Location: London

Asset manager: Sanlam

Name: Sanlam Asia Pacific Artificial Intelligence

Citywire sector: Equity – Technology

Managers: Chris Ford, Giles Worthington

Launch date: 15 February 2022

Sanlam says: ‘It’s not a tech fund.’ Managers Ford and Worthington are at pains to distance themselves from the technology classification.

The fund is a follow-up to their existing global strategy, the Sanlam Artificial Intelligence fund, which sits in Citywire’s robotics and AI sector – indeed it sits top of that sector over three years, with a return of 65%. 

Now nearly five years old, less than 50% of the fund is in technology companies. Instead, the managers tell Citywire Amplify, both funds are also looking for companies that are using AI to gain a competitive edge or transform their business, or indeed ones that cannot exist without AI – such as Alphabet, one of the global fund’s top three holdings.

‘We’re using AI in the Asia-Pacific fund just as we do in the main fund: to help define the investable universe,’ says Ford. ‘But we’re not using AI to populate the portfolio.’

An example of a non-tech company using AI effectively in the global fund is tractor giant John Deere. By fitting sensors to its equipment, it harvests data on soil composition and weather and turns that into ‘agronomic’ insights that tell a farmer how they should manage the hydration in their fields.

‘We see the same things developing in the case of the Asia-Pacific version of the fund. Companies such as Origin Energy and ASX in Australia or Hitachi in Japan. All of them have chosen to invest in these artificially intelligent solutions themselves because they aren’t available off the peg elsewhere.

‘Some of those will only look to utilise them for their own ends: a competitive advantage versus their peers. Others may at some point look to make those investments available to third parties and to monetise them.’

Ping An, China’s largest insurance company, is using AI to reduce its dependence on  insurance agents. ‘There’s something like 3.5 million insurance agents in China,’ says Ford. ‘Now, that’s not a scalable opportunity or, conversely, AI is ripe to take the cost out of that industry and revolutionise  insurance.’

That said, the catalyst for launching the fund is absolutely to do with investing in AI-providing tech businesses. When the first AI fund was launched, its ‘investable universe’ was half of what it is now, says Worthington. ‘And only 10% of companies were in the Asia-Pacific region’.

‘We couldn’t have done it in a properly risk-adjusted, diversified way,’ says Ford. Now, around half of all the companies in their set are listed or domiciled in the Asia-Pacific region, representing ‘a huge leap in opportunities’.

One factor leading that transformation is the graduation of Chinese tech startups into listed companies. ‘Over five years, those private equity opportunities have come to market, so you’ve got that breadth of opportunity that has just exploded right across the Asian region.’

China represents 30% of the portfolio, but ‘it’s not a China fund either’. Another 30% is allocated to Japan and 30% to other Asia-Pacific markets.

‘We’re seeing some of the largest, best-known bellwethers in the Japanese market beginning to put their house in order. Companies like Hitachi and Toshiba have been active in pruning their portfolio, getting rid of cross-holdings, resting and slow-growth asset-intensive businesses, and positioning themselves on the front foot for the first time in 30 years. In doing that, all of these companies are engaging with AI in a meaningful way because if you’re going to do that kind of thing, why wouldn’t you engage in AI?’

The managers’ argument is the Asia-Pacific region has more headroom given current global market conditions. Just as there is untapped reform in the Japanese corporate world, they say, so China is in a better position to cut interest rates or stimulate the domestic consumer economy than the US.

So, where does the North America market have to go?

‘The US market is now about 75% of global market cap,’ says Worthington.’In 10 years’ time, where do you think Asia-Pac market cap versus North American market cap is going to go on a global basis? I think it’s an easier argument to say: “I think the Asia-Pac region will grow in terms of market cap versus North America.” That doesn’t mean you can’t find interesting companies in North America and it doesn’t mean every company in Asia-Pac goes up.’

There are easy stories to tell that depict a ‘disconnect of valuations’ between Asia-Pacific companies and lookalike US businesses. One mentioned is Appia, a Japanese company which provides the tech behind digital marketing. Not only has it avoided the privacy blots that stain the copybooks of Silicon Valley doyens like Facebook, but it is discounted compared with US rivals with similarly clean credentials.

Ford says: ‘Having a rich opportunity set was something that we needed to wait to develop before we could think of launching this fund. That is compounded by the valuation opportunity that even by the end of last year we were beginning to think had presented itself, alongside the quality of some of the companies in the Asian market and the sheer rate of disruption that we’re seeing there. All of these things combined to inform the decision to launch the fund.’

Why it’s interesting: The managers may strenuously resist the tech fund labelling, but their older strategy does hold three US tech giants: Microsoft, Alphabet and Tesla. Until recently these were among what Citywire Pulse editor and former fund manager Andreas Dagasan dubbed ‘last men standing’ amid the tech selloff.

That began about this time last year, a ‘bifurcation of the market’ that saw companies lower down the market cap selloff, losing 50-80% of their value. The blue chips stood firm until the past few weeks, but then they started to crumble too. Netflix first, then Meta, Amazon and Alphabet joined. Microsoft and Apple, until recent days, had not followed suit.

An inauspicious time then to launch a tech fund? Even if it is, once again, ‘absolutely, definitely not’ a tech fund. The Sanlam managers brush off tech sector woes: ‘we certainly have the air cover, and we haven’t launched this fund for the next five minutes; we expect to be running it in 10 years’ time.’

Market spectators might justifiably expect tech launches to dry up in Q2. But Citywire’s data has tracked 23 launches classified into the Equity – Technology sector over the past year. While some may simply be existing strategies being launched into new markets, as is potentially likely in Asia where distribution is mainly through banks, some of the names are intriguing. Particularly the fact that four strategies carry the name ‘Metaverse’.

Could the metaverse be the big story of the next 10 years? No one can say. But AI has already been identified by Citywire’s Fix the Future writers as a key driver of global technological change – one of three ‘megatrends’ transforming the world we live in.

Fix the Future’s Miles Costello recently wrote about seven key technologies that would help redefine financial companies over the next 10 years. They were blockchain, cloud computing, the internet of things, open-source software, low- or no-code development platforms, hyper-automation and AI.

A PWC report (quoted by Ford and Worthington) projects AI will add $16tn to the global economy by 2030.

The Sanlam fund’s managers describe AI as ‘grotesquely unfair’. Once a company begins to embed AI and benefit from it, Ford argues, the competitive advantage compounds. John Deere’s agronomics subscribers can’t buy tractors off a rival.

But such competitive surges have knock-on effects too. In another article, Costello quotes an Oxford Economics report that talks about ‘digital spillovers’ – the economic growth that results, among other things, from businesses being pushed by rival innovations.

‘In commerce, this trend becomes self-perpetuating – the more businesses see competitors transforming themselves around them, the more they feel compelled to follow.’

Overall these spillovers ‘accounted for more than 70% of the $11.5tn global digital economy in 2016, on Oxford Economics’ measure’.

Fix the Future investment editor Algy Hall has also recently written about technological change – specifically how hard it is for investors to judge the pace of it. (I’d recommend his highly instructive primer on the subject, which you can read here.)

The adage goes that we overestimate the importance of technology in the short term and underestimate it in the long term. ‘The bitter irony is that this blind spot in our underestimating the long-term significance of emerging technologies co-exists with a tendency to overestimate short-term upside,’ writes Hall. ‘In the short-term, we tend to get stupidly overexcited by attention-grabbing new technologies, as illustrated by the dotcom boom.’

Hall recently also identified an interesting AI-enabled company held by 25 top equity managers: Relx. As well as scientific publishing, it also performs risk analysis. It has placed machine learning and AI behind its data analysis, Hall writes, ‘to create value from vast heaps of unstructured data.’

Market cycles do have the benefit of wiping out less healthy companies and leaving the better ones. Indeed, a survivor of the dotcom crash is still around and doing quite well: the then-bookseller Amazon.

Regardless of how the companies it invests in are classified, Sanlam’s fund is trying to tap into a key constituent of the technological change megatrend. The opportunistic part is casting its net over Asia Pacific ‘a region permanently in flow over the last five years’ and the hoped-for valuation upsides it presents.