Artificial intelligence has become impossible for investors to ignore. The real question is no longer whether AI matters, but how to invest in it wisely, as MARANA BRAND discovers.

The Appeal – and the Risk

AI sits at the centre of what many describe as a new industrial revolution. At one end of the value chain are the ‘picks and shovels’ – semiconductor designers such as Nvidia, whose chips underpin the global build-out of AI data centres. At the other end are the ‘hyperscaler’ cloud tech giants, like Amazon, Microsoft, Alphabet and Meta, that are investing hundreds of billions of dollars in building enormous data centres to meet the market’s appetite for AI.

Right now, the economics favour the suppliers. “They own the profit pool and have the best margins because of their scale. That lead is enormous, and it is a huge challenge for anyone else to close it,” Sean says.

“I am not prepared to forecast 10 years ahead and say it cannot change. You are already seeing up-and-comers entering that landscape. We have a company in our portfolio called Advanced Micro Devices (AMD). Although it carries a smaller weighting than Nvidia, we consider it a very credible second-tier competitor. But could AMD overtake Nvidia anytime soon? That is a long shot.”

That uncertainty is one reason the word ‘bubble’ keeps resurfacing. Yet Sean is cautious about using it. “A bubble usually looks like a massive blow-off top, with the kind of price action where broad indices double within 12 months, as we saw in 1999 during the dotcom bubble. We have not yet seen that price action. Instead, we have had optimism and a steady bull market, punctuated by some corrections along the way, which is normal.”

In fact, many of these large companies now have valuations that suggest greater scepticism than is generally reflected in articles about an AI bubble. These businesses have grown very large and investors are asking how much longer they can continue to grow.

That scepticism reflects fears of a mismatch between the investment rate and the monetisation rate. Large sums are being spent on AI infrastructure, but it is less clear that sufficient additional revenue will follow to achieve an appropriate return on this investment. “The concern is whether throwing another hundred billion dollars at the problem yields incremental improvement,” he says.

Why Concentration is Dangerous

That’s why Sean believes no portfolio should be a one-way bet on a single factor – such as AI – because themes come and go and trade tensions, supply-chain vulnerabilities and political volatility all affect sentiment. “In the USA, for instance, if you look at the S&P 500 and at returns in Republican and Democratic years, irrespective of policy or who the president was at any given point, that index has marched forward over time because of human ingenuity and the USA’s pro-capitalist system, which incentivises risk-taking and enables enterprises to raise capital and innovate.”

Value creation comes from many factors. “You need an appropriately diversified portfolio across sectors and themes. We invest in banks, private equity, AI-linked semiconductors and more traditional assets such as hospital stocks. Our focus is on ensuring that the quality of the assets we acquire stands up to scrutiny,” he says.

That does not mean you cannot allocate to newer ideas that are potentially nascent as businesses, but you must size those allocations appropriately. “We would always want the bulk of our portfolio to be comprised of very high-quality companies that can stand the test of time, companies that invest in and build the future. If you take a longer-term view, the rest is largely noise.”

Invest as much as you can, as early as you can, and be consistent and deliberate; small differences compound into massive outcomes over time.

Sean Ashton, Head of Investments at Private Clients by Old Mutual.

So Where Does AI Fit into Decision-Making?

Beyond what investors choose to invest in, AI is reshaping how investment decisions are made. Investing in AI is one thing, but at the back end, how much of the investment decision-making will AI take over?

Clients are no doubt using AI themselves and are far better informed than ever, Sean says. “Anyone can get an overview of a company they know nothing about in minutes, but I see AI as an assistant, not an oracle. Ideally, AI should remove repetitive, non-creative, non-value-add work from human activity. It allows us to cover a lot more ground more quickly.” But ultimately, there is still a decision to be made.

“That judgement factor has a massive human element. You need experience to know when something does not make sense or when the information is misleading. AI also doesn’t replace the relationship role or the executive decision-making role,” Sean says.

“A large part of what we do is helping clients not only make the right decisions over time, but also avoid making the wrong ones when it matters most. Those moments come when emotions run high, and I do not believe an AI bot will talk someone back from the proverbial ledge during a market crash, for example. When you panic, will you call your portfolio manager or message an AI chatbot?”

While there are many tools – like AI – for gathering information to make sound investment decisions, Sean believes what sets Private Clients by Old Mutual apart is the effort to turn over the stones. “It comes down to having an enthusiastic investment team with a deep sense of curiosity about the world, about finding opportunities, and a passion for this game. If you do not have a passion for this game, you will not last.”

The Future

“The advice I give to investors has not changed: invest as much as you can, as early as you can, and be consistent and deliberate; small differences compound into massive outcomes over time. The key is to keep investing and avoid rash decisions at market extremes, both high and low. Emotions creep in, and that is where the benefit of having an experienced portfolio manager to talk to really matters,” Sean concludes.

About

Private Clients by Old Mutual offers holistic, bespoke solutions for high-net-worth clients. We partner with you and various specialists, tapping into the required resources to provide an integrated plan for your holistic financial affairs, including investments, wealth structuring and transfer strategies, proactive tax planning and portfolio lifestyle and administration. Our level of individual attention and interaction is a defining standard in the personal service we provide. We boast a strong track record in wealth and investment management. As part of a brand that has been growing wealth for South Africans for nearly two centuries, we believe that there is no substitute for experience that comes with managing wealth through various economic and market cycles. Our team, therefore, has several decades of success and experience in successfully working with individuals, families, trusts and entrepreneurs in managing their wealth.

Contact

Private Clients by Old Mutual |+27 (0) 861 5300 | privateclients@omweatlh.co.za