Alexandre Zilliox

Alexandre Zilliox

Co-Manager of Thematics AI & Robotics strategy
Thematics Asset Management

Nolan Hoffmeyer

Nolan Hoffmeyer

Co-Manager of Thematics Subscription Economy strategy
Thematics Asset Management
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% in dollar terms, with the 3-year annualized return for the index topping 11% at the end of January 2024.1 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% with key constituents such as Apple, Microsoft and Nvidia down 26%, 28% and 50% respectively.2

With a global macro-economic environment compounded by war, persistent inflation and rising interest rates, a January article in Forbes magazine surmised that: “Tech had a difficult 2022, and signs point to 2023 being similarly hard for the industry. Finding strong investments can be stressful for many investors, leading some to move to safer investments, whether those be blue-chip stocks or fixed-income securities”.3

As record amounts of investor money flowed into short term treasuries and money market funds in 2023,4 spurred by almost risk-free returns reaching around 5%, tech stocks would go on to stage an almighty recovery supercharged by developments in AI that dominated news headlines throughout the year.5

Apple, Microsoft and Nvidia, the same three names that had lost over 40% on average in 2022, gained 49%, 58% and 239% respectively in 2023.6 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 Information Technology – with 50% 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. And it echoed a similar survey by Natixis of 500 institutional investors in December 2023, 52% of whom expected the IT sector to outperform in 2024.7

Both Institutions and fund selectors see much to be excited about in AI with 47% of fund selectors overall and 66% in Asia believe that AI is a bigger opportunity than the Internet. Another 66% 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%) believe AI will help them unlock opportunities that were not clearly visible before, while 64% of fund selectors and 66% 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 analysis.8

And finally, 66% of institutional investors predict that technological innovation in AI will supercharge tech growth again in 2024.9

Fund Selector Survey vs. Institutional Investor Survey - Sector Calls for 2024

fund selector survey vs institutional investor survey sector calls for 2024

Invest in tech companies or tech innovation?
With both fund selectors and institutions appearing even more optimistic on artificial intelligence as a catalyst for growth than they appear to be on the discreet tech sector’s likelihood of outperforming over the next 12-months, how can investors replicate this optimism in their portfolios?

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 that come with 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 customer10 – is classified as ‘broadline retail’ within the consumer discretionary sector. Meanwhile, Tesla, which plans to spend $1 billion this year to build a super-computer in an effort named Project Dojo,11 falls within the automobiles industry – also in the consumer discretionary sector.

Yet, thanks to thematic funds, investors are able to gain exposure 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, 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.

An illustrative sector breakdown of a thematic strategy focused on AI & Robotics12 :

an illustrative sector breakdown of a thematic strategy focused on A Robotics

An illustrative sector breakdown of a thematic strategy focused on the Subscription Economy.
(Companies such as Microsoft, Adobe, Relx Group and PowerSchool use subscriptions to monetize their generative AI technologies13)

an illustrative sector breakdown of a thematic strategy focused on the subscription eonomyPNG

Case studies

Relx Group
Relx Group is a British-based firm that was previously known as Reed Elsevier, a company that merged a British trade book and magazine publisher with a Netherlands-based scientific publisher. In 2015 the company rebranded, pivoting from traditional publishing to technology-driven information-based analytics. Applying AI and machine learning techniques to its huge database of books, journals and publications spanning fields including medicine, science and law, the company has revolutionized its business. Lexis Nexis, for example, is a database of legal information and case histories that has been used by many in the legal industry to research cases and access public records. What was once a relatively slow and clunky platform has been completely transformed with the launch of their platform Lexis+ AI. Lawyers are now able to research and prepare cases in matter of minutes, not only using the technology to analyze legal precedent but also to gain insights on the judge of the case and their previous decisions, sentences or damages awarded. The share price, that traded in the low-teens at the time of the rebrand, has reached an all-time highs in 2024 breaking through 33 GBP per share.14
AutoStore
AutoStore is a Norwegian company offering logistics automation systems (and more precisely cubic storage systems) that help automate warehouses and distribution centers. Although AutoStore is classified as a capital goods company within the industrials sector, the self-proclaimed ‘technology company’ is a pioneer in connected warehouse robots and thanks to their new algorithmic software solution Router, every route and every journey made by a robot is calculated in real time to ensure they take the optimal path to their destination. AutoStore’s automation systems are also capable of learning which products are most popular and will reconfigure the warehouse storage bins to minimize the retrieval and dispatch time. Today AutoStore counts over 58,000 robots within 1250 systems in over 50 countries worldwide and customers include luxury goods-maker Gucci, healthcare company Johnson & Johnson, airline operator Lufthansa and logistics giant DHL.15

Going beyond
The fact that both institutions and fund selectors are more positive on the potential of AI to unlock opportunities for their own businesses than they are on the tech sector narrowly defined suggests that those investors that exited the tech sector at the end of 2022 or those with cash on the sidelines might benefit from considering thematic investments as they seek to redeploy capital.

And when done well, thematic portfolios assemble a group of attractive companies that are underpinned by trends that are impactful, broad in scope and long lasting, without being constrained by industry or sector classification. After all, beneficiaries of technological innovation can be found beyond the boundaries of the tech sector.

Thematics AM is an affiliate of Natixis Investment Managers, and forms part of our Expert Collective.
1 Source : MSCI Index Factsheet as at 31/01/2024
2 Source : Bloomberg
3 Source: https://www.forbes.com/sites/qai/2023/01/19/why-were-tech-stocks-down-in-2022-and-how-long-will-the-slump-last/
4 Source: Bank of America and data provider EPFR, December 2023
5 Source: Bloomberg, December 2023
6 Source: Bloomberg, December 2023
7 Source: https://www.im.natixis.com/intl/research/
8 Source: https://www.im.natixis.com/intl/research/2024-fund-selector-outlook
9 Source : https://www.im.natixis.com/intl/research/2024-institutional-outlook
10 Source : https://www.cnbc.com/2019/08/15/nvidia-ceo-google-is-the-only-customer-with-silicon-at-scale.html
11 Source : https://www.bloomberg.com/news/articles/2023-07-19/musk-says-tesla-to-spend-over-1-billion-on-dojo-supercomputer
12 Source: Thematics AM as at 31/12/2024
13 Source: Thematics AM as at 31/12/2024
14 Source : https://www.relx.com/investors/investor-overview
15 Source : https://www.autostoresystem.com/investors

This communication is for information only and is intended for investment service providers or other Professional Clients. The analyses and opinions referenced herein represent the subjective views of the author as referenced unless stated otherwise and are subject to change. There can be no assurance that developments will transpire as may be forecasted in this material.

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 any regulated financial activity. 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. The analyses and opinions expressed by external third parties are independent and does not necessarily reflect those of Natixis Investment Managers. Past performance information presented is not indicative of future performance.

Marketing Communication. Please refer to the prospectus of the fund and to the KID before making any final investment decisions.

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