From semiconductors to the Internet of Things: tech’s hidden gems

Hello, I’m Chris Salih, investment research analyst at FundCalibre, and today I’m delighted to be joined by Jeremy Gleason, manager of the Elite Rated AXA Framlington Global Technology fund. Thank you for joining us today.

[00:11] Thank you for inviting me, Chris.

Let’s start with two letters, both vowels that are dominating the world of technology: A and I. So, I recently read a headline, describing them with the four horsemen of the AI, which was basically an article about semiconductors. Give us some insight – is there more to AI investments than just semiconductors? And, and if there are, what are those alternatives?

[00:34] Sure. So, the very short answer to your question is yes, there is more to AI investments than just semiconductors. However, I don’t want that to sort of diminish the importance of semiconductors in the overall advancements regards to AI, that have taken place most recently. I mean, AI’s not a new concept. It’s been around, it’s been readily discussed since the 1950s in works from the likes of Alan Turing, the very famous mathematician. And then, in the 1990s, we had the giant IBM supercomputers that were beating world champions at chess. And these were sort of massive, sizeable, expensive, hard to use units, which arguably only did one thing very well, which is play chess. So, the recent breakthroughs are considerable, and semiconductors are at the very heart of these breakthroughs. I talked about those sizeable, cabinet-size supercomputers of the past. A lot of the computing in these new AI systems is being done on semiconductors, which are literally 900 square millimetres in dimension. So, that’s sort of like one inch wide versus one inch long, that are powering these AI systems. So, semiconductors play a very important role in all of this.

With any adoption of new technology, I view that some of the really important factors to the mainstream adoption of a new technology is around cost; cost of that technology, the usability of that technology and the application of that technology. And with regards to costs, one of the great breakthroughs that’s taken place in recent years for AI has been around modern state-of-the-art semiconductors being able to achieve so much in such a little space and therefore has provided a great cost ratio for the productivity that is possible or feasible on those semiconductor chips. But putting all that to one side, there are other areas of AI-related investments that are very broad, [that] touches upon software, IT services, and also everything up the value chain from semiconductors in terms of the design and the manufacturing of those chips.

Let’s sort of look towards sort of the impact of it on the fund. I mean, I’m assuming you have some sort of exposure to AI and semiconductors and otherwise, can you maybe just talk us through, you know, how that is within the portfolio and just maybe an example as well?

[03:13] Yeah, absolutely. The way we’re approaching this is that AI, and the breakthroughs in AI, are very impressive and are very exciting and have the potential to create a lot of value for the companies involved and therefore for investors in the future. But we know that with all great new technologies is that the speed and the time for adoption can sometimes be longer than what’s originally expected. So therefore, what we’re not trying to do is find AI-only companies that are completely dependent on the success of AI for their near-term, mid-term and long-term futures. What we’re trying to find is companies who have good exposure to AI and therefore good exposure to this good medium and long-term opportunity, but have also got other areas of business, which will keep them ticking over quite nicely and quite comfortably in the short term, just in case we have any of those speed bumps that quite often come along with new technology.

So, in semiconductors, we own companies like Broadcom [Inc.], Advanced Micro [Advanced Micro Devices Inc.], and Marvell [Technology, Inc.], which I think are actually three of those four horsemen that you referred to at the beginning of this interview. We’re also in some other semiconductor companies, which will play an important role in the advancements of AI. We’re also in design software companies that are helping engineers design the semiconductors and systems to make these chips work perfectly for their intended use. We own companies who are making the equipment, which make those semiconductor chips, and companies that actually manufacture those chips as well.

And then across software, it’s a whole smorgasbord of companies that are utilising AI as a component of the products that they are selling to their customers. So, it’s not necessarily the whole of what they’re selling to their customers, but it is an intended additional feature, added-value opportunity to receive more revenues from their customers as a result. So, this could be software which helps enterprises to automate processes; analyse data and come up with sort of conclusions regards to that data; prevent cyber attacks.

Or in the consumer face, one of the areas that AI has been utilised is around video gaming. So, game developers would like to use or are using AI engines in their games to make their games more interesting, to make them adapt and learn from players’ gaming habits to make them more challenging, to make them more interesting and keep those players wanting to play the game for longer.

I assume that’s a process though, that would take a bit of time to make that some sort of optimal level of AI for something like a computer game?

[06:11] Absolutely. I mean, the great thing about this is it’s a learning process and the one thing that AI arguably does very, very well is learn. Machine learning is a core component of all of these systems. So, you can start off with a relatively nascent application and it should develop and get better over time.

Okay. I’m going to ask just because obviously technology such a broad brush and AI is dominating. I always think one of the key things for a fund manager is to sort of be looking at the places no one else [or] everyone else has sort of turned away from – are there a series of trends in the market that perhaps are just being completely overlooked because all the focus is on AI at the moment?

[06:50] Yeah, I think you’re right there. You know, attention gets shifted away and AI is definitely garnering a lot of interest at the moment. It’s capturing a lot of the headlines and it’s maybe detracting away from some of the other areas which are still doing very well, but are going along less well noticed.

And I think one of the areas maybe sort of that falls into that category is around ‘the internet of things’. It’s not a great buzz phrase, catchphrase! So, it’s always been a bit of a challenged area because it doesn’t, you know, roll off the tongue in the same way that ‘artificial intelligence’ does. There’s not been sort of decades of movies and books written about ‘internet of things’ in the same way that AI has enjoyed.

But if you think about it, increasingly gadgets all around us devices, appliances, et cetera they’re becoming smarter, they’re becoming more intelligent. They are able to sort of measure or read or monitor aspects of what’s happening. They can communicate that information back; that information can be analysed, shared and ultimately decisions made of that information. So, that whole ‘internet of things’ ecosystem, starting from the semiconductor chips – once again, we’re going back to semis here – that go into devices to make them smarter, to the connectivity, via wifi or Bluetooth or ethernet connections. And then the processing and the analysis and the outputs taken from that and the engagement saved with a mobile app, is all quietly going on in the background. It’s sort of a quiet evolution, which is ongoing, but it’s driving a lot of value within the entire technology industry, but maybe not one that’s getting as much attention as the AI opportunities that are hitting the headlines constantly.

Okay. And, just lastly, looking at the market as a wider piece, I mean, you talked recently about digital advertising budgets perhaps increasing, which is a sign that maybe businesses are more confident about the economy, loosely worded that is. But I guess how does that affect your holdings? I mean, do you sort of follow that with any degree of confidence yourself? It’s hard to follow those sort of signals … Is there any sort of change you make based on that sort of impact of that sort of move?

[09:31] Yeah, it’s a good question. I mean, to put it into context, you know, advertising’s obviously been around for forever as an industry. The emergence of digital advertising probably really only started to form in the mid-2000s, as more and more of us got broadband connections. So, the ability for advertisers to display useful information in the form of an advert, a video, et cetera, only started to emerge then. And then from then on, the growth of digital advertising was quite significant; year on, it was taking share from traditional forms of advertising and just growing the overall industry as a whole as well.

And that growth continued through to 2022 when we hit a bit of a wall. A combination of some very challenging year on year comparisons, a very tough macroeconomic backdrop, and also some of the geopolitical tensions around the world, which meant that advertisers quite frankly, you know, held back their budgets; they cut their budgets, they slashed their budgets, and they held back their budgets, which impacted the digital advertising industry as a whole.

The beneficiaries of this business are the likes of Alphabet, who are the company behind Google and YouTube, and Meta Platforms, the company behind Facebook and Instagram. And they saw those challenges in 2022. But starting off now in 2023, the first half of this year, they’ve actually started to see a recovery in that digital advertising business, which has clearly been a positive thing for those businesses and sort of the broader outlook that I refer to.

It is tough to necessarily draw a straight line between the uplift in revenues that those companies are seeing with sort of the broader state of the economy, but advertising budgets are very discretionary. Companies withhold them when they feel challenged or feel that times are difficult, and they increase them when they feel more optimistic about the opportunity to be able to create more revenues as a result of advertising.

And the one benefit of digital advertising versus traditional advertising is that advertisers typically get a much better return on investment in digital advertising. The impacts of digital advertising are much more measurable because you can see how the consumer reacts to an advert. Do they click through? Do they ultimately buy as a result of seeing that advert and then go into your website to have a transaction? Very different to TV advertising or radio advertising or billboard or magazine advertising where there was no obvious click through, there was no obvious transaction that took place directly as a result of that advertising. So, I would say that actually that the uplift we’ve seen in digital advertising is probably as a result of increased confidence in those advertisers in maybe the outlook that they have on their customers and the opportunity to sell their products and services.

Jeremy, thank you very much for joining us once again.

[12:52] Thank you, Chris. Pleasure.

And if you’d like to learn more about the AXA Framlington Global Technology fund, please visit FundCalibre.com.