Artificial Intelligence: The Defining Investment Theme of Our Era

The AI investment landscape has exploded recently, with significant growth in AI and big data funds, driven by interest from both Western and Chinese investors. The U.S. continues to lead in stock representation within these funds, despite Europe having more assets overall. Investors face challenges in balancing portfolios, particularly when high-performance stocks overlap with mainstream indexes. AI offers vast potential but carries considerable volatility.

Artificial Intelligence (AI) has rapidly surged into the spotlight as a defining investment focus of the current era. The “Investing in Artificial Intelligence Handbook” delves into what’s driving this growth and provides insights for investors looking to tap into the potential of AI. The enthusiasm around AI, particularly following the launch of ChatGPT 3.5, has sparked a significant influx of investment into AI and big data funds since late 2022, captivating millions of users around the globe.

In early 2025, these funds saw record inflows, partly because of strong interest from Chinese investors inspired by the success of DeepSeek, a homegrown AI leader. Such developments have contributed to assets in U.S.-domiciled AI and big data funds skyrocketing to about $5.5 billion by May 2025—a fourteenfold increase in just two years, albeit starting from a relatively low figure. Interestingly enough, the U.S. still holds only 15% of global assets in this sector, lagging behind Europe, where AI fund assets have increased fivefold over the last five years, reaching a whopping $22.7 billion.

The question of what gives a stock its AI title is becoming increasingly complex as AI embeds deeper into everyday life. While tech giants like Microsoft, Alphabet, and Nvidia often come to mind, the AI landscape is much wider than just these names. Companies such as Vertiv, providing vital infrastructure that supports AI data centers, and even big retailers like Walmart and Tesco, which utilize vast datasets for optimization through AI, fit the larger picture. This diversity makes creating thematic portfolios a bit more intricate, yet it opens the door to unique investment opportunities.

To pinpoint meaningful AI exposure, Morningstar takes a consensus approach, scrutinizing non-China-domiciled funds labeled as AI and big data funds. They track the most commonly held stocks across these portfolios. This method sheds light on the key players shaping the AI investment environment, offering a clear data-driven glimpse into the holdings that matter most.

Diving deeper, the analysis spotlights a group dubbed the Magnificent Seven—Nvidia, Microsoft, Amazon, Google, Meta, Apple, and Tesla. Notably, Nvidia is found in almost 90% of AI and big data fund portfolios, cementing its status as a market leader in AI chips. These companies represent the backbone of AI commercialization, from cloud computing to advanced robotics, creating a complex ecosystem where each has a distinct role.

However, the challenge arrives as fund managers consider these Magnificent Seven for their portfolios. Relying too heavily on them can lead to significant overlap with mainstream equity indexes like the S&P 500, which diminishes the distinct appeal of AI-focused funds and raises questions about the justification for their often higher fees. On the flip side, entirely avoiding these giants could expose funds to missing out on major performance gains from key AI beneficiaries.

Seeking a balancing act, most strategies look to retain a core allocation to these top performers while using the remainder of the portfolio to spotlight smaller, more specialized companies in the AI field. Although Europe has emerged as the largest market for these fund assets, the U.S. retains its edge in stock representation—most frequently held stocks in global AI funds are predominantly U.S.-based. This push highlights America’s ongoing leadership in technological innovation and its robust financial markets, creating challenges for investors wanting to diversify away from U.S. exposure in AI.

When it comes to growth, AI stands out, but volatility is the name of the game. The Morningstar Global Artificial Intelligence & Big Data Consensus Portfolio, crafted from the most commonly held stocks in AI-focused funds, has beaten the Morningstar Global Target Market Exposure Index by a whopping 35% since ChatGPT 3.5 debuted in November 2022. However, this significant outperformance comes at a cost—higher volatility and steeper drawdowns underscore the risky, high-reward nature of investing in emerging technologies. Investors must keep in mind that while the AI sector offers enormous growth possibilities, it’s also fraught with risks. Key factors like concentration in a handful of dominant players and evolving technologies make it vital to tread carefully when investing in this space.

In summary, the surge in AI investment is undeniable but comes with its ups and downs. With the Magnificent Seven dominating the landscape, fund managers face a tightrope walk between leveraging these giants and seeking broader exposure. As investors dive into AI, understanding the volatility and risks involved is crucial. Keep an eye on the shifting dynamics as the sector continues to grow.

Original Source: www.morningstar.co.uk