AI has its place in the portfolio, but resist overweighting specific stocks: Zenith

Tech stocks with a strong pedigree in artificial intelligence (AI) innovation should retain a “robust allocation” in investment portfolios. However, relying solely on specific AI stocks could substantially increase volatility in portfolios, according to analysts from Zenith Investment Partners.

Calvin Richardson, an investment consultant at Zenith Investment Partners, argues that “portfolios should maintain a healthy AI allocation without relying solely on specific stocks”.

He noted that Zenith’s own portfolios “have retained a robust allocation to the AI thematic through our technology exposures”, but don’t necessarily rely “on a concentrated bet on these tailwinds”.

A high proportion of Zenith’s AI-focused investment allocations have been in the tried and true ‘Magnificent 7’ stocks: Apple, Alphabet, Amazon, Microsoft, Meta, NVIDIA and Tesla.

These and other tech-related stocks grew considerably during the low interest rate environment of the post-Covid period – a period which favoured technology stocks that largely derive their value on the basis “that a meaningful portion of their profits will arrive in future years following a period of significant investment”.

While the stretched valuations of these stocks (which followed their rapid ascent over the last 12 months) have rightly increased investor concerns, Zenith argues for a longer-term view – one that appreciates “the immediate and longer-term risks and opportunities presented by innovative technologies, including AI”.

These seven bigtechs remain at the forefront of AI innovation, and their developments and investments in the technology will be critical to its evolution as a commercially viable asset.

For instance, Zenith noted, investors are banking on AI’s perceived productivity gains and the incremental revenue uplift associated with its broader adoption.

“Productivity enhancements could enable businesses to be run smarter, harder and faster – which ultimately reduces costs and increases profits. Automation of tasks, such as data entry, and the use of AI-powered chatbots can enhance business efficiency which may also free up human resources to focus on more complex tasks.”

For AI-focused investors, Zenith sees “incremental revenue opportunities for companies that can monetise their existing customer base”.

For instance, Zenith’s largest international shares holding, Microsoft, charges an additional fee to users who utilise their ‘co-pilot’ product, which is an AI feature that integrates into Word, Excel, PowerPoint, Outlook and Teams.

“Consequently, if companies like Microsoft can successfully embed themselves within their customer base, their competitive advantage strengthens and the moat around their business becomes increasingly impenetrable.”

Zenith also singled out its second-largest international holding, Alphabet, which it said is “likewise aggressively competing in the AI arms race”.

“Most recently, this has been through their newly launched generative AI model capable of ingesting video, audio and text, to rival Microsoft’s investment in Chat GPT.”

Apple, which is also investing heavily in AI, likewise features prominently in Zenith’s portfolios.

Tech investments demand ‘intestinal fortitude’

While the significant rise in the tech market – mostly notable the NASDAQ index – in the midst of a “deteriorating global growth backdrop, negative sentiment, sticky inflation and rising interest rates” has defied many prominent forecasters’ expectations, Zenith noted that these investments “weren’t generated in a straight line and required patience – and in the case of the last 18-months, intestinal fortitude”.

The investment firm added a word of caution: “Remember that there will always be a nascent issue which could potentially derail your returns; however, if you wait for perfect clarity, the share market will be expensive by the time you find it.”