Investing in AI: What Advisors Need to Know

Artificial intelligence seems to be taking over the technology world, with more and more companies opening for business in the now profitable AI sector.

For advisors and portfolio managers, the question is this: how can I best invest in artificial intelligence and which investments should I choose?

To answer those questions requires some background.

By definition, artificial intelligence makes it possible for machines to learn from experience, adjust to new inputs and perform human-like tasks, according to a white paper from SAS.

“Most AI examples that you hear about today – from chess-playing computers to self-driving cars – rely heavily on deep learning and natural language processing,” the paper stated. “Using these technologies, computers can be trained to accomplish specific tasks by processing large amounts of data and recognizing patterns in the data.”

It’s the potential uses that offer the potential for investment.

For example, in health care, AI applications can be used to create personalized medicine and X-ray readings for patients. In retail, AI offers virtual shopping capabilities that provide customized recommendations for shoppers – and can engage and examine purchase options with consumers.

In fact, there’s a huge financial interest in artificial intelligence virtually across the board.

“AI is technologically powerful because it can accomplish many traditionally human processes without fatigue, emotions or logical fallacies,” said Sasha Aurand, a marketing specialist at JAKT, a digital innovation studio in New York City.

A 'Massive' Opportunity

Business-wise, AI presents a “massive” opportunity for industry companies, and for the larger economy, she said. Some data points to consider:

• By 2020 there will be a $153 billion AI and robot market, with $70 billion supporting “AI-based analytics.”
• Over the same period, companies will see a 40-50 percent productivity increase from AI-based solutions for 290 million knowledge workers globally.
• By that time, companies will see a 30 percent hike in productivity, along with up to a 33 percent decline in manufacturing labor costs.
• The world will see a $5.2 to 6.7 trillion increase in annual, worldwide revenue attributed to AI by 2020.

Investors are already noticing. The rollout of the AI Powered Equity ETF in December was one of the most popular new funds in recent memory. The fund leverages AI technology to pick fund stocks.

The IPO raised $70 million in two weeks -- a hefty sum for a fund with only $2.5 million in assets.

Then there’s the Global X Robotics & Artificial Intelligence ETF, which invests in companies primed to benefit financially from AI technology. The fund has returned more than 57 percent in the past year, and has seen assets grow from around $250 million to $1.05 billion, as of early January.

Equally impressive is the ROBO Global Robotics & Automation Index ETF, which boasts $1.9 billion in assets, and returned 45 percent to investors in 2017.

Strong Sector Reach

Sector-wise, new AI investors may want to start kicking some tires in the financial and health care corners of the market.

“Investment bankers have long used computerized trading algorithms, but their static models don’t adjust well to changing markets,” Aurand explained. “In the machine learning age, adaptive algorithms reduce risk and increase gains. AI also helps include fraud reduction and anti-money laundering.”

In the health care sector, society has historically relied on doctors for disease diagnosis.

“But humans, even doctors, are fallible,” Aurand added. “Over 250,000 Americans die annually from healthcare mistakes. These errors cost $20.8 billion in 2016. AI-based diagnostic algorithms can change health care and save lives.”

It’s also worth researching companies that are already deploying AI projects and strategies, as they stand to benefit financially from doing so.

“Here is what I tell people: in public markets, investors need to look at companies that are successfully using AI to drive their business,” said Praful Krishna, chief executive officer of Arbot Solutions, an artificial intelligence company based in San Francisco.

“For example, Google is using AI for better targeting, and Caterpillar is using AI to invent self-driven mining vehicles,” Krishna said.

For investment advisors, and their clients, the door is wide open on artificial intelligence. It’s not a door that needs to be kicked open, but entered carefully and diligently, with the goal being technology research first, and stock market opportunities second.

“In our experience, AI shows up in weeds, not in headlines,” Krishna said.

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms. Brian may be contacted at [email protected].

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