The AI Pivot: Unpacking 2023’s Transformative Moment and Its Market Impact

Artificial Intelligence, or AI, has been one of the most resonating themes of 2023. In this episode we go beyond the hype, dissecting whether these AI advancements will truly herald a transformative era in technology.

Join Justin Maloney, Fund Manager of the Melville Douglas Global Equity Fund, in discussion with Chris Willis, Global Technology Analyst, as they delve into this topic and what it means for the companies owned in the Global Equity Fund.

About Standard Bank Offshore
Standard Bank Offshore is the international arm of the Standard Bank Group, Africa's largest bank by assets. Our banking, lending, fiduciary and investment services, provided by Melville Douglas, help us serve Africa's rapidly growing, globally mobile and affluent population. Our objective is clear - support Africa's growth by connecting the continent to international markets from our offices in the Jersey, Isle of Man, London and Mauritius.

With a heritage of over 160 years and on-the-ground presence in 20 countries across sub-Saharan Africa, Standard Bank Offshore is the partner of choice for individuals and businesses across Africa and beyond seeking seamless offshore banking solutions. From day-to-day banking to bespoke individual wealth and corporate solutions, we have you covered.


About Melville Douglas
Since 1987, Melville Douglas has been delivering superior investment returns across a number of asset classes. As a boutique investment management company within the Standard Bank Group, we are uniquely positioned to offer customised investment solutions and flexibility with the might of Africa’s largest banking group behind us.

Our years of exceptional investment returns and service are grounded in the principle that growing your wealth is more than just what we do – to us, it’s personal.

Transcript

Justin Maloney (00:00):

Are we asked of defining moments in history? Is this the equivalent of the internet in the 1990s or is it mostly hype? Chris, please can you enlighten us?

Chris Willis (00:12):

Hi Justin. Good morning and thanks for having me. 2023 has really been a defining year for AI, and I suppose the excitement really boils down to two things. The first is the accessibility of it. Until now, AI has been a novel but mostly foreign concept to us, despite it being embedded in technology that we use every day. I think very few of us would have been able to describe how we use AI until most recently. That all changed in November, 2022 with the release of ChatGPT. It's the first of the conversational AI chatbots that was made publicly available and it's become immensely popular growing to over a hundred million users at just under two months. It catapulted AI into the spotlight. The second reason that we're talking so much about AI is because of the enormous investments that have been going into it.

The release of ChatGPT catalyzed a wave of interest and investment in the technology. In only the first quarter of this year, open AI raised an additional $10 billion from their investors. And over the first and second quarters, AI startups raised about $15 billion. Now this is in addition to the massive investments being made by the corporates who are investing in their own AI projects. This number would far exceed that being spent in the startup world. And then also bear in mind that this appetite for AI investment is growing at a time when Silicon Valley venture capitalists and the global technology sector are dialing back after the spending excesses of 2021.

Justin Maloney (01:51):

Great. Understood. So Chris, could you tell us a little bit more about the technology?

Chris Willis (01:57):

Certainly, Justin, without being too technical, AI is really the simulation of human-like intelligence by machines and our attempt to give them cognitive functions. In other words, we're trying to build machines that are able to think like people, to problem solve and to reason. This has been built on decades of research and it's really only over the last few years that the technology has reached a point where you might mistake it for another human being if you were engaging with it. This has been made possible by the rise of deep learning and the development of generative AI models. These models are trained on massive data sets now up to 1 trillion parameters, and these are running mathematical models that can produce new content and data on command. This is the same technology that's driving apps like ChatGPT and MidJourney that have really captured the public's imagination.

Justin Maloney (02:58):

Fascinating. So we may have reached an infection point. Now let's move on to the investment opportunity. The fund has a number of investments in big tech. Is this the best way to gain exposure?

Chris Willis (03:11):

Yes, I believe it is. The fund is holdings in Microsoft and Alphabet, Amazon, and in Meta platforms, all of whom are leading in the development of AI technologies. They all have a tremendous opportunity set before them to use AI in a way that will propel their businesses forward. Microsoft, for instance, has chosen to partner with OpenAI in which it owns 49%. It's partnering with OpenAI for the development of large language models, which it'll use in its core business. These models will be used in products such as Microsoft Office and in services like the Azure Cloud platform. In turn, OpenAI will exclusively operate for Microsoft's cloud infrastructure, Alphabet, Amazon and Meta platforms are also all investing heavily into AI research, each having released a foundational model in 2023. These models will become the bedrock of the future of generative AI applications.

Google is something of a sleeping giant when it comes to AI. They've developed Deep Mind, which is thought to be the most powerful AI ever developed, but they've historically been cautious about deploying the technology and that view seems to have shifted now with the release of ChatGPT. It's also important to note that this isn't something new that these businesses are venturing into. They've been at it for more than a decade, and it's really the public's enthusiasm for ChatGPT and other chatbots that has spurred competition amongst them and raced to release enhanced products and new features to customers.

Justin Maloney (04:53):

Great. And are you able to give us some examples?

Chris Willis (04:58):

Sure. Both Google and Meta through their social media platforms, YouTube and Instagram are using AI to optimize content recommendation for users. This should result in a better user experience and in more platform engagement. In time, it's possible that generative AI could start to develop original content catered specifically to the user. Meta is already using generative AI to help advertisers create new ads specifically designed to target users. And this has seen an uplift to their advertising revenues. Google has for a while been using AI to improve search results and has recently released Bard. This is their competitor product to ChatGPT. In time. we expect that Bard and Google Search will become more integrated. Amazon operating one of the Globe's largest and most sophisticated retail operations uses AI to drive operating efficiencies by optimizing freight warehousing and last mile fulfillment. And then lastly, Microsoft will be launching its Copilot product later this year. This will incorporate an AI assistant into most of the office, Microsoft Office suite. I can't personally wait to see what this is going to be able to do to help me with my own email and diary management.

Justin Maloney (06:23):

Yes, I desperately need that as well. So am I right in concluding that far from being a threat to their core business models, AI will actually entrench their market leadership?

Chris Willis (06:36):

Absolutely. I mean, I think that this is definitely a big positive step forward for most of these companies. AI will make their products and services that much better than before, bringing more value to the customers who use them, which should drive greater use of them and grow their revenue from those products.

Justin Maloney (06:56):

And how about outside the technology sector? What about the impact on traditional industries like healthcare and financial services?

Chris Willis (07:08):

So, we believe that AI will provide opportunities for product and revenue expansion across industries. In healthcare for instance, you have drug discovery, diagnosis, treatment plans, and patient monitoring. These are all ways that AI can be used to improve the existing services. And then within financial services, very data heavy industry risk assessment and fraud detection will greatly benefit from AI. And then of course things like customer service will be greatly improved by generative AI chatbots. As data has become the oil of a modern enterprise essential to running smoothly, companies are able to use it to identify trends and to try to be one step ahead of the competition. For industries like healthcare and financials, the largest enterprises with the best data will have a natural advantage. While I don't think it'll be a winner takes all outcome, there will be some companies that fail to grasp at this opportunity. Others like JP Morgan and United Health will use AI to drive growth, reduce costs, win more market share, and ultimately this should drive improving shareholder returns.

Justin Maloney (08:23):

Interesting far. Chris, do you have any last thoughts on how all of this impacts the global equity fund?

Chris Willis (08:32):

So, I think it's important to keep in mind that while this is an incredibly exciting time, this is still a very long-term trend. It's one that's been building up for decades and will persist for many years to come. AI is one of the most transformative technologies we have seen, and it's already having a very positive impact on the world. We plan to capture that impact by remaining invested in our chosen stocks and allowing them to reap the benefit from years of investment in this space. In the short term though, there'll probably be a lot of noise about who the winners and losers will be. We saw this earlier this year with there being fears around Google, losing its dominance in search and we'll follow this news. But over the longer term, we believe that our companies with their proven business models will only stand to benefit from it.

Justin Maloney (09:26):

Excellent. Reassuring to know that we are on the right side of disruption. And with that, we have come to the end of the podcast, Chris and I would like to thank you very much for listening and for your ongoing support. Goodbye.

Chris Willis (09:39):

Goodbye.