A niche way to diversify your exposure to the AI boom

The last couple of weeks have been confusing. Mega-cap tech stocks and other firms involved in the AI boom have been hit because investors are suddenly more worried about how much money they are spending and whether it will earn a decent rate of return.

At the same time, a broad swath of firms that might potentially be disrupted by AI have also been knocked down.

This is not entirely inconsistent: you can set out a scenario in which AI is revolutionary, but early investors are not rewarded for their prescience because too much money was spent too fast.

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This has happened in previous revolutions: the British railway boom of the 1840s – one of the greatest investment manias of all time – made the stagecoach extinct yet also bankrupted many early backers. But it’s hard to discern such a thesis behind the recent moves.

Rather, it feels as if investors are increasingly unsure who will be the winners and losers of the AI boom. That’s fair: anybody who feels too certain is dangerously overconfident.

My instinct is that some of the AI firms are overvalued and some of the companies that are beaten down are quite likely to be AI beneficiaries.

Still, I would not want to stake too much of my portfolio on that view.

Yet the high degree of concentration in today’s markets means that many investors are effectively doing so – which explains why they are prone to overreact in both directions.

Calm your AI boom worries

So how does you invest if you want to reduce these worries? Shortly before the market’s latest bout of nerves, I was at an event with Majedie Investments (LSE: MAJE), a flexible, long-term growth plus capital-preservation trust, whose approach offers some interesting ideas for this. Max King did a write-up on this trust a year ago, which you can read for more detail, but in essence Majedie holds a complementary mix of niche funds in specific areas (about 60% of the portfolio), direct investments in individual equities (about 20%) and special situations (the last 20%).

If you can find niches that have strong structural reasons for outperformance, or where an expert manager can consistently add value, you may be able to earn decent returns almost regardless of what is going in markets more broadly. You’re not going to be immune to the ups and downs, but the outlook for tech stocks shouldn’t dictate all the returns for activist Japanese small-cap stocks, biotech, distressed credit and so on. (Of course, identifying these niches and getting access to good funds is not easy, which is where Majedie’s managers need to do their job). Special situations should, almost by definition, offer very different returns to the wider market, while a global equity portfolio that is not benchmarked against the tech-heavy indices is also able to follow its own path.

Majedie’s strategy is distinctive in the sector and is performing well, making it worth a look in its own right, while the wider approach of putting together complementary strategies is a sensible solution, especially at times like this.

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