One of the riskiest but most rewarding ways to invest is to pick up on a megatrend early and watch the money roll in once time has elapsed and the crowd starts to rush for the stock. We saw it with Afterpay, Bitcoin and lithium stocks, as well as many other investing themes. But few of us get lucky with these potentially booming investments, though right now many are wondering how they can cash in on the Artificial Intelligence (AI) boom.
Many of these people don’t know they already have, if they have exposure to the likes of iShares Core S&P 500 ETF (IVV), which gives them the S&P 500 in one trade.
Those who followed me into the BetaShares NASDAQ 100 ETF-Currency Hedged fund (IHVV), have a big exposure to AI via the Magnificent Seven companies spearheaded by Microsoft, Meta, Apple, Amazon, Alphabet, Tesla and, of course, the biggie of AI, Nvidia!
But don’t worry if you don’t have this fund as many of the other 493 US companies in the S&P500 would be exploring and exploiting the potential of AI, which will show up in both cost and revenue readings for many companies going forward.
A recent CNBC story wisely pointed out that “…there’s a whole world of stocks beyond flashy AI names such as Nvidia for investors looking to ride the latest tech wave”, according to investment firm Fidelity International.
It suggested investors look for indirect AI plays through less known AI companies, but I think the big fund managers will be doing the work trying to find these businesses. “Rather than focusing on so-called hot AI stocks – because names that are big today may not be the winners of tomorrow – investors may consider the many indirect beneficiaries, or diversified businesses, where the benefits of AI may not be immediately obvious to investors,” Fidelity said in its report.
Right now, the consensus on US earnings tips an 11% rise for 2024, but it could be less if interest rate cuts are delayed because of sticky inflation matters. But eventually rates will fall, and stock prices love the falling price of money, provided it doesn’t come with a serious recession.
Most smarties aren’t seeing a big downturn and I’m in that camp. I believe in the short term, the pluses from AI will outweigh the negative impact on businesses. The longer-term impact could be interesting for job losses and economies, but most big tech innovations go hand in hand with greater real GDP growth.
Back to AI and how latecomers could play it, I think instead of picking individual winners, I’d go after smart fund managers who’d be researching and searching for the companies that will derive great payoffs from being heavily invested in this new technology.
I learnt from the US founders of WCM Global Growth fund (WQG) that’s listed on the local stock market. WQG is a company I hold shares in after Associated Global Partners bought the Switzer Dividend Growth Fund. WQG doesn’t search for new tech companies that could be a hit or miss but look for the picks and shovels businesses that will benefit from a new technology.
Like all funds that chase the best of breed in growing industries, they copped it in 2022 and part of 2023 before surging back as rate rises seemed over in the US and the expectations for cuts were on the rise. This chart shows the past year story for WQG.
WCM Global Growth Ltd (WQG)
But WQG’s 5-yeat story shows how fast-rising interest rates hit these guys, like it did other growth managers and companies. However, those days seem over.
As someone invested in WQG, I wanted to see if this recent rebound in the share price (31.4% year-to-date) was possibly related to them being invested in AI businesses. So, I looked at WQG’s top 10 holdings, and this is what I found:
It’s top holding is Novo Nordisk. I discovered that this Danish global healthcare company, founded in 1923, has a driving purpose “to defeat diabetes and other serious chronic diseases such as obesity, rare blood and rare endocrine diseases.”
And it recently announced it had “… entered into a collaboration with Valo health in September to discover and develop novel treatments for cardiometabolic diseases using AI.”
This company is on board with two of the big megatrend drivers of tech and biotech share prices in the modern era.
Another top holding for WQG is Datadog. It too is tapping into AI, with this from its website telling us that “… with our collection of AI integrations, Datadog is at the forefront of delivering end-to-end monitoring across every layer of your AI tech stack. The chart below shows its AI commitment isn’t hurting the company’s performance and share price.
Datadog Inc.
Here’s the performance of WQG. You’ll notice that the interest rate rising years of 2022 and 2023 hurt their returns because they pursue best-of-breed growth firms, but the inception return of 15.02% a year shows their company filtering system for businesses on the up has been pretty good.
In coming weeks, I’ll look for global big and small cap funds that are likely to be winners as interest rates fall and the megatrends of AI, ‘magic’ diet drugs, the need for cybersecurity and alternative energy plays away from fossil fuels, ultimately determine the returns of the professional players who run these funds.
The point of looking at WQG was to flag that the funds that might have underperformed over the past couple of years (i.e. growth and tech-inclined funds, as well as small cap funds) could be winners in coming years.
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