Advisers are frequently presented with the challenge of a new investment trend, with products coming to market offering exposure to the exciting new area, and long-established fund managers suddenly discovering that their portfolio is perfectly exposed to that theme.
In 2020 and 2021, funds related to the broad theme of environmental, social and governance considerations were the theme du jour, but as 2023 gave way to 2024, demand for those products has fallen, and the topic with which fund professionals are scrambling to be associated with is artificial intelligence.
The growth in demand for such investment has not only pushed up the valuations of companies, somewhat nebulous in nature, that always benefit from the start of what Tim Levene, manager of the Augmentum Fintech investment trust, calls a “hype cycle”; very established technology companies such as Alphabet and Microsoft have also seen their share prices boosted by association with the trend.
But is it too late to invest there, and should one ever allocate client capital to a theme that has already become deeply fashionable?
Bigger picture
Ben Seager-Scott, head of multi-asset funds at Evelyn Partners, says one should always be sceptical about the investment case for major themes, even if one believes in the significance of the theme.
He says: “I tend to be highly sceptical of thematic investing and AI is no exception; that’s because I see a big risk of falling in to the narrative fallacy, buying into the great story behind the idea but not then thinking through valuations and the ‘boring’ investment technicals.
"There is a well-known saying that investors tend to overestimate its importance in the short-term and underestimate it in the long-term. I think that is probably true here, and just because AI could cause big changes in the way the world operates, which I believe it has the potential to do, doesn’t mean it’s straight-forward and obvious how to make a reasonable investment return from it."
Ben Kumar, head of equity strategy at 7IM, does construct portfolios based on sector or particular industries, but says he is “sceptical” about investing in themes. “Unless the current price is so compelling that the theme itself is largely irrelevant," he adds.
"Take biotech/healthcare innovations, for example. We have had an allocation to healthcare stocks for nearly five years; more of a sector view than a thematic one, although long-term healthcare spending is a key part of the case.
"But in 2022, following a sharp decline in the value of the more innovative healthcare stocks, once the thematic post-Covid momentum/excitement had vanished, we saw an opportunity to invest in a decent bunch of companies, in a sector we liked, at very low prices.
"On AI, we’d be in the same camp. It’s probably revolutionary for the way the world works. Maybe even more so than the internet. But just as piling into Pets.com and Yahoo in 2000 was a mistake, we think there are probably lots of mistakes being made today too. Not every company can be transformed by AI, there have to be losers as well as winners.”
