Stephen Tong, a portfolio manager/analyst for the Mid Wynd International Investment Trust, looks at the potent combination of data and AI through an investment lens, and why he’s seeing a host of opportunities for companies that possess valuable knowledge and are able to fully harness AI’s might in exploiting it
The maxim “Knowledge is power” is usually attributed to Sir Francis Bacon, the philosopher-statesman who established the inductive method of scientific inquiry in the 17th century. Similar axioms can be found in the Bible and in millennium-old Persian poetry, so the idea has clearly been around for a while.
A key question for investors is whether it still holds today. After all, it is easy to suppose every last shred of humanity’s accumulated wisdom is now at our fingertips – figuratively and literally – in the form of the superfluity of information accessible online.
The first point we need to make about this assumption is that all the facts in the world are practically useless if we do not understand the connections between them. It is necessary to appreciate how existing facts combine to produce new facts.
This is why detailed analysis can still make a big difference in identifying genuinely attractive investments. Even in the age of artificial intelligence (AI), we believe active fund managers who draw on in-depth research should have an edge in selecting the most promising stocks.
The second point to make is that, despite popular perceptions, every last shred of humanity’s accumulated wisdom is not accessible online. As has been the case throughout the ages, some knowledge remains fiercely guarded.
This can be a highly significant advantage for a business. As a result, what we might call “Knowledge is power” stocks have come to represent a novel slant on investing in the AI revolution.
Maximising knowledge and AI in tandem
A major attraction of AI is its unprecedented ability to produce insights by trawling data far more quickly and thoroughly than was previously feasible. This creates a host of opportunities for companies that possess valuable knowledge and are able to fully harness AI’s might in exploiting it.
Take Verisk, a multinational risk-assessment specialist. It uses data analytics and predictive modelling to help insurers understand and price risk. The threats it can anticipate and assess include natural disasters, terrorism, health issues and every kind of climate catastrophe – among them cyclones, floods, wildfires and thunderstorms.
Crucially, the company’s expertise in areas such as Extreme Event Solutions is anything but freely available. It is arguably unique and cannot be tapped – less still reproduced – by indulging in a couple of minutes’ Googling. This translates into a competitive edge that is both distinctive and likely to endure.
Similarly, consider US-based Intercontinental Exchange (ICE), which operates global financial exchanges and also holds enormous quantities of other financial data. Many organisations rely on this information for indexing, price discovery and capital-raising – and they have to pay handsomely to obtain it.
Forward-looking businesses such as Verisk and ICE are now determinedly sharpening their focus on AI to strengthen their client-facing offerings. This should lead to added value and further sources of revenue.
RELX provides a further illustration. Its stated strategic direction lies in developing “increasingly sophisticated information-based analytics and decision tools”. It is drawing on AI and its own extensive databanks to provide cutting-edge products that support professionals in fields such as medicine, law, fraud prevention and scientific research.
Staying ahead of the curve
We refer to companies like these as “compounders”. They are characterised by a capacity to deliver high returns on capital and reinvest – a cycle that should lend itself to ongoing growth and compounding cashflows over time.
Compounders can maintain their competitive edge for longer than is widely thought possible. Importantly, their ability to do so is best discerned not via a cursory survey of the day’s headlines but by digging deeper and really grasping what makes a business tick.
This explains why we have held most of our “Knowledge is power” stocks since long before AI rocketed into the mainstream. Informed by extensive research, we reasoned some time ago that companies’ proprietary databanks could give them a lasting advantage.
The broader view more recently was that some of these holdings would become victims of the AI revolution. The very opposite has transpired. Strong management and a commitment to innovation have instead allowed them to become beneficiaries of AI’s rise.
A vital point here is that AI can help these businesses further utilise their data but cannot help other businesses replicate it. This should give investors confidence in compounders’ long-term profitability.
Ultimately, there is a huge amount of money to be made from the potent combination of data and AI. “Knowledge is power” companies are well aware of this, and it is fascinating – not to mention potentially rewarding – to see how they are staying ahead of the curve.
