The Rise of AI
This post was sent to subscribers on 20th June 2024 - In this week’s Blog we welcome our first guest writer
Graham Withers - Head of Investment at PBIM writes about the rise of AI
Where have we got to ? A mid-year report on markets and portfolios
Dear David & Max,
I read your recent blog post The Magnificent 7 ride with interest and it segued into our subsequent conversation about AI as part of my firm’s thoughts on the wider investment themes likely to shape the global economy over the medium to longer term. So in taking up your invitation to expand on the subject of AI, I claim no expertise on the subject beyond an active interest fuelled by extensive reading and tapping into the knowledge of experts who do.
Lawrence Burns, an esteemed portfolio manager at Bailie Gifford Investments says
"Despite the rapid advances in AI, its impact is still early days as companies find ways to leverage and apply the technology". He continues that AI progress is continuing at pace and that it is essential to invest in and be of supportive transformative change. In 2018, he met Professor Brian Arthur, one of the world’s most influential thinkers on technology and the economy, who told him that he "thought artificial intelligence (AI) would be the most significant invention since the Gutenberg printing press" which "was quite a statement, given that the printing press was invented over half a millennium ago" and given that "Gutenberg’s invention made knowledge accessible, allowing ideas to spread like never before. It powered the Scientific Revolution, the Reformation, and countless political revolutions. Its impact was profound and immeasurable".
Burns continues that "AI has the potential to impact the world similarly, but instead of externalising information, it is externalising intelligence, making it available at rapidly decreasing cost anywhere in the world, instantly and on demand. That could be to write a high school student’s essay on the reign of Queen Victoria or to help a radiologist identify a cancerous tumour. Given that you can do even more with intelligence than you can with information, Prof Arthur concluded that, logically, AI’s impact should be even more significant than the printing press. Fast-forward nearly six years, and his views look increasingly prescient. The latest AI models now very nearly match or exceed human performance in a growing number of tasks, including image classification, reading comprehension, visual reasoning and competition-level mathematics".
This leads to the question of how we seek investment opportunities within artificial intelligence, and Burns believes it is helpful to divide them into three layers: hardware, infrastructure and applications.
The hardware layer is about making the physical computational devices that enable AI. These are the critical enablers of AI and three key companies here that you might well be aware of now (having not been just a short time ago) are NVIDIA, the leading designer of AI semi-conductors (in essence, microchips in "old school" language), TSMC and ASML. TSMC (the T stands for Taiwan which makes this a politically sensitive stock too), make/fabricate the chips that NVIDIA design, and a key part of the manufacturing process are the lithography machines where Dutch-business ASML has a monopoly position.
Infrastructure refers to "the cloud service providers that buy NVIDIA’s chips and offer scalable, on-demand access allowing companies to train and deploy AI models without the overhead of building their own infrastructure". In essence, the "cloud service providers democratise access to both computing and AI". There are three dominant cloud service providers in the form of Amazon, which operates Amazon Web Services; Microsoft Azure and Google Cloud (Alphabet).
There are also companies that are building large foundational models for AI and these foundational models have become so large and complex that the computing power and energy required to train them is making them increasingly expensive. Consequently, they are very much the domain of Amazon, NVIDIA and Meta Platforms (formerly Facebook).
The third area is the application of AI. "This is about making productive use of AI in the real world". For example, "Tesla is using AI to make its cars self-driving and even hopes to leverage those advances to produce humanoid robots. After all, what is a self-driving car if not a robot operating in the physical world?". "Recursion Pharmaceuticals is leveraging AI to improve drug discovery by creating a map of human biology that could dramatically cut the cost of developing new drugs....Meta Platforms is using AI to improve advertising targeting across its platforms such as Facebook, Instagram and WhatsApp to powerful effect" and "Spotify is using it to enhance its personalised song recommendations and has released its AI-powered DJ to much fanfare."
Ultimately, whilst he cautions that "it is still important to remember that progress is rarely a straight line", Burns reiterates his firm belief that "all companies can benefit from the application of intelligence. AI can be thought of as a powerful new set of tools for companies to apply to their business that will, crucially, only get significantly better with time". This is a view that Peregrine & Black very much shares and we continue to look for avenues of investment to serve our clients, whether this be via directly into the individual companies (where suitable); in specific funds fully exposed to this theme, or in more diversified global growth funds where the manager can seek such opportunities across the whole market.
This is, of course, telling a very positive AI story, but one quickly becomes aware that not all is rosy in the AI “garden”. The UK Cabinet Office has recently issued its “Online disinformation and AI threat guidance for electoral candidates and officials”. The guidance “outlines mitigations to disrupt the impact of disinformation campaigns, which are increasingly being created using generative AI.
I fear this may be a longer letter than you were expecting but the importance of this development has this week resulted in Nvidia becoming the most valuable company on earth this week. So are the Magnificent 7 being overtaken by the Lone Ranger ?
Yours,
Graham
Graham Withers is a chartered fellow of the CISI and head of investment management at Peregrine & Black.