Worried about an AI bubble? These investment trusts could help
Capital spend on artificial intelligence infrastructure is coming under more scrutiny, but the sector still dominates passive indices.
Is the shine coming off the Nasdaq 100?
The index – effectively a benchmark for US big tech, since it includes the largest 100 stocks listed on its namesake exchange but excludes finance companies – reached an all-time high of 30,730 on 3 June.
Over the next month, the index fell by 4.6%.
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Increased fears over a potential artificial intelligence (AI) bubble bursting have played their part in this demise.
The AI boom over the last few year has been driven largely by a consensus that the enormous sums spent on AI infrastructure would inevitably pay for themselves.
“Now that is changing, and some [tech companies] are issuing debt to fund their AI operations,” said Annabel Brodie-Smith, communications director of the Association of Investment Companies (AIC) – an industry body that represents the UK’s investment trusts. “It’s understandable that some investors are looking to diversify their portfolios away from the AI boom and many investment trusts offer a great opportunity to do this.”
Any passive investments you hold will likely be heavily exposed to the big tech stocks that form the bulk of the Nasdaq 100 and the S&P 500.
“Correlation is the real risk in current markets,” said Saftar Sarwar, chief investment officer at model portfolio service manager Binary Capital. “A ‘diversified’ global portfolio is often not that diversified. Five companies account for around 30% of the S&P 500 – a very high level of concentration.”
But could these investment trusts offer some diversification and protect you in case the bubble bursts?
How to diversify away from AI
One of Sarwar’s first tips for diversifying away from AI is to avoid the “obvious emerging markets” of Korea and Taiwan.
These, he says, “are now significant technology-exposed equity markets”.
Instead, he recommends “so-called emerging frontier markets” like Poland, Egypt and Turkey, and picks out BlackRock Frontiers Investment Trust (LON:BRFI) as a route to gaining exposure given its 52% weighting towards financials.
Tomiko Evans, chief investment officer at portfolio manager Crossing Point Investment Management, recommends European stocks as another market that could offer diversification.
“Europe gives investors access to a broader mix of companies across sectors such as industrials, financials, healthcare, consumer goods and infrastructure-linked areas,” she said.
“Within this space, JPMorgan European Growth & Income (LON:JEGI) is one option we find interesting. The trust provides exposure to growth, but through a diversified European equity portfolio,” Evans continued. “Its approach combines quality, value and earnings momentum, allowing the managers to seek companies with attractive growth prospects while remaining disciplined on valuation.”
Buy British to avoid AI?
Both Evans and Sarwar believe undervalued UK stocks provide fertile ground for anyone looking to reduce their exposure to AI.
“UK equities have spent a decade unloved, and undervalued, for exactly the reason that now could look like an important advantage: minimal AI and technology exposure,” said Sarwar. “Trusts such as Merchants Trust (LON:MRCH), City of London (LON:CTY) and Law Debenture (LON:LWDB) own UK value or UK traditional equities with dividend yields of around 3% to 4%... These are good investment trusts if you want to move away from the whole AI theme and believe that the UK offers more compelling equity valuations relative to other markets.”
Sarwar also highlighted Temple Bar Investment Trust (LON:TMPL) for its value discipline and its heavy weighting towards the UK in comparison to the US.
Evans, meanwhile, picked out Murray Income Trust (LON:MUT). “Rather than simply owning the traditional large cap UK income names, the managers can look across a broader range of companies that can generate cash, pay sustainable dividends and offer scope for capital growth,” she said, adding that the trust offers “UK equity exposure, income discipline and relatively limited direct technology exposure” for investors that want to reduce their tech exposure without moving fully into defensive assets.
