Marketing communication – For professional investors only
For investors looking for longer-term exposure to AI-powered technological innovations, the answers may lie beyond the tech sector.
After a tough run in 2022, technology returned to form in 2023 to emerge as the best-performing sector. In the same timeframe, artificial intelligence (AI) emerged as the hot new theme as the transformative power of generative AI and large language models went mainstream. For investors looking for exposure to these multi-decade themes and technological innovations, the answer may lie beyond the tech sector.
In 2023, the MSCI ACWI Information Technology Index returned 51.5 percent in dollar terms, with the 3-year annualized return for the index topping 11 percent at the end of January 20241. But these impressive returns hide what has been a roller-coaster couple of years for the tech sector.
Indeed, just twelve months previously, the same index was down over 31 percent with key constituents such as Apple, Microsoft and Nvidia down 26 percent, 28 percent and 50 percent respectively2.
As record amounts of investor money flowed into short-term treasuries and money market funds in 20233, spurred by almost risk-free returns reaching around 5 percent, tech stocks would go on to stage an almighty recovery supercharged by developments in AI that dominated news headlines throughout the year4.
Apple, Microsoft and Nvidia, the same three names that had lost over 40 percent on average in 2022, gained 49 percent, 58 percent and 239 percent respectively in 20235. For investors that saw their technology holdings plummet in 2022 and decided their cash was better kept on the sidelines in 2023, going into 2024 the question is whether the winning streak will continue for the sector, or whether they’ve missed the boat.
Is AI Development the New Space Race?
According to the Natixis Fund Selector Outlook 2024, even though broader uncertainty in the macro and market outlooks of those surveyed was evident in their overall sector calls for the next twelve months, fund selectors are feeling more certain about IT – with 50 percent expecting the sector to outperform.
The survey assembles the views of 441 fund selectors at leading wealth management, private bank, and insurance platforms across 28 countries worldwide.
Both Institutions and fund selectors see much to be excited about in AI with 47 percent of fund selectors overall and 66 percent in Asia believe that AI is a bigger opportunity than the Internet. Another 66 percent of institutions go so far as to equate the rapid development of AI as the new space race.
What’s more, beyond simply investing in tech companies with AI exposure, fund selectors see direct advantages to applying the technology within their own process. Almost three-quarters of fund selectors (73 percent) believe AI will help them unlock opportunities that were not clearly visible before, while 64 percent of fund selectors and 66 percent of institutional investors think the technology will help them uncover hidden risks. Adoption rates are already strong among both institutional investors and fund selectors, with more than half having begun using AI to aid in their analysis6.
Invest in Tech Companies or Tech Innovation?
Traditionally, for broad exposure to IT stocks, discrete sector funds or index ETFs have been the most obvious vehicles of choice for investors looking for exposure to tech stocks.
But as modern technological innovations become increasingly pervasive across a wide range of industries, thematic investment funds now offer an alternative approach to harness disruptive and innovative technologies without the limitations of a concentrated sector bet. After all, there are a host of world-renowned firms whose profits are inextricably linked to technological innovation, but that do not sit within the technology sector.
If we look at AI, we see an interesting illustration of the nuanced difference between portfolios exposed to tech stocks versus those exposed to technological innovation. Even within the Magnificent Seven, Amazon – who behind Microsoft and Meta is AI-chip maker Nvidia’s third largest customer7 – is classified as ‘broadline retail’ within the consumer discretionary sector.
Yet, thanks to thematic funds, investors can gain exposure to technological innovations like AI rather than just tech stocks. The obvious benefits of this approach versus traditional sector investing are two-fold. First, these strategies are inherently long-term, and exposed to multi-decade structural growth drivers or ‘mega-trends’ which can reduce the need or the temptation to try and time the markets.
Second, they are also more broadly diversified across, as they target a universe of companies that relate to the theme, irrespective of their sector or industry classification. This helps ensure portfolios are more broadly diversified, combining different business models, cycles and industry dynamics.
1 Source: MSCI Index Factsheet as at 31/01/2024
2 Source: Bloomberg
3 Source: Bank of America and data provider EPFR, December 2023
4 Source: Bloomberg, December 2023
5 Source: Bloomberg, December 2023
6 Source: Natixis
7 Source: CNBC
Written in March 2024.
Additional Notes
Marketing Communication. For professional investors only. Past performance is not indicative of future results. All investments involve risk, including the risk of capital loss. The provision of this material and/or reference to specific securities, sectors, or markets within this material does not constitute investment advice, or a recommendation or an offer to buy or to sell any security, or an offer of services. Investors should consider the investment objectives, risks and expenses of any investment carefully before investing. The analyses, opinions, and certain of the investment themes and processes referenced herein represent the views of the portfolio manager(s) as of the date indicated. These, as well as the portfolio holdings and characteristics shown, are subject to change. There can be no assurance that developments will transpire as may be forecasted in this material. In Switzerland: This material is provided by Natixis Investment Managers, Switzerland Sàrl, Rue du Vieux Collège 10, 1204 Geneva, Switzerland or its representative office in Zurich, Schweizergasse 6, 8001 Zürich.
NATIXIS INVESTMENT MANAGERS Paris 453 952 681 Capital : 178 251 690 € 43, avenue Pierre Mendès-France, 75013 Paris www.im.natixis.com
THEMATICS ASSET MANAGEMENT - A French SAS (Société par Actions Simplifiée) with a share capital of €150,000. RCS Paris: 843,939,992. Regulated by the AMF (Autorité des Marchés Financiers), under no GP 19000027. 11 rue Scribe, 75009 Paris, France
