Interactive Investor

Ian Cowie: how to buy AI stock winners on the cheap

1st June 2023 10:00

by Ian Cowie from interactive investor

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Gaining exposure to AI through investment trusts big discounts might help allay fears that hype is running ahead of reality here, points out our columnist.

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How do you fancy gaining exposure to artificial intelligence (AI) at double-digit discounts to net asset value (NAV)? Despite AI being all the rage on global stock markets, that’s the bargain basement pricing still available from the Association of Investment Companies (AIC) ‘Technology & Technology Innovation’ sector.

Better still, one investment trust outside this sector, whose biggest holding has soared on AI mania, remains priced at an eye-stretching 37% discount to NAV. That’s the equivalent of a ‘buy two, get one free’ offer, which might help allay fears that hype is running ahead of reality here, much as it did before the dot.combubble burst 23 years ago.

Allianz Technology Trust (LSE:ATT) and Polar Capital Technology Ord (LSE:PCT) are the obvious places to gain access to digital disruption in general and AI in particular. Both have long track records of strong global growth and remain reasonably-priced.

For example, ATT is trading at a 12% discount to its NAV, despite delivering total returns over the last decade, five years and one-year of 554%, 84% and 12% respectively, according to independent statisticians Morningstar. Similarly, PCT - where I have been a shareholder for more than a decade - is priced 13% below its NAV and its total returns over the same three periods are 434%, 79% and 14%.

These statistics demonstrate that ATT has delivered higher returns over the medium and long term but is marginally behind PCT over the last year. This reflects ATT’s bigger asset allocation toward medium-sized companies, which have delivered higher growth in the past, but is currently out of step with the market’s preference for blue-chip, household names, which have a heavier allocation in PCT’s portfolio.

Both these investment trusts have the same three shares among their top holdings - the world’s most valuable company, Apple Inc (NASDAQ:AAPL), the software giant Microsoft (NASDAQ:MSFT) and the microchip-maker NVIDIA (NASDAQ:NVDA) - albeit in slightly different proportions. For example, ATT’s biggest shareholding is Apple, while PCT’s is Microsoft, and both have NVDA in third place.

That latter holding is significant because NVDA’s share price surged 24% higher one day last week after it increased its forecast for earnings in the second quarter of this year. Such a slender basis for such a big movement in price might give grounds for some scepticism among people who understand that a prediction, like a promise, is not quite the same thing as money in the bank.

Either way, NVDA’s share price spike briefly meant that it had a stock market value of more than $1 trillion (£806 billion), joining AAPL and MSFT among the elite band of equities with such stratospheric valuations. The only others still worth more than $1 trillion are the oil company Saudi Aramco (SAR), Alphabet (NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN).

Coming down from the clouds, NVDA is also the biggest holding in another fund where this small investor happens to be a shareholder. Step forward Canadian General Investments (TSE:CGI) in the AIC’s ‘North America’ sector, which might deserve a higher profile among British investors and a bigger valuation than implied by its 37% discount to NAV.

Like ATT and PCT, which have total assets of £1.18 billion and £3.26 billion respectively, CGI is a big fund with total assets of £1.26 billion. While ATT and PCT can both boast they survived the dot.gone crash, after being founded in 1995 and 1996 respectively, CGI has much greater longevity, dating back to 1930 during the Great Depression.

Here and now, CGI also offers a more diversified portfolio whose second and third biggest holdings are the railways group Canadian Pacific Kansas City (TSE:CP) and the gold mining royalties company Franco-Nevada Corp (TSE:FNV). Apple also features in its top 10.

Unfortunately, diversification can not only diminish risk but can also reduce rewards. CGI’s total returns over the last decade, five and one-year periods are 197%, 60% and minus 5.6% after it came unstuck with a big stake in the Canadian e-tailer Shopify (NYSE:SHOP).

More positively, CGI yields dividend income of nearly 2.9% which has risen by an annual average of just over 5% during the last five years. By contrast, ATT and PCT pay no dividends at all. However, CGI’s ongoing management charges of 1.38% are steep, compared to ATT and PCT’s 0.7% and 0.84%.

Despite these differences, all three investment trusts offer old-fashioned good value exposure to new technology.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Apple (AAPL), Canadian General Investments (CGI), Microsoft (MSFT) and Polar Capital Technology (PCT) as part of a globally diversified portfolio of investment trusts and other shares.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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