The dominance of the “magnificent seven” US technology shares has caused a fresh headache for professional stockpickers, with active US and global equity funds struggling to match the returns both of their tech cohort and the wider market of which they form part. But with companies such as Nvidia (US:NVDA) powering ahead, in part because of their association with artificial intelligence (AI), it’s worth asking how the funds targeting this specific theme have fared.
Several exchange-traded funds (ETFs) track baskets of AI stocks, and while some thematic portfolios can differ widely in terms of what they hold, funds available to UK investors in this space have made very similar returns this year. The L&G Artificial Intelligence ETF (AIAG) has made a 27.1 per cent sterling total return for 2023 as of 6 November, with the WisdomTree Artificial Intelligence ETF (INTL) up by almost exactly the same amount. Sanlam Global Artificial Intelligence (IE000IKG3JC0), an active fund, is up by 23.4 per cent, but one active outlier, the Ossiam Europe ESG Machine Learning ETF (LEMV), is down by around 1 per cent.
Looking at the first two names, they appear more diversified than some other thematic funds. The L&G ETF holds some of the usual AI suspects, from Microsoft (US:MSFT) to Nvidia, but has no standout big bets. Its biggest position, in Alteryx (US:AYX), comes to just 2.9 per cent, the fund has 62 holdings, and its biggest 10 positions make up only around a fifth of its assets. The WisdomTree fund, which tracks a different AI index, has a similar number of positions but, as per their latest disclosures, these two funds recently shared just two top 10 holdings in the form of Splunk (US:SPLK) and Advanced Micro Devices (US:AMD).
The different ways to target AI as a theme come out clearly in a promotional document for the WisdomTree fund, which identifies a variety of AI categories, from the “enablers” that develop the building blocks for AI, such as advanced machinery and semiconductors, to the “engagers” that involve AI in their products, software or systems.
Turning back to the funds themselves, it’s notable that the actively managed Sanlam portfolio has much bigger bets on the names that have grown so prominent in recent years: top holding Alphabet (US:GOOGL) makes up roughly 6 per cent of the fund, with Microsoft and Nvidia on similar weightings. With the magnificent seven having wavered at points in 2023, it might be telling that the more widely diversified AI ETFs are slightly ahead of the Sanlam fund in the year to date.
Thematic funds can be volatile, however, and at the risk of drowning you in numbers, I should add some further context. The returns from these funds look impressive when compared with the MSCI World’s 9.1 per cent sterling gain over the same period. But the Nasdaq Composite, a tech-heavy index that might be seen as a broader bet in terms of the themes and subsectors it targets, is up by around 26 per cent in sterling terms.
Shareholders in tech funds such as Polar Capital Technology (PCT) are also sitting on some big gains this year.
But all the funds I’ve mentioned suffered some nasty losses in 2022. Much like big bets on specific stocks, portfolios with such a narrow focus can land you with big losses to accompany the gains made at other times.
