When one looks at the rise of some of the world’s biggest companies, it is all too easy to assume success was pre-ordained and that the signs were clear for all to see.
Hindsight is a dangerous beast and countless investors have kicked themselves for not spotting – and backing – today’s winners. But the truth is that success is not written in the stars – or in a broker note, and only by understanding an industry inside out can investors come close to finding those shining stars among a universe of familiarity.
In the artificial intelligence (AI) market, signs of this behaviour are all too common. The very nature of these cutting edge companies makes them harder to comprehend – and assess their future earnings potential – especially if the underlying technology which supports them is not fully understood.
It is for this reason that the investment community will continue to underestimate the impact of AI as a means of delivering returns.
Investors have historically failed to look ‘under the bonnet’ when it comes to developments in artificial intelligence, and thus remain several steps behind the trend.
Take cyber security, industrial robotics, or smart media, for example. The common nexus of enabling technology platforms that stand behind each of these industries was visible for some time before becoming mainstream.
Unless the investment community gets to grips with what's going on in the background with such technologies, this trend seems set to continue.
Winners among the AI community are not random. They share commonalities, such as having access to large amounts of data, creating solutions to repetitive human tasks, or operating in heavily-regulated markets. They also tend to have corporate cultures that are open to doing things differently, and a very highly qualified workforce.
Some of the broad characteristics that might be required for the successful implementation of these platforms include very large, accessible, and organised datasets, a large amount of human involvement in repetitive tasks involving said data, and a need for high degrees of accuracy, for example.
If we apply these themes to the current market environment, what does it point to in terms of investment opportunities yet to be recognised by the wider market? Certainly the more mature parts of the economy – such as insurance and broader financial services, as well as industrial services – all tick the categories above, and are thus ripe for the coming AI revolution.
For example, within aeronautical engineering, AI platforms could monitor the health of engines underneath the wings of aircraft, whilst in healthcare, some of the biggest companies in the world are implementing changes to the way they operate using AI.
In May last year one of the very large healthcare companies from the States flew its management team over for their analyst day. The CEO stood up in front of a room full of healthcare analysts and insurance analysts and said 'Thank you for coming, I'm going to introduce you to our chief technical officer, and he's going to spend the next hour telling you how artificial intelligence is going to change everything we do inside this business'. This is a company with a market cap of $220bn.
Following this example to its conclusion, if you are one of the competitors to that company and you know that the industry leader is beginning to implement these technologies rapidly, then you know their competitive moat is only going to widen very significantly from here. And if you do not respond, you will find yourself in an incredibly deleterious position very quickly.
That is the power of AI, and that is the game-changing capability it offers, but only those investors who do not underestimate it can hope to be at the forefront of investing in it.
Chris Ford is manager of the Smith & Williamson Artificial Intelligence Fund.
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