As 2023 came to a close, I was not surprised to see that Collins Dictionary declared “AI” as their word of the year. Artificial Intelligence was definitely the hot topic of 2023, with the popularity of ChatGPT, the UK hosting a global conference on the future of AI, and it even being the subject of Ian Lowes’ Comment in issue 126 of this magazine.

Needless to say, AI was also a hot topic in the investment arena. A lot of the early, application specific research is being done by private firms, however, making it difficult for most investors to gain access. This has led to a focus on a small number of large companies with either an exposure to the field of Artificial Intelligence themselves, such as Alphabet (Google) and Meta (Facebook), or those seen as benefitting from the rise of Artificial Intelligence, such as the chip manufacturer NVIDIA. This focus in itself has led to a new term – the “Magnificent Seven” – being Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA and Tesla. (See fig 1.)

The interest in these companies as a way of gaining exposure to AI saw them perform well over the last year. As can be seen in the chart, their individual performance eclipsed the performance of the rest of the index, especially when you bear in mind that these seven companies make up around a third of the S&P 500 index as a whole. (See fig 2.)

Let’s just consider that for a moment. Around a third of the S&P 500 index, an index which, as its name suggests, contains 500 companies, is concentrated in just 7 of those
500. So, anyone investing passively in an index tracker will have a third of their returns based on the fortunes of those seven firms. It would have served them very well over the last twelve months, but do they realise that their investment is largely based on such a small pool of companies?

Those of us who have been around for a while have seen similar situations before. The biggest, of course, was the dot.com boom of 1995-2000, where anything linked to the internet was seen as a sure-fire winner. On a smaller scale, it is not that long ago since driverless cars would be the next big thing, and that was followed by 3D printing. They are both technologies which will no doubt be big things in the future, but we are now several years beyond their initial arrival. After the initial hype and excitement died down, it became apparent each time that things would not be happening as quick as everyone hoped.

Personally, I think the same is true for Artificial Intelligence. It clearly has a huge potential to transform our lives on many levels. News stories about AI systems diagnosing illnesses as well as doctors, and helping find new medicines all show the possibilities that are there. These are specific, focused areas however, and as seen with driverless vehicles, developing a complex system which can deal with all eventualities in the real world is, well, complex.

Of course, no-one knows how AI will play out, but history has shown us that once the initial excitement dies away, we can expect to see the early investors taking their profits, leading to those same share prices which have surged ahead falling back. At that point the concentration risk of those seven companies making up such a large proportion of the index will come to the fore, with the returns of the index, and any passive investments linked to that index, being dragged down by those seven, even if the other 493 perform well.

There is also already some pushback from people worried about control being given to computer systems, and the potential loss of jobs which would arise as AI proves to be able to perform some roles more reliably and of course, at a lower cost. These societal concerns will not stop the development and introduction of AI, but it will inevitably slow it down.

There will certainly come a time when significant elements of my job, as with many others, can be performed by a machine. As a test, I did ask ChatGPT to write an article about Artificial Intelligence and investing, and although at first glance the text it produced appeared well written and readable, in some parts it was inaccurate. None of it made it into this final version, but I will leave it up to you to decide if that was a good thing or not!

Lowes Financial Management is authorised and regulated by the Financial Conduct Authority