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The world’s most valuable technology firms powered the Nasdaq 100 Index to its best performance in more than a decade in 2023 as investor exuberance over the promise of profits driven by artificial intelligence (AI) drowned out concerns about the impact of higher interest rates. Will the party continue in 2024, or will the companies that benefited from the unbridled enthusiasm – and the investors who brought ever more punch to the party – endure an AI hangover, as lofty expectations go unrealized?
“It’s still quite uncertain how fast companies will adopt a lot of the technologies that are being talked about,” says James Learmonth, portfolio manager at Harvest Portfolios Group Inc. in Oakville, Ont., who oversees Harvest Tech Achievers Growth & Income ETF HTA-T.
He suggests the market for AI and AI-related products will top US$2-trillion by the end of the decade. But looking out over the next 12 months, he has grown more reserved about AI-linked stocks.
“The long-term potential here is massive. I don’t know if that exact [US$2-trillion] number comes to fruition or not. But it’s fair to say that it’s set to grow exponentially,” he says. “In the shorter term, I do think a lot of these names have probably gotten ahead of themselves.”
Beyond Nvidia Corp. NVDA-Q – which has seen significant demand for its processing chips and, correspondingly, revenue and earnings – profits stemming directly from AI from other related stocks aren’t as identifiable, Mr. Learmouth notes.
He points to Microsoft Corp.’s MSFT-Q Copilot products for its Office suite, which are being introduced now, as one example.
“There are very high expectations for adoption levels,” Mr. Learmouth says.
“Over the next 12 to 24 months, this is where the rubber meets the road. We’re going to have to see that expected demand translate into actual revenue. If that doesn’t happen, you’re going to probably see a correction across some names,” he adds. “That’s the risk as we move through 2024. We hit some air pockets.”
Sean Durkin, senior wealth advisor and portfolio manager with the Durkin Dietz Group at National Bank Financial Wealth Management in Toronto, suggests avoiding such a scenario by taking a broad-based allocation in a vehicle such as an ETF.
“In areas where we see an economic tailwind, yet we don’t want to risk getting the stock selection wrong, we will utilize the ETF to achieve exposure,” he says.
“So, while we will hold larger-capitalized companies, we also use a broader-based technology ETF to round out the space – to capture, for instance, Nvidia. We don’t directly own that name, but our ETF allocation captured that exposure for us.”
Mr. Durkin questions whether it makes sense to go in big on AI because “we don’t know how profitable the AI space is going to be,” he says. “And we don’t really know the uptake, if you will, of how companies are going to utilize the artificial intelligence tools that are available to them.”
That hasn’t stopped hundreds of millions of dollars from pouring into new AI – or AI-rebranded – investment funds in North America, as investors and asset managers alike position themselves to take advantage of anticipated growth.
“Over the past year, everyone’s trying to figure out how to invest in generative AI,” says Raj Lala, chief executive officer of Evolve Funds Group Inc., which offers a suite of technology-focused funds.
Until recently, Evolve has held off launching an AI-tilted offering, keen to take a more nuanced approach compared to others who have charged into the space.
“Whenever we have launched a fund, what we have not wanted to do is simply duplicate what an investor already owns via the S&P 500 or Nasdaq or other broad beta strategies,” Mr. Lala says. “We want our funds to give investors pure-play access to the right companies in that theme.”
Mr. Lala believes he has hit the correct entry point into the space with Boosted.ai, an AI-driven research platform backed by some of the biggest venture capital investors in technology. The software helps guide tactical decision-making for portfolio managers, the company says.
Evolve has a preliminary prospectus for the new Evolve Artificial Intelligence Index Fund and is awaiting approval from securities regulators.
Boosted.ai’s technology leverages more than 100,000 online data sources, according to co-founder and chief executive officer, Joshua Pantony, who says approximately 180 North American asset managers currently subscribe to the service.
“It’s idea generation and accelerating the research process, as well as portfolio monitoring,” he says of the platform’s capabilities.
“Examples of things you might use our system for is to help understand what kind of stocks are going to do well in a world where global warming becomes an increasingly important issue, or maybe a tsunami hits in the South Pacific, and that’s going to affect 30 per cent of a portfolio – our system would backtest for that.”
“I define this as AI-squared,” Mr. Lala says. “It’s using artificial intelligence to determine what are the right artificial intelligence companies – or the ones being affected the most by AI – to invest in.”
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