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“Hallucination” is the Cambridge Dictionary Word of the Year. How the boffins at the bumper book of words arrive at this I have no idea, but in this context, it means when artificial intelligence makes things up. The award testifies to the importance of AI in the popular consciousness. And, of course, as an investment theme, largely through the prism of the Magnificent Seven stocks of Alphabet (GOOGL), Apple (AAPL), Meta (META), Microsoft (MSFT), NVIDIA (NVDA), Amazon (AMZN), and Tesla (TSLA).

The S&P 500 Index is up 9% over 12 months to the end of October 2023. As has been frequently highlighted, that growth has been very much the gift of these seven companies, driven by market interest in AI. Strip them out, and the returns of the American blue-chip index look lacklustre.

Given this, it’s little surprise that there are funds devoted to AI. What is surprising is that there are not more. There are 14 UK-registered for sale funds with an AI or automation-themed name, six of which are ETFs. Eleven of these Lipper classifies as Equity Sector—Information Technology, two are Equity Global funds and one is Equity Asia Pacific, as their IT exposure is below the threshold required for an IT fund.

On average, the 14 funds are up 10% for the 12 months to the end of October: 6.7% for the two Global mutual funds, and 10.7% for the Equity Sector IT vehicles. That compares to an average of 3.11% for both sectors combined: 2.38% Global to 8.93% for IT. Stripping out robotics and automation-themed funds, we get eight funds, with 12-month returns of 13.8%.

The Magnificent Seven make up about 28% of the S&P 500, and 42% of the index is tech. Not all the Seven are tech stocks, with Amazon, at 3.5% of the S&P, and Tesla, at 1.7%, classified as Consumer Cyclical. The 14 funds have an average IT exposure of 63%, but this varies widely. It’s also worth noting that the robotics-themed funds are, as you’d expect, less weighted to the Magnificent Seven.

Sluggish Uptake

In terms of where the money is going, the first thing to note is that there hasn’t been a mad rush to market by fund management companies. Eight funds is hardly a deluge. What’s more, only one was launched this year, and just two others in 2022.

While there may be a plethora in the pipeline, asset flows would suggest that this is unlikely. The eight “pure” AI funds’ total net assets sum to £6.74bn, the lion’s share in just one vehicle. Year-on-year change in asset value has been 4%, which is significantly lower than their 13.8% return. Far from piling in over the course of a year where AI has been the hot-button topic, then, these funds have suffered redemptions.

Why is this? Has the investing public not got the Cambridge Dictionary memo?

By way of comparison, UK investors have put £166m into IT funds over the past 12 months, compared to £2.17bn into Equity US and £10.4bn into Equity Global. It’s possible that investors in aggregate are happier to take their AI exposure through Big Tech in more diversified geographic funds, rather than as a pure-play theme, which may be deemed riskier and more speculative. One wealth manager did comment to me that AI as a theme has a very high correlation to US equities, so a more focused exposure wasn’t worth the additional risk. It would be surprising if that was a one-off view. The sobering experience of the renewable energy bandwagon may weigh on investors’ minds. For those who do have the appetite for a purer play, and who have the capacity, there is the option of private markets.

Whatever the reasons for low specialist fund flows, it’s clear that AI has yet to take off as a pure-play theme. There may be a word for that, but I don’t have a dictionary at hand.

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