Jun 07, 2019 Equities

How to create an "artificially intelligent" portfolio

Artificial intelligence is expected to improve many companies’ productivity. Investors can buy into this topical theme through equities and funds.

  • Investors increasingly see artificial intelligence (AI) as an investment opportunity. This technology is set to change society even more profoundly than did the Industrial Revolution.
  • Thanks to AI, Germany's annual economic output is expected to grow by around EUR 430 billion by 2030.
  • Companies from many different sectors should be considered for an “artificially intelligent portfolio”. Dedicated funds simplify the analysis and selection process for investors.
3 minutes to read

"Alexa, show me a romantic movie; this sci-fi film is too much like reality for me." Using artificial intelligence in everyday life is no longer some kind of future pie in the sky, as the technology used in the voice assistant Alexa demonstrates. But how much economic potential does AI have, and how can investors allocate funds to it?

AI is based on adaptive algorithms that can analyse huge volumes of data, recognise information patterns and make complex decisions on that basis. Household services that work using voice recognition, such as Alexa, embody this way of working. We come across artificial intelligence in everyday life too, for example in fitness apps, which analyse data on body functions to create a custom training plan, or autopilot systems in vehicles, which adapt to an individual’s driving style. There are also medical applications, with AI providing diagnoses, for instance.

Artificial intelligence is no longer sci-fi; it has become part of our daily lives.

According to a study by PwC, artificial intelligence could increase Germany's economic performance by around EUR 430 billion by 2030.

AI looks set to change society even more than did the Industrial Revolution

Many people are already using AI applications, but some are still sceptical about the trend. They find self-driving cars and fridges that send messages creepy. Investors who see an investment opportunity in artificial intelligence tend to be more open-minded about its economic potential.

Experts at the business consultancy McKinsey expect artificial intelligence to change our society "ten times faster and with 3,000 times the impact" of the Industrial Revolution[1]. The consultancy firm PwC gives some specific figures. It predicts that Germany's annual economic output – measured by GDP – will increase by around EUR 430 billion by 2030 as a result of AI[2]. The argument is that AI will probably make many companies more productive, creative and flexible, as well as faster, thereby helping to reduce costs. According to PwC, the health care and automotive sectors are particularly well placed to benefit from the technology.

Many companies fit in an "artificially intelligent portfolio"

So, how do investors find the most promising equities for an "AI portfolio"? Selecting and analysing these securities is more challenging than it might at first appear. That’s partly because the investment opportunities are scattered right around the globe, and partly because it is not just AI software developers that are making money from this smart technology. Companies in many different sectors that are developing new business models through AI applications or successfully building on older ones are equally interesting.

A diversified portfolio might, for example, include service providers that are specialised in data collection and evaluation. Digital data are, after all, the raw material from which intelligent algorithms derive their insights. The statement "data is the new oil"[3] wasn't coined by chance. Examples of such companies include social networks operators, online marketplaces and search engine providers.

"Data is the new oil."

Meglena Schtilijanowa Kuneva,

Investment opportunities are more abundant than it may at first appear. Private investors can target AI through equities and funds.

Certain hardware manufacturers could also be of interest – such as chip producers whose processors can handle the huge volumes of data that AI applications involve. Storage media manufacturers should also offer potential returns. The same goes for cloud services operators that take on the management and analysis of big data volumes in external data centres. Finally, manufacturers producing vehicles, machines, household appliances or entire factories that are heavily data driven and deploy AI, perhaps in their control technology, are worth a look by investors.

As use of AI and "big data"[4] creates a growing need for cybersecurity – measures to protect against attacks by hackers or IT damage from other sources – investors should also take a look at companies in the data protection and network security domains. Worthwhile investments are likely to be found there.

To relieve investors of time-consuming and costly analysis and selection, asset managers are offering AI-focused exchange-traded funds, as well as actively managed funds. According to Frederic Fayolle and Tobias Rommel, managers of the DWS Invest Artificial Intelligence fund, AI investors need to have a long-term investment horizon. "Not all AI projects will be able to deliver the returns investors expect on a continuous basis," say the experts. "Those who invest in a mega-trend like this should also expect temporary price drops." This, however, changes nothing about the potential returns these investments can offer.

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1. https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-four-global-forces-breaking-all-the-trends

2. https://www.pwc.de/de/business-analytics/sizing-the-price-final-juni-2018.pdf

3. These are the words the former EU Commissioner for Consumer Protection, Meglena Schtilijanowa Kuneva, used in 2009 to describe the importance of data for the global economy. https://archiv.wirtschaftsdienst.eu/downloads/getfile.php?id=3983

4. Technologies for processing and evaluating huge amounts of data

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