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The role of AI in a
Sanlam Private Wealth
May 31, 2023
In our view, AI is a transformative investment theme of very long duration, and its longer-term social and economic impact could be comparable to that of the railways, the internal combustion engine, the telephone or television.
At the moment, we don’t think all companies (or governments) understand the opportunities and threats that AI creates, but many are beginning to wake up to its impact. Five years ago, we spent much time explaining what ‘AI’ is – this is certainly not the case now. We believe there’ll be winners and losers from the widespread adoption of AI, with the winners enjoying faster rates of growth than their peers.
The social and economic impacts of AI are potentially huge. AI will undoubtedly remove a lot of dull, repetitive, rules-based work – this should free up humans to focus on value-adding areas and to think more strategically or creatively.
However, we can’t ignore the fact that many jobs in the developed world are likely to disappear in the coming years due to AI-enabled automation. Examples include the transport sector, in which jobs involve moving things from A to B on roads or within warehouses, rules-based professions such as accountancy, and even creative industries – AI can already create music that’s practically indistinguishable from that written by humans.
The challenge for policymakers will be to make sure that the transition period is not too painful and that workers are given the tools and opportunity to reskill. This is not a new challenge or even specific to AI – it’s a problem that has existed ever since the industrial revolution held out the promise of automated or mechanised work.
In our view, the benefits of AI will outweigh the downsides. For example, in healthcare, AI is already, on average, better at analysing mammograms than the average human radiographer. In addition, while there is a limit to how much analysis a radiographer can do in a given day, AI can work 24/7 and play a critical role in clearing treatment backlogs and providing better clinical outcomes at a lower cost.
There are revolutionary environmental applications too. For example, Google has an AI unit called DeepMind whose work on protein folding has opened the door to ‘eco enzymes’ that could be used to break down the plastic and other contaminants that pollute the world’s rivers and oceans.
Nvidia, one of the companies we hold in the Sanlam Global AI Fund, has created a complete digital replica of planet Earth using AI that can model how different environmental scenarios could play out over time. This kind of technology could revolutionise how we think about climate change and how policymakers respond and, crucially, it can give us early warning of specific climate-related disasters.
We think AI should play a role in all diversified portfolios. Even if you don’t agree with or like its deployment, the genie is out of the bottle. Five or 10 years ago things like self-driving cars and ‘doctor bots’ sounded like something from a science fiction film – now they are a reality.
We’d urge investors to think about how AI will affect the earnings and long-term growth trajectories of the companies they invest in – companies that use and deploy AI can build even stronger moats around their existing businesses, but those that fail to engage run the risk of becoming irrelevant. For example, in the US we’ve already seen some educational companies warn that AI has had a negative impact on their business, as the rise of generative AI (and particularly the emergence of ChatGPT) has led to reduced demand for traditional learning tools.
The advent of ChatGPT – perhaps the first global watershed moment in AI – took some people by surprise. However, it is actually just part of a longer-term trend towards better natural language processing (NLP). NLP forms the crucible within which those looking to assert their AI dominance have sought to burn most brightly.
To give some context here, ChatGPT was launched in 2018 with 150 million parameters. It has increased in complexity to the point that GPT-3 now has 175 billion parameters – in other words, more than 1 100 times more than just four-and-a-half years ago. ChatGPT uses GPT3.5, a tweaked version of GPT-3 with broadly similar capabilities. Microsoft paid OpenAI for exclusive access to commercialise GPT-3 in the third quarter of 2020 – it’s one of the key reasons that we own a position in Microsoft.
Stepping back a little, our core thesis is that we expect AI to permeate the entire economy over time. This is something that all investors should think about – not least because some businesses will face profound disruption because of AI.
To access the widest range of opportunities, investors should look for funds and strategies that invest on a global and unconstrained basis – not just for reasons of portfolio diversification but because different countries have different levels of adoption and engagement with AI. For example, in China AI has been part of everyday life for many years, and it has been adopted at a level that would most likely prove difficult in the West due to ethical and privacy concerns.
It’s also important to remember that AI is only as a good as the data that it is trained on, so companies and institutions that own or control rich, deep and complex data sets can play a critical role in the ongoing development and deployment of AI – if, of course, they choose to engage with it.
Comments by David Lerche, Chief Investment Officer of Sanlam Private Wealth:
Sanlam Private Wealth clients who have international equity investments with us already have ‘obvious’ exposure to AI’s Western leaders in both Microsoft and Alphabet (Google) – through the Sanlam Global High Quality Strategy, but also via investment in the growth-oriented Baillie Gifford Worldwide Global Stewardship Fund, where the mantra is, ‘What could go right?’ Our South African portfolios have high exposure to Eastern AI leader Tencent (via Prosus).
With the vast number of potential use cases, many companies will benefit from AI, but we suspect that in any given industry, the leaders – who typically have wider margins and stronger balance sheets that facilitate forward thinking and investment for the future – will be the key winners. This aligns with our philosophical preference for investing in higher-quality businesses.
It’s only with time that we’ll fully understand the extent of AI’s impact on our lives, but we are confident that it will be nothing less than profound.
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