Mr Rommel, the founder of Microsoft, Bill Gates, considers the development of artificial intelligence to be as fundamental as the development of the microprocessor, the computer or the Internet. Do you agree with him?
I wouldn't disagree. Bill Gates got involved with the developers of ChatGPT early on and experienced first-hand the immense speed at which the underlying models are improving. If you look at how many companies are working on generative AI, how many scientists are researching it and how much capital is flowing into this area, then you can assume that something fundamentally new is emerging. We are probably still at the very beginning of this development.
With the opening of ChatGPT to the general public just over a year ago, generative AI has experienced a tremendous upswing - including on the stock market. What is driving investors?
ChatGPT has certainly fired the imagination because we can now see what generative AI is capable of. It can instantly create images, write texts and code software. These are capabilities that we haven't seen before. And of course this opens up completely new possibilities. In addition, we have also seen in recent months that AI can actually have a positive impact on the fundamental data of companies because sales and profits are growing faster than previously thought.
We specifically look for companies whose products cannot be easily copied by competitors.
In your opinion, which sectors are currently benefiting most from the AI boom?
We have set up the fund in such a way that it reflects the current beneficiaries from three areas. Firstly, there are the companies that collect data or have proprietary data themselves. Secondly, there are the companies that provide the computing power needed to train the AI models and then ultimately run them. And the third area is the users, i.e. companies from different industries that use AI in a differentiated way and can thus increase their business growth.
How is the investment process for DWS Invest Artificial Intelligence structured?
There are two pillars of analysis for our AI fund. Firstly, we naturally take a close look at whether a company is benefiting from the AI trend. We specifically look for companies whose products cannot be easily copied by competitors. It is important that the company can grow faster than the market with this product. And that AI makes a significant contribution to sales, profits and, of course, the share price.
Fundamental analysis also remains important, of course. As fund managers, we are embedded in the DWS global equity team, which analyses the fundamentals of all the companies in which we invest: What does the balance sheet look like? How promising is the business model? What confidence do we have in the management? The combination of these two factors then leads to the decision as to whether a company is suitable for our portfolio or not.
How do you find out which companies have a real competitive advantage thanks to AI?
This is a team effort. I don't manage the fund on my own, we are a team of four, each of us contributing individual strengths. I am mainly responsible for the semiconductor stocks. Then there is Felix Armbrust, who has already developed an AI model for his doctoral thesis and is well versed in the technical side. Manuel Mühl has been covering internet platforms and media companies for many years. And we have Zequn Zhang, who grew up in China, speaks fluent Mandarin and has a very good understanding of the value chain in Asia and the companies there. And of course the team is backed by the entire DWS investment platform with over 50 analysts in Frankfurt alone and a presence in most of the important markets.
Does your selection process also include company visits?
Definitely. For example, I was recently in China and met up with companies. Asian companies are an important part of our portfolio and of course we also want to find out how they are doing in direct dialogue with the management.
What was the most important thing you learnt on your trip to China? What impressed you the most?
Clearly the dynamism with which things are developing in China and also the technological progress in many areas. I found it fascinating that almost all the companies I spoke to reported on the use of AI. Whether it's a game developer that uses AI to design new computer games or a medical technology company that uses AI to identify blood cells more quickly in diagnostics. There was even a battery manufacturer that wants to use it to develop more efficient batteries. The extent to which AI is already being used in China today is truly impressive.
In which regions do you expect the strongest AI-driven developments in the near future? Is it the USA with its Silicon Valley and the technology companies based there? Or is it actually China?
The USA is of course still in a comfortable position. Especially when it comes to semiconductor technology, it has a head start over China. We currently have two thirds of our portfolio invested in the US, but also around 25 per cent in Asia, including around ten per cent in China. The country has a lot of potential and will certainly continue to expand its position. The Chinese have set themselves the goal of becoming the world leader in artificial intelligence by 2030 and are heavily subsidizing this with state subsidies.[1] Every year, thousands of scientists leave the universities to work flat out on AI across the entire value chain. And the Chinese are also ideally positioned on the data side. Just think about how many internet users there are in China: more than in the US and Europe combined.
China has a lot of potential and will certainly continue to expand its position. The Chinese have set themselves the goal of becoming the world leader in artificial intelligence by 2030.
We haven't even talked about one small continent yet, that's Europe. Do you have any European companies in your portfolio?
Yes, around 5 to 10 per cent of the companies in our portfolio come from Europe. However, it is difficult to find suitable companies here. Our continent simply lacks an ecosystem like Silicon Valley. There, companies, scientists and investors are all concentrated in one place. It's similar in China to some extent. But it simply doesn't exist in this form in Europe.
Where do you think AI can have the greatest impact in the future?
The question is not so easy to answer. Users are an important pillar of our portfolio, which is why we are also looking at many industries outside the technology sector. The two most interesting areas at the moment are probably medicine and the transport sector. In the healthcare sector, it is becoming apparent that AI will help to significantly reduce drug development times and costs. And in the transport sector, autonomous driving is on the verge of a breakthrough. We can expect a lot more of this in the future.
The performance of your fund has been subject to strong fluctuations in recent months. Why is that?
DWS Invest Artificial Intelligence is a growth fund, so fluctuations are quite normal. Our aim is to invest in companies that have the potential to double their sales and profits over ten years. With such companies, you don't receive the dividend immediately because the majority of the value creation is expected in the future. If interest rates rise, as we experienced last year, this is often particularly difficult for growth companies, as they are generally valued more expensively than the broad equity market. Conversely, however, if interest rates fall again in the medium term, as we expect here at the company, this will benefit valuations.[2]
So investors who are afraid of the risk should keep their hands off your fund?
I always say that DWS Invest Artificial Intelligence is a fund that offers a long-term perspective. Our investors should therefore have staying power. A savings plan in which you regularly invest a fixed amount over a longer period of time would be conceivable, because then you could even benefit from these fluctuations thanks to the cost-average effect. If prices go down a little, you get a little more shares, and if they go up, a little less. This can pay off in the long term.
DWS Invest Artificial Intelligence currently has a strong overweight in the IT and communications sectors, which together account for over 70 per cent of the fund's total assets. What distinguishes the fund from other technology funds?
We have deliberately positioned the portfolio in such a way that we are well diversified in terms of sectors, regions and size. In terms of sectors, there is naturally a strong focus on technology. There are many beneficiaries of the current AI boom in the software sector in particular. However, we also deliberately include other sectors. And the regions? Of course, this year it would have been best if we had only held US equities in the portfolio, as Chinese equities tended to be in the red. But that can change quickly. And the large companies were also the performance drivers this year. But we are still trying to achieve a certain balance between companies with a very high market capitalization, so-called mega caps, on the one hand and smaller disruptive companies on the other.
Parallel to the strong growth of AI applications, the public debate on ethical or copyright issues is also increasing. Does this influence your investment decisions?
Yes, this is of course a very important issue that we are monitoring closely. In the case of AI, we currently have no authorization regulations for these new models. This is very different from the situation with medicines, for example. In medicine, it can quickly take a few years for a drug to be authorized by the regulatory authority. This is not the case with AI. You just release the model onto the market and see what happens. It certainly won't stay that way. I think it's only a matter of time before we see more regulation for AI. However, the challenge will be to agree on certain standards at a global level. After all, there's no point in us Europeans rushing ahead and the new technologies then being further developed in the USA or China. And we shouldn't underestimate the side effects of regulation. For example, the fact that it tends to favor large companies because they simply cope better with complex licensing requirements than small ones.
In healthcare, it can quickly take a few years for a drug to be authorised by the regulatory authorities. This is not the case with AI.
Would you also use AI to improve your selection process?
We are currently testing a few tools at DWS. However, we have not yet rolled this out on a broad scale. Ultimately, AI is a technology that can certainly help us in many areas of our daily work. In terms of the financial markets, it will also lead to the markets becoming even more efficient, as has been the case with other technological achievements in the past.
Will AI one day be able to recommend stocks for us to buy?
I remain sceptical for two reasons. Firstly, because the database in this area is rather small. For AI to recognize a cat, for example, it needs millions of cat pictures. And we only have 50, maximum 100 years of history on the stock market. That's not much, especially for someone with a long-term investment horizon. And secondly, because it is very important for our selection process to talk to the companies personally and ask the management, for example, what they think of their competitors. This is information that AI does not have access to, but helps us enormously in our assessment. That's why I remain optimistic that our job will continue to exist.
The Team
As Lead Portfolio Manager, Tobias Rommel manages the DWS Invest Artificial Intelligence portfolio, among others. The business economist has more than 17 years of industry experience and specializes in the analysis of shares from the semiconductor sector. He is supported by three colleagues at DWS Invest Artificial Intelligence.
Felix Armbrust, who has already developed an AI model for his doctoral thesis, analyses software companies. Manuel Mühl has been covering internet platforms and media companies for many years. The team is completed by Zequn Zhang, who grew up in China, speaks fluent Mandarin and has a very good understanding of the value chain in Asia and the companies there.
