Investing in an AI-driven future

Coming up, we boil down artificial intelligence for financial professionals. And no, this episode was not written by a chatbot.

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From Thrivent Asset Management, welcome to episode 46 of Advisor’s Market360™. A podcast for you, the driven financial advisor.

By now, there’s a good chance you’ve heard of ChatGPT, the state-of-the-art AI chatbot that’s garnered widespread interest because of its ability to carry natural, human-like conversations. Since it first came to the public late last year, ChatGPT has achieved viral success and has given us a first-hand look at the future of tech.

Of course, artificial intelligence, or AI, isn’t new. Various forms of AI have existed for decades and it currently powers apps and tools we use daily. AI models work quietly in the background to provide modern speech and image recognition, fraud detection, personalized recommendation engines, and much more.

But recently, the field of AI was thrust into the spotlight. Generative AI, like the language model under ChatGPT’s hood, is proving that a sea change in computing is around the corner. Business leaders across industries see disruptive potential as ChatGPT continues to effortlessly churn out instant, contextual responses that cover a vast array of topics and fields.

Investors and advisors are taking notice and are wondering, “What’s next?” That’s where two of Thrivent Asset Management’s tech-savvy investment experts come onto the scene. We talked with Vikram Kaura, Senior Portfolio Manager for Thrivent Mid Cap Stock Fund, and Peter Karazeris, Senior Equity Research Analyst. They answered our questions on what financial professionals need to know about the state of AI.

AI is predicted to shake up the status quo, just like other core technologies have throughout the last several decades: the dawn of the PC, followed by the Internet; then later, smartphones and social media. Now, AI ­– in particular, generative AI – signals an inflection point and the beginning of a new era of computing.

It's a lofty claim, but Kaura and Karazeris believe that AI is opening the door to a new space where pioneers can build things that hadn’t been possible before, things that could determine the names of tomorrow’s tech titans. We’ve seen it before – thinking back to the dawn of the internet, a handful of small, garage-based startups such as Google and Amazon adopted the internet early and built upon it. Later, they turned into household names. They disrupted entire industries, changing the way millions of people shop, search for information, and interact with each other. Right now, there may be a garage where the next Google is in its infancy. That’s the potential our experts see in AI.

One of the differences with AI is its ability to automate a myriad of tasks in work and in life. Some people see the pros in having a virtual assistant take on mundane tasks, but on the other hand, some believe that AI could take away jobs. Is this a legitimate concern? Kaura and Karazeris both answered with a “maybe,” depending on how repetitive the work is. For this reason, they said that financial advisors don’t need to worry too much.

The risks to the labor market are hard to assess, and Kaura urges against using blanket statements or jumping to conclusions. The nuances in different industries vary. For example, corporate IT teams will likely see an impact. ChatGPT has proven that it can help with troubleshooting software issues, and even more impressive is its ability to write code in different programming languages. Using natural language, one can describe a need, and in an instant, the AI provides code. With a chatbot similar to this, employees might not need to submit requests to an IT department.

In Kaura’s view, there are several layers of potential in this example. For a large company, a next-gen chatbot can boost efficiency and productivity across departments. It could spur innovation as employees explore new routes to getting work done. Where it becomes less clear is the impact this would have for the IT workers. The risk to their roles is obvious, but they’re not necessarily out of work. More of their time could be available for higher value tasks. Over time, it is possible that companies with AI tools used across their workplaces may gain a competitive edge. Thrivent’s investment analysts look for these traits as they consider opportunities.

What else can generative AI do? Cutting out a middleman in the workplace is one thing, but with AI, newer companies could provide a way to bypass large, de facto information providers. Let’s say you’re planning a trip. You could use Google along with a number of other websites to find airlines, hotels, and activities to do at your destination. But what if there were a single site that you could plainly tell what you were looking for and it would check all of the boxes for you, eliminating the need for Google? This is what disruption might look like in the age of AI and is a pattern that Kaura and Karazeris expect to see as winners emerge in the future.

We’ve covered the high-level picture of why AI is worth paying attention to. Now, let’s look into more concrete examples of what our Thrivent experts are looking for.

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Who are going to be the big names in 5 or 10 years? That’s the important question for investors. Our experts described three frameworks that they use to assess opportunities in AI.

The first framework helps the investment team assess infrastructure, or the underlying foundation upon which new AI applications can be built. A historical example from the early PC days comes from Microsoft and Intel, a duo referred to as Wintel. They found tremendous growth by providing a foundational platform as PC adoption was rising, which helped to establish themselves as a standard in the workplace. In turn, software developers chose to build applications on Wintel-based systems, putting their product in front of the large audience using the Wintel platform.

In today’s AI race, Nvidia and cloud service providers including Amazon Web Services, Microsoft’s Azure and Google Compute Platform are seen as the infrastructures of choice. These platforms are where the majority of AI algorithm development is taking place.

The second framework aims to identify solutions built for vertical industries on today’s AI infrastructure. This is a maneuver that we’ve seen from large companies, and Karazeris expects that more will quickly follow. We’re still in the early stages of adoption, but the main players of tomorrow may be the ones that get ahead during this critical stage so they can capture the growth to come. Such a maneuver could provide long-term growth if they align and tailor their platform to specific niches and industries.

One example that Karazeris highlighted was Nvidia, which has already positioned itself for growth by verticalization. It aligned its data center business with the banking industry after making a partnership with Deutsche Bank, developing AI tools specific to banking. This helped the company grow its data center business from $830 million to $15 billion in seven years. Now, it has the opportunity to partner with other banks that could benefit from these tools, which could help Nvidia capture a larger share of the banking industry.

The third framework the investment team uses seeks to identify companies that create novel products. If analysts find a promising new AI product or service, they’ll put that under a microscope to determine the size of its market and its opportunity for growth. In their research, they hope to find truly innovative products with disruptive potential, something that could take the thunder from today’s tech giants. Our earlier example of a travel planning service that replaces Google is a small use case illustrating this idea.

Karazeris also mentioned another AI-driven opportunity – access to data. Winners in this space will likely be those who have or find a treasure trove of data, paired with an inflow of new data, that can be used to train AI models. Currently, a number of companies already have a wealth of valuable data within their own walls, giving them an early advantage in the AI race.

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Disruptive, AI-fueled growth could come in any industry. It’s possible we’ll see AI tools making such an improvement in efficiency that companies are able to outpace their competitors. This is especially true for smaller companies that can adopt and pivot their workflows quicker than their larger competitors.

Let’s use industrial companies as an example. Kaura has big hopes for AI in the industrial space, seeing it as the next transformative innovation like the many that preceded it. He listed the invention of the steam engine, the advent of electricity, and there’s no doubt that computers made a seismic shift, too. Because of computers, the physical and digital realms work together. Now, this intersection is what will give AI a role to play in the industry.

AI deployed in a factory setting could monitor what is currently happening and send alerts about what is going to happen, like when a machine will break down if it continues to run at its current rate.

Health care, a sector that spends a fortune on technology, is no doubt a place where AI is already being used to enhance patient outcomes. Computer vision, an AI method for a computer to categorize and name the disparate things it sees in an image, is used to analyze medical imaging, like finding polyps and tumors that can be missed using manual methods.

Kaura believes that almost every industry can use AI to become more efficient or to spur product innovation. In this sense, he sees every company as a tech company. Karazeris added that, within every industry, AI has the potential to take away the scale advantage enjoyed by larger companies and open doors for newer, more innovative companies.

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Where there are opportunities, there are also risks. It’s impossible to discuss tech disruption without recalling the Dot Com bubble. Rapid adoption of the internet and the companies built upon it led to excessive speculation and then… “pop.” That’s a good reminder of the importance of not jumping on the bandwagon. Karazeris took a moment to describe Thrivent’s investment philosophy. In the midst of buzzing trends, the investment team strives to maintain their long-term, research-driven approach. Anyone looking to invest in the AI race would be wise to exercise similar discipline.

Where there are winners, naturally there are also losers. It’s estimated that AI could disrupt hundreds of billions of dollars in cloud spending, digital advertising, and e-commerce sales. What this amounts to for Google is a “code red” for many of its sub-businesses in these areas.

AI itself has its own risks. Speaking of Google, it has signaled its intent to enter the AI chatbot race. In early February, the tech giant held a demo call to show off its own ChatGPT competitor called Bard. But during the call, attendees noticed the chatbot provided factually incorrect information. As a result, in the week that followed, Google’s parent company, Alphabet, saw its shares drop by nearly 10%.

Furthermore, the ability for a company to moderate its generative AI models will be paramount. Incorrect information isn’t the only thing to fear. If offensive or biased information crops up, that AI app or model could lose users. Moderation isn’t easily automated, and programmers will need to be on hand to patch issues in an AI’s system of safeguards. This presents a payroll impact that could be an issue for smaller companies.

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For financial advisors wondering what the AI revolution means for their daily work, Kaura and Karazeris shared their ideas. To start, we’ll remind you of what was briefly mentioned earlier: advisors need not worry about their job becoming obsolete. Advisors might find that too much of their time is taken up by repetitive administrative work or unavoidable, mundane tasks. Eventually, you could see AI automating those tasks, allowing you to spend more time on the productive activities that drive relationships with your clients.

No doubt automating tasks sounds good, but what does it really look like? Our experts shared some ideas off the top of their heads. Say there’s a new tax law enacted, and you’d need to research whether any of your clients are impacted. An AI-powered assistant could run an analysis for you and provide a report of who might be affected. For each of those clients, it might make suggestions on what to discuss in a proactive call. Another possibility is having an AI model trained on past client interactions. Then it could answer questions around which demographic groups have responded more to certain products, what time of day works best to call people who work in a particular field, and so forth. Maybe it interfaces with your clients, too, answering simple questions in the context of their situation and leaving them with points to discuss with their advisor.

Of course, there’s a lot of assumptions and “what ifs” here, but in the months and years ahead, whether it’s in financial services or other industries, our experts assure us that we’ll be seeing work transformed by AI.

Admittedly, we have just scratched the surface on the impact of AI and investment opportunities it will bring. We hope these snapshots of information provided a little bit of clarity and assurance that a future with AI will most likely be a positive for our industry.

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Thanks for listening to this episode of Advisor’s Market360™. All episodes are available on Apple Podcasts, Spotify, and Google Podcasts. Email us at podcast@thriventfunds.com with your feedback, questions and topic suggestions for future episodes. Advisors: do you have a story you’d like to share? Email us and you might hear it in a future episode. And as always, you can learn more about us at thriventfunds.com and find other insights of interest to you, the driven financial advisor. Bye for now.

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All information and representations herein are as of March 6, 2023, unless otherwise noted.

This podcast refers to specific securities which Thrivent Mutual Funds may own. A complete listing of the holdings for each of the Thrivent Mutual Funds is available on thriventfunds.com.

Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.

Thrivent Asset Management, a division of Thrivent, offers financial professionals a variety of investment products to help meet their clients’ needs. Thrivent Distributors, LLC, is a member of FINRA and SIPC and a subsidiary of Thrivent, the marketing name for Thrivent Financial for Lutherans.