Artificial intelligence (AI) was not really on the radar when Chris Ford started the Sanlam Artificial Intelligence fund (formerly Smith & Williamson Artificial Intelligence) five years ago.
But since then, this long-only global equity fund’s performance has blown past virtually all other global equity strategies by investing only in companies interacting with artificial intelligence.
Technically, the fund sits in the Investment Association’s Specialist sector, but with a return of 150% since launch, it would have been the third highest performer in the IA Global universe.
This puts it in the top 0.01% of the 338 global equity funds in the sector with a comparable track record.
Performance of the fund since launch
Source: FE Analytics
Below, Ford explains his investment process, why it is important to watch out for AI ‘fairy dust’ sprinkled into company filings and how he gives his brain a good ‘wash’.
What is your investment process?
Most investment processes kind of look the same. You have a guy – and it is usually a guy – with another guy – who together run the fund. They have some other guys – who are usually younger guys – who do some investment work and they’re called analysts.
Somehow, they all talk to each other and a fund emerges at the other end. Broadly speaking, that's kind of how the investment world works. To that extent, it doesn't look very different to how it looked in the 1990s. Yet when we look out into the rest of the economy, the world has changed in the intervening 25 years.
We had the luxury in 2016 of starting with a blank piece of paper.
When you start to tiptoe into the artificially intelligent world to address business processes, what one finds is that it opens a whole other pool of suggestions of how you would look to engage with AI in the future to deliver further competitive advantages to your business process – in our case it was the investment process.
This is extraordinary powerful because you end up with this kind of compounding improvement because of your ability to innovate and improve iteratively your investment process.
One of the things that we did was develop our own artificial intelligence platform to define our investment universe. Whilst I'm acutely aware, it's a bit too cute for its own good having an AI platform sitting inside and supporting an AI fund, it's a tool that I would never be without having worked with.
But just because we're an AI fund doesn't mean we don't do the work that you would find any bottom-up stock picking, long-only portfolio manager doing. With all the positions that we hold, we do a lot of bottom-up work.
Why should investors pick your fund?
The reason that people should pick our fund is because they believe that artificially intelligent systems are going to be transformational inside the economy and that we can find the companies that are engaging most fruitfully with those artificially intelligent systems to disrupt their market.
I think we've demonstrated over the course the last five years that there is a good chance that we're right on both of those counts.
What have been your best and worst calls over the past year?
Our best calls were some of the stocks that we've run for a very long time: Alphabet has made us 2.8%.
We made one mistake in the last year that was problematic for us in the space of streaming entertainment. We did not appreciate the extent to which competitors to Netflix, Roku and others were prepared to continue to pay up vast extortionate amounts of money for content. Netflix cost us 0.73% before we exited the position.
Most exciting stock pick in the fund?
I think that some of the things that John Deere is doing with AI in the agricultural space is interesting.
In a world where the crisis in Ukraine and the geopolitical isolation of Russia has focused minds very hard on agricultural commodities and shortages – the requirement to continue to drive yields up in the acreage that's available to us now is very apparent.
So using artificial intelligence systems and smart economics and the way that John Deere is able to deliver to their clients is a really interesting proposition.
It is going to be taken up by the farming community much more rapidly than maybe otherwise would have been the case.
Are there any sectors you won’t invest in?
There's nowhere that we wouldn't go if we couldn't find the right opportunity. But there are some places where it'd be unlikely for us to go.
I can't imagine a circumstance where we would end up investing in a tobacco company. I just can't imagine how they would be able to demonstrate that there was an artificially intelligent platform that somehow was transforming their business.
There are a lot of companies that will tell you that they've got AI. It's become a bit like the fairy dust that you sprinkle over your 10-K to help you feel a warm fuzzy feeling. But you can peel away the layers of the onion in some of these companies and very quickly it becomes apparent that it's just fairy dust.
How risky is your fund?
I can tell you that our stock level beta has been between .95 and 1.05 and that's been lower than I might have expected when we launched the fund, and I can tell you what our VAR [Value at Risk] looks like and so on but you can find that out for yourself.
Ultimately what we've tried to do here is to put together a long-only global equity fund, with 35 names in it, but with an absolute gale of a tailwind.
What we hope we've done is construct a portfolio that looks a bit like what a global equity fund will look like in 20 years’ time because then the companies in which we are investing will be around in 20 years’ time to be held in a fund such as that. That's not the case for many of the others.
I've been asked several times over the course of the last five years ‘Well isn’t your fund going to just end up looking like a normal global equity fund?’ My answer to that is well, yes, it is. But if that's what it does, then we’re going to have won.
The key thing is to make sure that we're investing behind the thing that we think is going to allow the companies in which we invest to enjoy that persistence, duration and resilience that might not necessarily accrue to others.
Do you incorporate environmental, social and governance (ESG)?
We have no tolerance for bad environmental scores. We spend a lot of time thinking about carbon because we can count that.
But we have a relatively higher tolerance for governance scores when we can understand it. The reason for that is we spend such a long time getting to understand our companies and meeting with management teams, so we feel like we can control for that risk much better.
What do you do outside of fund management?
My background is in music. I got all the way through to doctoral study in music. I'm a violinist and pianist and various other things as well – so I come home every evening and I play Bach.
It's a good way of getting the brain washed from the rigours of whatever the market has been throwing at you for the day.