24.03 Liontrust Global Innovation Report - The Rise of AI 04.24 - Flipbook - Page 10
W H AT I N V E S T O R S A R E A S K I N G …
What is the investment case for technology companies?
We believe investing in technology is compelling for
three key reasons: i) technology stocks have the best
fundamentals of any sector – not just growth, but the
highest return on invested capital (ROIC), free cash
flow margins and lowest leverage; ii) technology
stocks have a strong long-term historical returns profile,
underpinned by strong growth in earnings; iii) we are
at the beginning of a new technology cycle driven by
AI that we expect to generate strong earnings growth
over the coming years.
What are the risks of investing in technology?
As with any investment, technology stocks have risks.
They can be volatile and subject to swings in sentiment
and macroeconomic and financial conditions.
Moreover, not every great technology or innovation
is a good investment. To minimise this risk, we seek
to invest in technology companies that i) create high
value for customers through innovation; ii) capture
value for shareholders through barriers to competition;
iii) have good management; and iv) generate strong
returns on capital.
AI is in its early stages and therefore while there is
huge potential, there is also the heightened risk to
investors of backing the wrong horse. This requires
a flexible mindset and investment process and the
willingness to change one’s views as the facts on the
ground change.
What key metrics do you look for in technology
and innovative companies?
The Global Innovation team primarily considers
four factors: value creation through innovation,
value capture through barriers to competition, good
management, and strong returns on invested capital.
If a company meets our requirements on these four
characteristics, then we consider including it in our
Global Innovation 200 universe. Inclusion in the funds
is then determined by valuation upside. We seek to
buy companies in a cyclical downturn where possible.
We seek a persistently high strong return on invested
capital (ROIC) and for more established companies
and an upward trajectory in ROIC for companies
earlier on their journey. Across all companies, we
demand a sound balance sheet, particularly a healthy
net debt to EBITDA (earnings before interest, taxes,
depreciation, and amortization) ratio.
What impact will AI have on the economy and stocks?
We view AI as a general purpose technology, meaning
the potential productivity gains are everywhere.
Quantitatively, it is of course difficult to project the
coming impact but estimates from Mckinsey suggest that
generative AI could ultimately add $2.6 trillion to $4.4
trillion to the global economy annually1, while Goldman
Sachs believes that AI could eventually increase
annual global GDP by 7%2. Although the projections
of generative AI’s productivity boost vary (with some
forecasting as much as a 14% global GDP boost by
2030)3, the direction and significance of the uplift is
widely accepted.
Crucially, we believe AI has the potential to enable
certain companies to both create and capture value,
our key requirements for the potential of innovation to
drive stock returns.
Is the UK/Europe benefiting from AI or is it mainly
a US story?
The US is currently leading the AI race but will by
no means be the sole beneficiary. Europe has led
the effort to regulate AI across developed nations,
Canada has been the first country to announce a
national AI strategy and the UK is investing heavily
in AI infrastructure, including a $100 million strategic
investment in semiconductor procurement. In Harvard
Business Review’s ‘top ranked AI nations’ index, the
UK sits in third position (behind the US and China),
with Germany and France coming in fifth and sixth
positions respectively.4
The UK is investing heavily in
AI infrastructure, including a
$100 million
strategic investment in
semiconductor procurement
Mega-cap technology companies may reside in the
US, but companies that enable and benefit from AI
can be found across the world. ASML, a Dutch leading
supplier to the semiconductor industry, has a virtual
monopoly in the production of extreme ultraviolet
lithography machines (which pattern the tiny details
on advanced microchips, including AI chips). Beyond
European technology companies, L’Oréal is pioneering
‘beauty-tech’ through harnessing AI.
1
The economic potential of generative AI, The next productivity frontier. Mckinsey & Company, June 2023
2
The Potentially Large Effects of Artificial Intelligence on Economic Growth, Briggs/Kodnani. Goldman Sachs, March 2023
3
Sizing the prize, PwC’s Global Artificial Intelligence Study: Exploiting the AI Revolution, 2023
4
Charting the Emerging Geography of AI, by Bhaskar Chakravorti, Ajay Bhalla, and Ravi Shankar Chaturvedi. Harvard
Business Review, December 2023
10 - The rise of AI: Technology and Innovation Report
