Giles Worthington, Fund Manager of the Sanlam Asia-Pacific Artificial Intelligence Fund, provides an update to investors on the Fund's theme and long-term strategy.
Why launch an Asia-specific AI fund?
We’ve been running a model portfolio internally for two years – the reason being that Asia is the direction we have been pulled in based on not only what is happening at the company level but also in terms of the wider investment universe. For example, when we look at topics like Natural Language Processing, in the same way that all roads used to lead to Rome, now they lead to Asia Pacific.
Back in 2016, Chris Ford and Tim Day sat in a darkened room and looked all around the world for companies that were involved in AI in any shape or form. Back then, the universe was about 250 companies – and that’s a global number. Within that, there were maybe 20 or 30 companies in Asia. In 2016 you couldn’t offer a regional APAC AI strategy as there was no diversity.
What are the similarities to the global AI fund?
In the same way that the global fund isn’t a tech fund or a US fund, the Asia fund isn’t a tech fund or a China fund. As with the global fund, we want to be diversified because it is essential to have from an investment perspective. However, we could also see that Asia is absolutely at the leading edge of AI technology and we wanted to offer investors a pure play in the region.
Why does Asia matter?
If you break things to the most basic level it comes down to size. For example, if you take two AI algorithms that are broadly similar, the one with the bigger data set wins. The populations of countries like India and China dwarf any other country on earth. The Chinese government has plenty of detractors, but one thing that it does have is a clear policy and thought process about AI, privacy and data sets. We can debate the rights and wrongs of China, but the reality is that they are way ahead of either the US or Europe in terms of how they think about AI, how they use it and therefore the advantage they are likely to derive from it.
What are the fundamental drivers supporting AI?
In 2017, PwC did a survey on AI and the impact it might have on GDP. They estimated that by 2030, AI would generate somewhere in the region of US$16 trillion of GDP at a global level – with half of that in the Asia Pacific region but less than 20% going to North America. AI in Asia is enjoying explosive growth in AI – partly because it has a structural advantage due to the size of its data sets and a young, digitally-native population that is ready to engage with AI. At the corporate level, Asian companies don’t tend to have the preconceptions and prejudices about AI that long-established companies in the West may have.
The other thing to look at is deployment rates of AI. Europe really lags here but China and India are leading the way. China is already the global leader in e-commerce with twice the rates of penetration seen in the US. The fourth-largest e-commerce platform in China didn’t even exist 18 months ago. Can you imagine the third of fourth largest player in the US not existing two years ago? The level of change and disruption in Asia is largely without precedent, reflecting the lack of incumbency.
In India, the growth of e-commerce means that you need to come up with a way of delivering packages worth less than 500 rupees (around £5) at a profit. This demands completely different thinking on logistics and how to manage payments compared to a market like the US with existing infrastructure. The world’s most efficient logistics companies will come out of Asia – because of necessity.
As an aside, the most popular app in the world – TikTok – is owned by ByteDance, a Chinese company. For the first time, we have companies developing and evolving outside the West Coast of the US – in fact outside the US full stop – that are dominating their respective industries. This is not a pipedream; it’s already happening today. ByteDance is privately owned, so not investable for our funds, but its success reflects the massive change in the profile of innovation around the world.
What about AI’s impact on productivity?
There are two things to think about here: AI can transform productivity, particularly in relation to laborious or repetitive tasks, which means societies can become better off.
Over the longer term, we also need to stand back and think about demographics. Between now and 2050, China’s population will lose 500,000 people a year due to the ageing population trend. Who will care for the elderly people as the population shrinks? Increasingly AI is used to facilitate healthcare in China. To stay wealthy, countries like China need productivity gains to offset the unfavourable demographic trends – this is where AI will play a crucial role. Japan also has an aging and shrinking population, so like China it will need to come up with novel solutions.
If you look at Asia as a whole, the average age across the region is about 33 and this population is digitally native. This gives us some confidence that the population will engage with AI and drive the required productivity gains.
How has the Asian market evolved?
In you look at Asia in the late 1980s or early 1990s, it was largely as you would expect it to be – the MSCI regional indices were dominated by large, well-known Japanese companies and Japanese banks. If you go forward ten years, other sectors like telecoms are starting to come in to the top 10 largest companies, but it’s still quite a dull market. If you go forward another ten years, the lack of Facebook-type companies is quite striking. But, if you look at the market now, it has changed beyond all recognition. Tencent and Alibaba have delivered CAGRs in excess of 30% for 10 years. This is phenomenal. As an investor, the thing to do is try and understand the dynamics and whether the growth and profitability can be sustained for the next x number of years as opposed to whether the company can beat expectations over the next quarter.
Asian companies are beginning to establish infrastructure and this means they can persist over time. As a growth investor, trying to figure out how the next five or 10 years may play out is far more important than worrying about whether Tesla or anyone else is likely to deliver a quarterly beat on revenues and earnings. In our minds, it makes much more sense to focus on persistent, long-term growth, rather than worrying about short-term market ‘noise’.
Learn more about Sanlam Asia Pacific Artificial Intelligence Fund
The Fund invests mainly in equities (e.g. shares) and equity related securities of companies based in the Asia Pacific region therefore the value of the investments will be vulnerable to sentiment in that market. Exchange rate fluctuations may cause the value of investments to go down as well as up. Investing in companies based in emerging markets may involve additional risks due to greater political, economic, regulatory risks, among other factors.