Investment Leaders Quarter 2 2023 Understanding the Impact of AI on the Investment Landscape

Artificial Intelligence (AI) is revolutionising industries worldwide, including the investment landscape. It is crucial for financial professionals in Australia to stay informed about the advances in AI and the opportunities they present. In this article, we will delve into insights from Loftus Peak's recent webinar on Understanding Artificial Intelligence (AI) as an Investor, which provides information that can help navigate this evolving landscape.

AI refers to the development of computer systems that can perform tasks that would typically require human intelligence. It encompasses various technologies and techniques aimed at enabling machines to analyse data, learn from it, and make informed decisions or predictions. AI has gained significant traction in recent years and is now widely used in different domains and is already deeply integrated into our everyday lives, although many people may not recognise it. From digital assistants like Siri and Alexa to search engine algorithms and social media platforms, AI-powered technologies are all around us. AI enhances online shopping experiences through personalised recommendations, pricing optimisation, and chatbot support, while robots streamline production and ensure worker safety in industries such as aerospace and hospitality. In transportation, AI powers self-driving cars and autopilots, improving safety and efficiency. It also plays a vital role in fraud detection in banking.

Types of AI Applications

AI can be categorised into two main types:

1. Discriminative AI: This type of AI involves making predictions based on available data. Examples include weather forecasting, fraud detection systems, or advanced driver assistance systems (ADAS) in vehicles. ADAS uses discriminative AI to analyse sensor data and identify objects on the road to assist drivers in making safer decisions.
2. Generative AI: Generative AI leverages large language models to produce new content. It can write poetry, compose essays, or create original pieces of work based on a given query. For instance, generative AI models like GPT-3 have demonstrated the ability to generate human-like text and creative content.
    

Integration of AI in Investment Strategies

Today, AI has become mainstream, with the advent of tools like ChatGPT and MidJourney. Within Loftus Peak's portfolios, approximately 65% to 67% of investments are exposed to AI. Our approach focuses on identifying investment candidates within the below major thematics:

1. Ecosystems and networks: The growing interconnectedness of devices and platforms generates vast amounts of valuable data, creating opportunities for AI-driven insights. For example, companies like Apple with their expansive network of connected devices or social media platforms that record behavioural responses of individuals provide rich datasets for AI applications.
2. Data centres: AI relies on robust data analysis, and data centres play a vital role in processing and extracting value from large datasets. Companies that provide data centre services, such as cloud computing providers like Microsoft Azure and Amazon Web Services (AWS), enable the storage and computation necessary for AI applications.
3. Connected devices or Internet of Things (IoT): As more devices become connected, the generation of data increases, enabling AI applications for real-time decision-making. For instance, AI can optimise energy usage in smart homes or improve predictive maintenance in industrial IoT applications.
4. Health and life sciences: AI-powered analysis of biological data such as molecules facilitates breakthroughs in healthcare and personalised medicine.  For instance, AI has already accelerated the rate of protein discovery. Alphabet’s AlphaFold predictively discovered over one thousand times more protein structures than have ever been discovered experimentally, as the chart below shows.

Industry Disruption and AI

AI has the potential to disrupt every industry. Loftus Peak’s portfolio focuses on identifying companies that act as tools, enablers, or beneficiaries of AI-driven innovations. Here are some examples:

• Tools: Semiconductor companies that provide the essential building blocks for AI technologies, such as Nvidia or Intel. These companies produce high-performance chips that power AI algorithms and enable data processing at scale.
• Enablers: Companies that leverage AI tools to create solutions for their own consumption and eventually offer them to beneficiaries. For instance, cloud computing providers like Microsoft Azure and AWS, which provide AI infrastructure and services to businesses.
• Beneficiaries: Beneficiary companies are those that directly benefit from the application of AI technologies. They leverage AI to drive innovation, improve efficiency, and gain a competitive edge in their respective industries. Beneficiary companies span various sectors, including healthcare, finance, manufacturing, and retail. For example, healthcare companies may use AI to enhance diagnostics, develop personalised treatment plans, and improve patient outcomes. Financial institutions may employ AI algorithms for risk assessment, fraud detection, and automated trading. The beneficiaries of AI-driven innovations are poised to thrive in the rapidly evolving digital landscape.

Evaluating Risk and Opportunities

While AI presents exciting investment opportunities, it is crucial for financial advisors to consider risk factors and conduct rigorous evaluations. We emphasise careful analysis and due diligence when selecting AI-driven investment opportunities. Here are some risks and opportunities to consider:

• Market Competition: As AI technologies become more prevalent, competition among companies in the AI space intensifies. Financial advisors should assess the competitive landscape and identify companies with unique value propositions and sustainable advantages. Investing in companies with strong intellectual property and proprietary AI algorithms can mitigate the risk of commoditisation.
• Ethical and Regulatory Considerations: AI technologies raise ethical and regulatory concerns. Financial advisors must be aware of potential controversies surrounding AI, such as privacy issues, algorithmic bias, and accountability. Assessing how companies address these concerns and adhere to ethical standards can mitigate reputational and regulatory risks.
• Data Security: With the increasing reliance on data for AI applications, data security becomes paramount. Advisors should evaluate how companies handle data privacy, cybersecurity measures, and compliance with data protection regulations. Investing in companies with robust data security practices reduces the risk of data breaches and associated legal and financial repercussions.
• Talent Acquisition and Retention: The success of AI initiatives heavily relies on skilled AI talent. Financial advisors should assess companies' ability to attract and retain top AI professionals, as well as their investments in research and development. Companies with a strong talent pool and a commitment to AI innovation have a competitive advantage in the evolving landscape.
• Market Volatility and Uncertainty: AI technologies are continuously evolving, and market dynamics can be volatile. Financial advisors should evaluate the adaptability of companies in the face of changing market conditions and technological advancements. Diversifying investments across companies operating in different sectors and geographies can mitigate the risk associated with specific AI applications or industry disruptions.
   

The Future Outlook

Advisers should monitor emerging trends and technological advancements in AI, such as deep learning, natural language processing, and computer vision. These advancements open up new opportunities for investment in industries like healthcare, finance, manufacturing, and transportation. By keeping abreast of AI innovations and their potential impact on specific sectors, advisors can identify promising investment opportunities.

AI's impact on the investment landscape is expected to continue growing in the coming years. As the technologies evolve and mature, financial advisers should stay informed about the latest developments and understand how they can leverage AI-driven insights to deliver value to their clients. The ability to identify investment candidates that embrace AI and drive industry disruption will be key to successful investment strategies in the future.