Media interest in artificial Intelligence (AI) has hit frenzied levels in recent years. What’s more, AI stocks — those seen to have some connection to the mega trend — have become hugely popular with investors.
I include myself among the latter. Indeed, not having exposure could compromise my goal of growing my wealth significantly over the long term.
What’s all the fuss about?
To say that the advent of AI could change nearly every aspect of our day-to-day lives is putting it mildly. From self-driving cars to drug discovery, here’s a tech revolution very few of us will be able to avoid.
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All this is going to prove incredibly lucrative for some companies. According to a report published last year by Bloomberg Intelligence, the generative AI market (think ChatGPT) will grow from $40bn to $1.3tn by 2033, for example.
I want a slice of that pie.
Here’s how I’m invested
Right now, I hold one fund in my Stocks and Shares ISA that is wholly focused on this area.
The actively managed Sanlam Global Artificial Intelligence Fund invests in companies “that are engaged in the main activities associated with AI, whether through research and development, and/or in the provision of services, or in the transformational adoption of such services”.
The top three holdings in the portfolio are, perhaps inevitably, Microsoft, Nvidia and Alphabet. However, its managers are unconstrained in terms of which stocks they are allowed to buy. This means it deviates from the main indices from this point onwards.
So far, that strategy has worked. And then some. An annual return of 21.2% in the last five years to the end of 2023 speaks for itself and helps to justify the 0.5% annual fee.
Bubble territory?
Of course, it’s worth asking whether AI stocks have moved too far, too fast.
Now, I don’t know the answer to this — no one does. However, at least some hype does appear to be already priced, in considering the gains made by the US tech titans in 2023.
I also agree with star investor Terry Smith. He thinks the true ‘winners’ of this revolution won’t become apparent until, well, they’ve won. As Smith points out, Nokia and Yahoo were once giants of the mobile phone and search engine spaces respectively before losing their crowns.
Separating the wheat from the chaff will take time. This is exactly why I’m not keen to stockpick my way to riches here.
Owning a fund — active or passive — is also arguably less risky. If interest in these stocks were to dwindle, they would inevitably fall in value. But this would surely be a temporary wobble, given the benefits that AI should eventually bring.
On the flip side, throwing my cash at a couple of companies and crossing my fingers could prove disastrous.
Horses for courses
Investing in AI-related stocks won’t be for everyone. For example, anyone looking to make passive income is unlikely to find much of interest here. Most firms in this space will be re-investing profits to reap the rewards later on. Throwing cash back at shareholders simply isn’t a priority.
As a mostly growth-focused Fool however, that’s fine with me. So long as I don’t get overinvested, I believe that buying now and sitting on my hands will pay off handsomely in a few decades.
