Is AI creating unbeatable sector leaders?

By: Xuesong Zhao, Lead Fund Manager, Polar Capital Artificial Intelligence Fund

A key element of the strategy behind the Polar Capital Artificial Intelligence Fund is to invest in not just artificial intelligence (AI) enabling companies, but the beneficiaries of AI across all sectors. This approach sets us apart from peers concentrating more on AI functionality itself. We see the opportunity for tremendous value creation beyond the technology sector and the ability to invest in the disruptive AI winners, as well as avoiding the many companies that will be negatively impacted, as being key.

An example of where we have seen this advantage already begin to play out is in the advertising sector.

Past disruption prompting AI readiness now

Advertising agencies are all too familiar with existential disruption and the threat of customers plugging straight into platforms like Google and Facebook and bypassing the incumbent model of employing advertising agencies, to reduce spending.

The advent of AI-assisted creative suites has prompted many to revisit this, with the sector seemingly at a crossroads, as agencies try to re-showcase their value to clients and shareholders, over and above what in-house generative AI products could achieve without them. French advertising firm Publicis Groupe serves as an interesting case study in this regard.

Publicis’ AI seeds now showing green shoots

While it is not the only firm in the sector experimenting with AI, Publicis has been a notable outlier in embracing the technology, drawing “reactions of outrage, jest and negativity…” from the industry for launching Marcel, its internal AI platform, in 2017.

Marcel connects 100,000 staff, using internal profiles to pair the right assets with the right campaign at the right time, optimising employees’ skillsets and availability. Seven years on, AI is now a core tenet of the business model, designed to keep the firm relevant and command an ever-growing lead over competitors.

Having acquired digital transformation business Sapient in 2015 and data technology platform Epsilon in 2019, Publicis is able to help customers navigate and implement AI internally, combine third-party proprietary data with vast datasets to make ads relevant and, importantly, encourage customers to easily fold-in Publicis creative services. As such, its model has evolved to use AI to link business units and efficiently manage and structure the data flowing between them, also informing the end product. 

The market opportunity

Our preference for companies integrating AI technology for the good of a longer-term business transformation often attracts us to firms that have already deployed AI programmes long before the excitement and sectoral disruption of the past two years.

Publicis was able to raise its annual revenue forecast three times in 2023 despite some peers cutting guidance, broadly as a result of laying the groundwork for business change seven years ago. While the headline cost of an advert may fall as AI tools facilitate lower production costs, projects such as hyper-personalised content, which require the ability to manipulate large datasets, could lead to a significant increase in volumes and deliver continued growth in contract sizes and customer wins. A lower upfront ad cost also has the ability to service smaller clients previously priced out of engaging with an agency – opening up a potentially sizeable market. It is the companies able to capture both these first and second order impacts presented by AI that offer the most differentiated opportunity versus their peers.

While Publicis will not be immune to industry or market challenges, its early innovation means it is less vulnerable to a general malaise within the sector and is more likely to emerge as a longer-term sector leader. 

AI benefits could compound as competitors play catchup

AI is playing a meaningful role in improving intra-company efficiency, allowing firms to enhance their own productivity and glean useful insights from ever-growing datasets. It is this opportunity, beyond a superficial AI overlay, that should allow companies embracing AI to improve, generating value through these productivity gains either directly or through increased innovation. 

Ultimately, it is the Fund’s ability to invest away from headline AI enablers and into sectors beyond the remit of technology-focused funds that allows us to explore these opportunities for long-term AI value creation. Not only does this allow us to stay nimble, investing in the burgeoning industries AI has yet to create, but it also gives the strategy a broader global equity footprint – providing another differentiating characteristic compared with more traditional technology funds.

Discover more about the Polar Capital Artificial Intelligence Fund 

This is a marketing communication. For investment professionals only. For information purposes only. This material is not intended to provide advice of any kind. Issued by Polar Capital LLP and Polar Capital (Europe) SAS. Polar Capital LLP is authorised and regulated by the United Kingdom’s Financial Conduct Authority (“FCA”) and the United States’ Securities and Exchange Commission (“SEC”). Registered address: 16 Palace Street, London SW1E 5JD. Polar Capital (Europe) SAS is authorised and regulated by France’s Autorité des marchés financiers (AMF). Registered address: 18 Rue de Londres, Paris 75009, France. Some information contained herein has been obtained from third party source and has not been independently verified by Polar Capital. All opinions and estimates constitute the best judgement of Polar Capital as of the date hereof, but are subject to change without notice, and do not necessarily represent the views of Polar Capital, and may not be achieved.