How To Invest In AI, Best Funds

Whatever precisely happened over those 45 days, it seems obvious to us that going forward AI will generate superior returns simply by applying a Momentum-style to its stock picks.  This is because there is a volume of overwhelming evidence (see link below) that Momentum is the only investment style (or factor if you like) which consistently generates superior long-term returns, and AI will interrogate that research and learn from it.

This begs another question:  How should you invest into AI itself to achieve the best results for your portfolio?

Should you just ask ChatGPT?  Or is there a better approach to investing in AI that has been proven to work over decades of research?

The answer is straightforward.

Momentum-style investing involves selecting funds based on their recent performance.  This approach has consistently outperformed any other investment strategy over the long-term.  

It’s all set out here in "The History Of Momentum Investing – Two Centuries Of Pedigree"

There is a mass of evidence proving this.

In fact, the evidence shows that it is insultingly simple and infuriatingly profitable for those who believe they have some special insight (but fail regularly).

You can see the results yourself just by looking at our Dynamic UK Blended Portfolio made up of UK stock market funds using a straightforward Momentum process.  This is what we did:

1. Select the top 3 performing funds over the last 6 months from the 3 UK equity fund sectors.
2. Hold them for 6 months.
3. After 6 months switch to the latest top 3 performers over the prior 6 months.

Couldn’t be simpler! And the results?

This has generated growth of more than 8x the FTSE 100 index since May 2000*!  Imagine what this could mean for your pension fund.

Put another way, an investment of £100,000 in May 2000 grew to £1,527,920 today with our Dynamic Portfolio, or £180,480 with the FTSE 100 index since May 2000 – an extra £1,347,440 by making more intelligent fund choices, based on evidence of success which stretches back over a century.

You might be thinking:  Could this approach work for investing into specialist AI funds?

Yes!  Instead of relying on your own intuition or following the advice of the so-called “investment experts”, it is best to choose those AI funds with momentum based on their recent performance.

And how do you create a fund performance league table?

We’ve done the work for you here.

If AI is the future, then having a clear, tried-and-tested process to invest into this technology is essential.  This approach has been online at FundExpert for more than a decade – and it’s not artificial!

Beyond momentum…

But we mustn’t be smug or complacent.  Long-term investing success also requires that you know when to adapt.

In 9 years out of 10 there is little point doing anything other than investing using a Momentum-style to select your funds and shares.

But in the 10^th year you have to adapt.  This is one of those times, at the end of a 40-year cycle of falling interest rates and falling inflation.  So rather than just look at what has momentum with those AI funds, you should also consider the context, both the macro environment and the micro, the makeup of the individual funds.

Let’s look under the bonnet...

In our listing of AI funds sorted for current momentum, we have also added the L&G Global Technology Index fund.  This gives a sense of how a generic tech fund has performed versus those with a narrow AI focus.  You will see that it comes a commendable 2^nd with only one AI fund beating it.  In table 1 below we have compared the top 10 holdings of the L&G fund with the top AI fund (from Global X), and one of the laggards (from Allianz).

Why?  Because the US stock market has been driven by a handful of mega, and overvalued, tech stocks in 2023, and we wanted to make sure we weren’t buying into AI funds that also over-weighted these stocks.  As you can see, Gobal X only shares one large holdings with L&G – this is encouraging.

Investor protection 

Be very wary of the high risks in such specialist funds. Assume a roller-coaster.  We invariably recommend Stop-Losses for investor protection, automatically selling with a 10% loss.  In this instance a 15% Stop-Loss might be preferable.

Table 1 – Top 10 holdings, L&G tracker vs two AI funds

You can also see in this table the concentration of those top 10 holdings.  For example, with Global X they represent more than 62% of the fund.  That is very concentrated!  It highlights the risk again, while also highlighting that rewards will be high if the confidence of the fund manager in this small number of stocks turns out to be justified.

Last but not least in this comparison, note that all three funds have about 87% of the fund invested into the US.  If the US market takes a sharp turn for the worst (as we expect), it won’t be easy for any stocks/funds to resist this downward pull.  But it might well represent the best chance you will get to buy cheaply into AI specialist funds.

Conclusion

Artificial intelligence could rapidly change the world over the next decade, hopefully mostly for the better, once some global regulation is put in place.

The specialist AI funds which we have listed here, in order of current momentum, are a fascinating opportunity. But don’t under-estimate the various risks, as outlined above.

*Dynamic UK Blended Portfolio (1527.92%) vs FTSE 100 TR in GB (180.48%) 1^st May 2000 – 5^th May 2023