastructure and facilitation of AI is evolving rapidly. We see opportunities in a variety of areas such as analysis software, in cheap fast compute power, in data generation, in automation tools as well as a variety of new usages.

While there has been a lot of focus on robotics (which can be thought of as an automation tool) we view this as only one of the applications of AI. Customer service is being transformed by chat bots, voice recognition and predictive software while transportation is being rethought through autonomous driving (deep learning to train to understand how to drive instead of relying on manually-coded algorithms) and ride sharing.

The requirement for more data to be stored and analysed at faster speeds is creating many opportunities for AI application in software for companies such as Adobe, ServiceNow and Saleforce.com, as well as datacentre-focused semiconductor companies like Broadcom, Cavium and Xilinx. We view Alphabet (Google) as a key AI enabling platform as the company is already integrating AI technology into all of its services.

Summary

The potential pervasiveness of AI to disrupt a broader range of industries makes for a truly compelling investment opportunity. We believe this will continue to create opportunities for the Global Technology Strategy to invest in the longer-term beneficiaries of the AI trend and that there are multiple areas of investment potential. Over time, as the development of AI and its usage broadens we expect the investable universe to expand further as current venture capital investments become the IPOs (initial public offerings) of the future.

Note:

1 Deep learning: involves feeding a computer system a lot of data, which it can use to make decisions about other data. This data is fed through neural networks – logical constructions which ask a series of binary true/false questions, or extract a numerical value, from all the data which pass through them, and classify it according to the answers received.

2 Moore’s Law: coined in 1965 by Intel co-founder Gordon E. Moore, it is the ability to roughly double the number of transistors that can fit onto a chip (aka integrated circuit) every two years.

3 Use case: a software and system engineering term describing how users use a system to accomplish a particular goal.

4 Initial public offering: shares of a private company are offered to the public for the first time.



References made to individual securities are for illustrative purposes only and should not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase the security.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

For promotional purposes.


Important information

Please read the following important information regarding funds related to this article.

Janus Henderson Global Technology Fund

Please read all scheme documents before investing. Before entering into an investment agreement in respect of an investment referred to in this document, you should consult your own professional and/or investment adviser.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change.

If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially.

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

Any investment application will be made solely on the basis of the information contained in the Prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the prospectus, and where relevant, the key investor information document before investing. Copies of the Fund’s prospectus and key investor information document are available in English, French, German, and Italian. Articles of incorporation, annual and semi-annual reports are available in English. All of these documents can be obtained free of cost from Janus Henderson Investors registered office: 201 Bishopsgate, London EC2M 3AE.

Issued by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Henderson Management S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier). We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Copies of the Fund’s prospectus are available in English, French, Spanish German and Dutch. Key investor information documents are available in English, Danish, German, Finnish, French, Italian, Norwegian, Spanish, Swedish and Dutch. Articles of incorporation, annual and semi-annual reports are available in English. All of these documents can be obtained free of cost from the local offices of Janus Henderson Investors: 201 Bishopsgate, London, EC2M 3AE for UK, Swedish and Scandinavian investors; Via Dante 14, 20121 Milan, Italy, for Italian investors and Roemer Visscherstraat 43-45, 1054 EW Amsterdam, the Netherlands. for Dutch investors; and the Fund’s: Austrian Paying Agent Raiffeisen Bank International AG, Am Stadtpark 9, A-1030 Vienna; French Paying Agent BNP Paribas Securities Services, 3, rue d’Antin, F-75002 Paris; German Information Agent Marcard, Stein & Co, Ballindamm 36, 20095 Hamburg; Belgian Financial Service Provider CACEIS Belgium S.A., Avenue du Port 86 C b320, B-1000 Brussels; Spanish Representative Allfunds Bank S.A. Estafeta, 6 Complejo Plaza de la Fuente, La Moraleja, Alcobendas 28109 Madrid; Singapore Representative Janus Henderson Investors (Singapore) Limited, 138 Market Street, #34-03/04 CapitaGreen, Singapore 048946; or Swiss Representative BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich who are also the Swiss Paying Agent.

Information on this document is on Henderson's best endeavours.

Specific risks

  • This fund is designed to be used only as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
  • This Fund may have a particularly concentrated portfolio relative to its investment universe or other funds in its sector. An adverse event impacting even a small number of holdings could create significant volatility or losses for the Fund.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • If the Fund holds assets in currencies other than the base currency of the Fund or you invest in a share class of a different currency to the Fund (unless 'hedged'), the value of your investment may be impacted by changes in exchange rates.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • The Fund is focused towards particular industries or investment themes and may be heavily impacted by factors such as changes in government regulation, increased price competition, technological advancements and other adverse events.
  • Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.

Risk rating

Janus Henderson Horizon Global Technology Fund

The Janus Henderson Horizon Fund (the “Fund”) is a Luxembourg SICAV incorporated on 30 May 1985, managed by Henderson Management S.A. Any investment application will be made solely on the basis of the information contained in the Fund’s prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the Fund’s prospectus and key investor information document before investing. A copy of the Fund’s prospectus and key investor information document can be obtained from Henderson Global Investors Limited in its capacity as Investment Manager and Distributor.

Issued by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Henderson Management S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier).

We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Past performance is not a guide to future performance. The performance data does not take into account the commissions and costs incurred on the issue and redemption of units. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially.

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

The Fund is a recognised collective investment scheme for the purpose of promotion into the United Kingdom. Potential investors in the United Kingdom are advised that all, or most, of the protections afforded by the United Kingdom regulatory system will not apply to an investment in the Fund and that compensation will not be available under the United Kingdom Financial Services Compensation Scheme.

Copies of the Fund’s prospectus and key investor information document are available in English, French, German, and Italian. Articles of incorporation, annual and semi-annual reports are available in English. Key Investor document is also available in Spanish. All of these documents can be obtained free of cost from the local offices of Janus Henderson Investors: 201 Bishopsgate, London, EC2M 3AE for UK, Swedish and Scandinavian investors; Via Dante 14, 20121 Milan, Italy, for Italian investors and Roemer Visscherstraat 43-45, 1054 EW Amsterdam, the Netherlands. for Dutch investors; and the Fund’s: Austrian Paying Agent Raiffeisen Bank International AG, Am Stadtpark 9, A-1030 Vienna; French Paying Agent BNP Paribas Securities Services, 3, rue d’Antin, F-75002 Paris; German Information Agent Marcard, Stein & Co, Ballindamm 36, 20095 Hamburg; Belgian Financial Service Provider CACEIS Belgium S.A., Avenue du Port 86 C b320, B-1000 Brussels; Spanish Representative Allfunds Bank S.A. Estafeta, 6 Complejo Plaza de la Fuente, La Moraleja, Alcobendas 28109 Madrid; Singapore Representative Janus Henderson Investors (Singapore) Limited, 138 Market Street #34-03/04 CapitaGreen, Singapore 048946; or Swiss Representative BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich who are also the Swiss Paying Agent. RBC Investor Services Trust Hong Kong Limited, a subsidiary of the joint venture UK holding company RBC Investor Services Limited, 51/F Central Plaza, 18 Harbour Road, Wanchai, Hong Kong, Tel: +852 2978 5656 is the Fund’s Representative in Hong Kong.

Information on this document is on Janus Henderson Investors' best endeavours.

Specific risks

  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • This fund is designed to be used only as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • Changes in currency exchange rates may cause the value of your investment and any income from it to rise or fall.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • The Fund's value may fall where it has concentrated exposure to a particular industry that is heavily affected by an adverse event.
  • Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.

Risk rating

Share

Important message