AI funds are offering investors the opportunity to capitalize on the burgeoning interest and opportunities that Artificial Intelligence presents. Using the Consensus Purity Score, Morningstar was able to rank funds based on their pure exposure to the AI theme. A top 5.
How do you establish a company within four weeks that’s valued at more than 200 million euros? Ask Guillaume Lample, Arthur Mensch, and Timothée Lacroix. The thirty-something experts in artificial intelligence and former employees of Meta and Google founded the whirlwind startup, Mistral AI. They raised 105 million euros in their first funding round - a European record - which should eventually compete with Microsoft-backed OpenAI, the developer of ChatGPT.
This underscores the strong interest in solutions and tools that can be realized based on artificial intelligence. It was clear that artificial intelligence would play a significant role in our future, leading to groundbreaking innovations and potential disruptions in various fields. However, the launch of ChatGPT in November 2022 seems to have triggered a genuine revolution and an AI race. The revolutionary chatbot went from zero to 100 million users in just a few weeks; much faster than other applications. For instance, WhatsApp took 50 months to reach 100 million users, and Instagram 2.5 years.
The giants are joining in
Not just startups, but also large tech giants from Google to Alibaba have recently announced that they are developing their own AI-driven chatbots. Companies realize that we are at a technological tipping point where generative AI solutions, big data, and cloud computing are shaping the future. However, developing such an application is no easy task and requires many years of training the model, which in turn requires large and high-quality datasets and immense computing power.
This necessary computing power results in an almost insatiable demand for advanced chips essential for AI applications, benefiting the semiconductor industry, with Nvidia being a prominent example. Demand for Nvidia’s data center chips has skyrocketed, and with the recent release of the powerful H100 chips, the company has solidified its leading market position. The company presented business results and forecasts in late May that far exceeded expectations, resulting in investors raising the company’s valuation by 200 billion dollars. This relentless enthusiasm has led Nvidia to join the elite club of companies with a market value of more than 1 trillion dollars.
Legislation
Although AI seems to offer endless possibilities, rules are coming regarding the use of artificial intelligence. The European Parliament agreed on legislation on Wednesday to ensure that artificial intelligence is used responsibly, with privacy being a major concern. For example, AI for real-time face recognition has been scrapped, and systems that analyze and judge citizens’ behavior have been banned. Earlier, ChatGPT was temporarily restricted in Italy because it was not clear how the chatbot handles personal data.
Regardless of regulation, investors are excited about the investment opportunities that artificial intelligence offers and are pouncing on shares of companies that can benefit from it. For example, the share price of the American C3.ai is already 280 percent in the black year-to-date, measured in euros, while Nvidia, thanks to the recent price jump, is 177 percent more valuable. This is a huge contrast to the losses of 62 percent and 47 percent, respectively, that investors suffered in 2022 when there were major concerns about investments in data centers and the downturn in the gaming industry.
In the investment world, AI fits into the topic of thematic investing; a strategy that focuses on long-term changes and that has quickly become popular. This growing investor interest in thematic investing in recent years has led to the launch of a variety of investment funds. These include specific technology funds that focus on AI, robotics, and other high-tech innovations.
However, the subjective nature of theme definitions, leading to a lack of consensus, means that thematic investing presents certain challenges. Moreover, companies can be exposed to multiple themes due to the nature of their business activities, increasing the complexity even further.
To overcome this challenge, Morningstar first created a framework in which thematic investment funds are classified at three levels. Technology is one of the four broad themes, which is subdivided into 16 themes including Artificial Intelligence & Big Data. This theme is further divided into sub-themes such as artificial intelligence, deep learning, and machine learning. Thematic funds are assigned to a theme based on intentionality. Natural language processing techniques have been used to determine this intentionality, for example, based on fund names, but also through information from prospectuses, marketing material, and data points in Morningstar Direct.
Consensus Purity Score
To measure the purity of thematic portfolios in relation to the theme, Morningstar has developed a new methodology that results in the Consensus Purity Score, which ranges from 0 to 1. This measure is calculated at the stock level, looking at how often a particular stock occurs in the portfolios of the funds classified in a certain theme (correcting for stocks that occur in multiple themes), and the association of that stock with the theme.
An NLP algorithm is also used to scan information (for example, capital investments, M&A activities, or product developments) from various sources, including company publications, company descriptions, news, and segmented sales figures. The Consensus Purity Score is aggregated at the portfolio level based on the positions in a portfolio and their portfolio weight.
Echiquier Artificial Intelligence
The top 5 this week is compiled based on the Consensus Purity Score at the portfolio level for investment funds classified under the theme Artificial Intelligence & Big Data, measured as per the fund classes available in the Netherlands. With a score of 0.93, Echiquier Artificial Intelligence offers the purest exposure to the theme. The portfolio consists of 33 stocks, including positions in large technology companies such as Amazon, Nvidia, and Microsoft. However, smaller companies such as Datadog, Palantir Technologies, and Alteryx are also found in the portfolio. With a handsome return of over 32 percent, the fund has greatly benefited from the interest in AI-related companies.
Jeffrey Schumacher is the director of manager research at Morningstar Benelux. Morningstar analyzes and assesses investment funds based on quantitative and qualitative research. Morningstar is one of the knowledge partners of Investment Officer and ranks five investment funds or providers every week.