Investment Strategy Brief:
A Primer on Generative AI

Below is a transcript of this week’s video.

Hi, this is Mike Reynolds with Investment Strategy at Glenmede.

The topic of our brief this week is artificial intelligence, so we thought it would be appropriate to use AI to generate a title for this slide deck. Shoutout to ChatGPT for its clever play on words.

Artificial intelligence is gaining a lot of attention lately, and not just for its ability to title presentations. The concept really isn’t anything new, as traditional AI has been a tool used by many to take existing data and leverage computing power to process and analyze. However, the latest hype is around the prospects of an emerging subset called generative AI. What generative AI does differently, is it can look at existing data and create entirely new content based on inputs. For example, given a prompt it can write prose or reports, help design and catch errors in computer code, generate art or interact with people. As with many budding technology trends, it’s often not perfect and can make mistakes. But the generative capabilities of these tools have made significant strides over the last few years.

A couple examples of popular tools include ChatGPT, which has so far been the fastest applications to reach 100 million users. ChatGPT is a multi-purpose chat bot that responds to prompts that can range widely in topic, from brainstorming ideas to a slide deck to making suggestions for fine-tuning a resume. But ChatGPT is just one of many applications out there, each with their own strengths. For example, AdCreative AI can build online banner ads for companies if given a description of what it should look like. Another is Murf AI, which if given a script will automatically add voiceovers to videos that sound like a real human. These are just a few examples, but they highlight some of the opportunities that this technology is creating.

The flip-side of technological innovation is that it has the potential to turn existing industries and jobs obsolete. For example, the advent of the internet had a profound effect on newspaper publishers, with the total number of industry employees in the U.S. falling by 77% over the last 30 years. With that said, business leaders are increasingly recognizing the ability of AI to create productivity efficiencies for their existing labor base.

Despite some of these fears about potential jobs lost to AI, it’s important to realize that over the long term, creative destruction can be a net job creator. Take for example, the invention of the automobile. Horse-drawn personal transportation was previously the norm, which required the help of blacksmiths to produce horseshoes and maintain carriages. The mass production of cars and trucks made much of that work obsolete, but that was more than offset by the labor now required in motor vehicle manufacturing. There were more jobs in those two industries combined than there were without cars.

Another example is in farming. In 1930, the work of one farmer was enough to feed 9.8 people in the U.S. But because of continuous innovation and efficiencies in agriculture, one farmhand essentially feeds 172 people. Yes, that means fewer jobs on farms, but it also helped create lots of jobs in related industries, such as grocers, food manufacturers and dining facilities. The key point here is that technological advancement could potentially disrupt legacy industries, but the expected productivity lift is a tailwind to economic growth.

So what does this mean for investors? Just because an industry has a lot of potential, that does not automatically make it a good investment. While innovative companies that make use of game-changing AI technology may have attractive growth prospects, the price you pay for those investments is a key determinant of future returns and should be a major consideration for investors. The overall market, for which we use the S&P 500 as proxy, is currently valued at a 2.3 price-to-sales ratio. In comparison, the technology sector is almost triple that at 6.2. What’s more, is that several stocks that are levered to AI by either developing the tools or providing resources to the industry trade at a significant valuation premium, perhaps already reflecting the hype around this technology.

Additionally, it is not always obvious who the long-term winners of innovative disruption may be. For example, the Tech Bubble of the late-90s and early-00s was centered on hype for internet stocks. Of the top ten tech stocks at the Tech Bubble’s peak in March of 2000, only two had enough long-term success to remain in the top ten today. The beneficiaries of technological change can be difficult to predict, even by the collective wisdom of the markets.

So in summary, generative AI and its capabilities are catching the attention of investors, especially as several products have emerged that have the potential to enhance productivity. The disruption associated with change has the potential to shake up existing industries, but innovation has historically been a net job creator and driver of economic growth. Investors should approach hot tech trends carefully though. Breakthroughs can provide enticing opportunities, but investors should pay attention to the price tag. And picking out the long-term winners of these innovative disruptions is not always an obvious and straightforward exercise.

Thanks for listening! And please don’t hesitate to reach out with any questions.

This material is intended to review matters of possible interest to Glenmede Trust Company clients and friends and is not intended as personalized investment advice. When provided to a client, advice is based on the client’s unique circumstances and may differ substantially from any general recommendations, suggestions or other considerations included in this material. Any opinions, recommendations, expectations or projections herein are based on information available at the time of publication and may change thereafter. Information obtained from third-party sources is assumed to be reliable but may not be independently verified, and the accuracy thereof is not guaranteed. Outcomes (including performance) may differ materially from any expectations and projections noted herein due to various risks and uncertainties. Any reference to risk management or risk control does not imply that risk can be eliminated. All investments have risk. Clients are encouraged to discuss any matter discussed herein with their Glenmede representative.