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This year, registered investment advisors have heard plenty about artificial intelligence (AI) and on multiple fronts. AI is the commonality among the “magnificent seven” – the cadre of mega-cap growth stocks that propelled broader equity benchmarks higher in the first half of the year.
Likewise, advisors are also learning about how AI can benefit their practices. It’s a lot to consume and it’s worth it to compartmentalize AI the investment theme and AI the practice tool. One thing that these two issues have in common is that they’re rapidly evolving. The investment element will be addressed here. Currently, it’s generative AI that’s commanding the most attention both in terms usage and investment implications.
While AI, in various forms, has been around for some time, the current area of emphasis is on generative AI. Courtesy of McKinsey, here’s an efficient way of describing generative AI to clients:
“Generative artificial intelligence (AI) describes algorithms (such as ChatGPT) that can be used to create new content, including audio, code, images, text, simulations, and videos. Recent breakthroughs in the field have the potential to drastically change the way we approach content creation.”
However, there’s more to the AI investment thesis, including the technology’s intersection with other disruptive industries.
AI, Say Hello to Cloud Computing
A prime example of an already disruptive industry that could benefit from intersecting with AI is cloud computing. It’s not hyperbole to say this is a match made in heaven.
“Cloud Computing companies may turn out to be the primary distribution mechanism for AI software. With access to large amounts of data, small teams can code algorithms, but building a large sales force may prove inefficient and costly for AI companies,” according to Global X research. “Conversely, Cloud Computing companies have existing scale in hardware, processing, and sales, in addition to active client bases.”
Internet of Things (IoT) – an innovative investment segment that may not be getting the credit it deserves – is also AI-adjacent and very much AI-relevant.
“Perhaps the most powerful implantation of AI is increased automation of manual activity. Even in our interconnected and technology-driven world, in 2020, only 31% of manufacturing companies had a single fully automated process,” adds Global X. “Humans still feed significant information and instructions into machines. If AI can drive more efficient processes, they will need to absorb and analyze data. Internet of Things companies can provide the hardware layer in those processes.”
Corporate Uses for AI
Today, generative AI has some business applications, but it’s very much consumer-facing. That’s not a bad thing, but it implies room for AI to grow on the corporate side and do so beyond industrial robots.
For clients that are AI-enthused, it worth pointing out that AI can be a driver of cost synergies across myriad industries. That speaks to the long-term efficacy of this investment thesis.
“AI will likely prove more beneficial to companies in controlling costs and finding new efficiencies than for consumers who only ask for a new workout plan or recipe every few months,” concludes Global X. “While the technology has vast consumer potential, the list of AI applications in business is long: advertising, search, translation, medical testing, medical devices, cybersecurity, procurement, inventory management, hiring and talent acquisition, and customer service, to name a few.”