The FTSE 100 and FTSE 250 aren’t exactly brimming with obvious AI-related stocks. Therefore, investors wanting to get exposure to this game-changing technology often have to turn to US tech stocks or UK investment trusts holding such shares.
The problem is that many tech funds are filled with the same Magnificent 7 stocks, making them near-identical. Why pay extra fees for ‘active’ management when a low-cost index tracker gives you virtually the same exposure and likely performance? I don’t see the point.
Something different
In contrast, I think Baillie Gifford US Growth Trust (LSE:USA) does offer something different. For a start, it has more deviation from the Magnificent 7-dominated benchmarks by not owning Alphabet, Apple, or Microsoft. It has Tesla, but it’s now not much more than 1% of assets.
The main edge I see here is that the trust can invest in private markets. And it’s likely there where some massive companies will emerge in future across various fields of applied AI.
Baillie Gifford US Growth Trust sees a lot of opportunity here, and it hopes to get in near the ground-floor level with some of these start-ups.
Reshaping Hollywood?
We are in a new technological paradigm. Things are getting weird, quickly.
Baillie Gifford US Growth Trust
One potentially very disruptive private company is Runway AI, which uses generative AI to make and edit videos, images, and special effects. Users can type prompts to generate clips, turn stills into animations, and add effects like fire or flooding.
Both Netflix and Lionsgate Studios are using Runway’s platform, as well as ad agencies, brands, artists, freelance creators, and podcasters. Baillie Gifford says a major retailer has used it to visualise 3D models of furniture listed on its website.
Runway recently secured $308m in new funding from investors including Baillie Gifford. The trust says: “Our investment hypothesis is that by 2030, creators will be able to use Runway to make amazing sequences for movies, TV shows and adverts for a fraction of the cost and time required today.”
Things to bear in mind
Of course, generative AI start-ups like this could one day face copyright lawsuits, because we don’t now what material they used to train their models on. So there’s a risk some go bankrupt, while another Hollywood backlash could erupt if AI threatens jobs in the industry.
Also, there’s no guarantee that the trust will back the winning horses. OpenAI seems to have slipped through the net, with the ChatGPT maker now valued at north of $350bn, according to some reports.
Given the firm’s focus on disruptive growth stocks, it could underperform if these suddenly fall out of favour. This happened spectacularly in 2022, as we can see below.
A nice mix of AI shares
On balance though, I think this is an excellent trust to consider for long-term AI growth potential. It has a nice blend of profitable, dominant tech firms like Meta, Nvidia, and Amazon, as well as exciting unlisted AI firms like Databricks and Runway AI.
Sandwiched between the giants and the start-ups are stocks like cloud-based data storage firm Snowflake, whose growth is accelerating due to AI. And Netflix, whose profit margins could improve over time if it can use generative AI to make some content at far lower cost.
