How do I invest in AI stocks?

Q. How do I invest in AI stocks?

A: AI or artificial intelligence is the hottest area of technology at present and many investors will be wondering how they can gain exposure to it. There is a wide variety of options; some offer concentrated exposure to AI while others include AI-related investments within a more diversified fund. 

Actively managed funds dedicated to AI include the Sanlam Global Artificial Intelligence fund. Sanlam says the fund ‘looks to invest in companies that are using AI to their benefit’ and adds: ‘Businesses that incorporate the use of AI will have a significant advantage over those that don’t. We seek to identify those companies who are likely to significantly benefit from AI integration and boost their long-term economic value.’ Chris Ford, who manages the fund, has said AI ‘will permeate almost all areas of the global economy’.

Another option is the Polar Capital Artificial Intelligence fund. Polar Capital says: ‘The pace of innovation and rate of adoption of artificial intelligence is rapidly accelerating. No longer an emerging technology, AI has reached an inflection point and entered the mainstream, bringing with it potentially profound disruption. [Our] fund adopts a highly active approach to this rapidly evolving environment, seeking multi-sector exposure to both the enablers of this technology and the beneficiaries as the investment landscape is rewritten.’

There are also passive AI funds, such as the Legal & General Artificial Intelligence UCITs ETF.

You can also invest in areas closely related to AI such as robotics and automation. Two passive options are the Legal & General ROBO Global Robotics & Automation Index ETF and the iShares Automation and Robotics UCITS ETF.

If you want to invest in AI via a more diversified technology fund, there is plenty of choice. For example, the Polar Capital Technology Trust, an investment trust quoted on the stock market, invests in a range of technology companies, many of which are leaders in AI. When we profiled the trust in August we said it had had ‘a fantastic year thanks to the decision to increase the allocation to this area … it now has around two-thirds of the portfolio invested in AI-related businesses’.

Allianz Technology Trust, another investment trust, also has exposure to AI. Its 10 biggest holdings include Nvidia, which makes AI chips, Microsoft, which is behind the Copilot AI chatbot, and CrowdStrike, whose anti-hacking software uses AI.

Scottish Mortgage, one of Britain’s largest investment trusts, has holdings in several leading technology companies that are heavily involved in AI. The trust’s manager, Tom Slater, wrote last month: ‘The portfolio is poised to harness AI’s growth potential with a recent trim to Nvidia, an addition to Meta Platforms and a new buy in TSMC.’

A smaller trust that has nevertheless invested in a big way in AI is Manchester & London: it has almost 40% of its money in Nvidia and another 23.2% in Microsoft, with holdings in the chip maker Advanced Micro Devices (AMD), the chip machine maker ASML and other AI-exposed companies on top. It’s very rare indeed for funds to dedicate so much money to single holdings. In its most recent annual report M&L said: ‘The manager’s multi-year interest in and studying of artificial intelligence continues to put the fund in a good position to capitalise on the continuation of the era of AI. The conviction of the manager and board remains strong that the growth of AI is in its infancy.’

Some investors may prefer an AI-heavy tech fund that is not an investment trust (investment trusts are favoured by many investors but there are more factors to understand, such as the existence of ‘gearing’ or borrowing and the chance that the trust will trade at a discount or premium to the value of its assets). One such fund is AXA Framlington Global Technology. In a commentary published in late October its manager, Tom Riley, highlighted the AI exposure of several of the fund’s holdings, including Nvidia, Taiwan Semiconductor Manufacturing (TSMC), ServiceNow, Amazon and Salesforce.

A generalist technology fund that is passively managed is the Legal & General Global Technology Index fund.

Or, if you want more modest exposure to AI as part of a diversified portfolio that invests beyond the technology sector, one option is Rathbone Global Opportunities, which is on Fidelity’s Select 50 list of funds. It has a fifth of its money in technology stocks, including Nvidia (3.6% of the fund), Microsoft (2.8%) and Alphabet, the owner of Google (2.3%). James Thomson, the fund’s lead manager, told a Fidelity discussion panel in the summer that he believed the world was right at the start of the next AI-led generation of computing and that AI could drive half of all incremental economic growth over the next decade.

You could also invest in individual AI-related shares, although this is seen as a more risky approach because you will need to try to identify the winners yourself, while a fund automatically offers more diversification than a handful of individual stocks. The most obvious choice would be Nvidia, whose computer chips are seen as particularly suited to processing AI tasks, but others include the rival chip makers AMD and TSMC, the software companies ServiceNow and Salesforce, both of which have incorporated AI into their products, and Amazon via its cloud computing arm, Amazon Web Services. Amazon’s boss said in late October that ‘AWS’s AI business is a multi-billion-dollar revenue-run-rate business that continues to grow at a triple-digit year-over-year percentage and is growing more than three times faster at this stage of its evolution as AWS itself grew’.

Further options include other companies mentioned above as holdings in AI-related funds: Microsoft, Meta Platforms, formerly Facebook, ASML and CrowdStrike.

It’s always worth remembering that restricting your investments to one sector of the economy is inherently riskier than taking a diversified approach and that some commentators have said AI is overvalued relative to its profit-generating capability.

Important information -  investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Shares in investment trusts are listed on the London Stock Exchange and their price is affected by supply and demand. Investment trusts can gain additional exposure to the market, known as gearing, potentially increasing volatility. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.