Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Retail investors with AI holdings are probably in two minds now. Tech stocks continue to hit record highs, but there are also fears they are overvalued. For those looking to diversify their portfolio but still stay invested in AI, investment trusts offer a number of options.
Magnificent Seven tech stocks are the most obvious way to access AI. The companies have been increasing spending on AI infrastructure and their share prices have shot up as a result. Well-known investment trust giants such as Scottish Mortgage, on a 12 per cent discount, have long been fans of tech companies, holding positions in listed companies including Amazon, Nvidia and Meta.
But investment trusts are also seeking to access AI through less obvious companies or are capitalising on the boom via other routes.
Will Crighton, an investment trust analyst at Stifel, also recommends Polar Capital Technology, at an 11 per cent discount, and Allianz Technology, at 10 per cent, for their diversity.
“Both trusts are becoming more underweight to the Magnificent Seven and are looking to find the less well known winners,” he says. Both trusts have outperformed the Dow Jones World Tech index this year after a period of underperformance, but are still on discounts, which he argues is because investors have preferred to access tech stocks through passive funds. “We feel the case for active over passive in this area of the market is growing,” he says.
Elliott Hardy, an investment trust analyst at Investec, adds RIT Capital Partners, on a 24 per cent discount, to this list, arguing that it offers investors access to big tech companies but also private companies such as OpenAI, and balances out both of these areas through uncorrelated investments like government bonds.
An alternative route is HG Capital, a private equity trust, which invests in software that helps companies manage their accounting and HR systems. That software is being given a big boost by AI, according to Luke Finch, a partner at the trust.
He thinks HG Capital is reasonably well-placed in the case of a bubble bursting as it is one layer removed from the infrastructure spending at the tech giants. The trust currently trades at a 10 per cent discount.
Matt Hose, an investment trust analyst at Jefferies, recommends Pantheon Infrastructure, at a 15 per cent discount, and Cordiant Digital Infrastructure, at a 26 per cent discount, as alternative options for investors looking to access data centres in Europe.
A smaller company option is the Aberdeen Asia Focus investment trust, at a 13 per cent discount, which invests in Asia’s AI supply chain among other themes. Gabriel Sacks, manager, says that the trust takes advantage of the fact that while the US dominates chip design, it relies heavily on Asia for chip manufacturing. Chroma ATE, one of the trust’s holdings, provides equipment and services to stress test semiconductors for Nvidia and quality control for TSMC.
One question for investors buying an investment trust at a discount is whether it will ever narrow, with the sector struggling for some time now to close discounts. Hose at Jefferies thinks the outlook is “a bit more positive than it has been”, pointing to activist interest in the space, and argues that those with AI exposure should do better than the pack.
Of course, there are plenty of investment professionals who do not believe the market is in a bubble. Those include Ben James at Baillie Gifford, who thinks that AI will affect every investment. “AI is a general-purpose technology, everything will be exposed to it at some level.”
“The big thing that is being missed by many in the market now is that most of the focus and debate is on spend, whereas the focus should actually be on the capability enhancements generative AI tools are having at companies. Companies are doing things now that they couldn’t do before,” he says.
Ben Rogoff, manager of Polar Capital, is also a defender of market enthusiasm. His trust mainly focuses on so-called enablers: companies providing the computing, networking and power infrastructure for AI. But he thinks that Big Tech will start to lose its market dominance of AI in the coming years, offering opportunities for investors to find less obvious winners.
“Where others see an AI bubble, we believe we are in year three of a multi-cycle infrastructure build required to support what we consider the next general-purpose technology,” he says. “AI is not just another theme; it is the defining technology of this decade,” he argues.
