Can you avoid AI as an investor?

News around AI this week has been enough to power some nightmares with a suspicious resemblance to Blade Runner.

Former Anthropic employees are warning that Large Language Models (LLMs) could lead to human extinction within a decade, and the companies themselves are asking for, and laying out, legislation. Of course, there’s a lot of opinions that can come out of these headlines, and the motives that led to the statements. Some may say that these companies are keen to put in guardrails now to prevent new players from entering the space. Others believe there’s genuine concern.

Both can be true at once. But mounting fear around AI could lead some investors to start proceeding with more caution, be it for ethical reasons or simply because they fear a market crash on the horizon. Some have been moving already: among the top sells this week on AJ Bell’s platform were Meta and Microsoft.

For those looking to move away from AI in their portfolio, investing in today’s market could present a challenge.

Why it’s complicated to avoid AI

In the past, someone with an ethical objection to certain businesses, such as oil or tobacco companies, had the choice of opting out of these investments through screened versions of funds. However, if there is a movement to opt out of AI investing, it could quickly become quite complicated.

Those that are currently invested in a screened portfolio are likely to have a larger holding in the AI theme than someone with a standard portfolio, because many screened portfolios have a heavier weighting to the tech sector to account for the loss of companies in sectors such as energy. For example, the iShares MSCI World Screened ETF has a 33% exposure to information technology, while the standard iShares MSCI World ETF has a 30% exposure.

Someone taking a stand against AI on top of eliminating other investments seen as unethical investments already will find a shrinking pot of companies they can invest in.

The other question will be the extent to which investors want to avoid AI. It’s one thing to root out the listed companies leading the space, like Google-owner Alphabet, Meta, and Space X. It’s another to identify the companies that are part of the AI supply chain. Nvidia is the company that has designed the chips making the advancement in AI possible. In another extension, companies like TSMC, SK Hynix and Micron have all become a vital part of the AI chain through manufacturing chips and memory cards.

Avoiding a company that has AI as part of its process is becoming nearly impossible. The National Bureau of Economic Reports estimates that 78% of US firms and 71% of UK firms are now using AI, and those numbers are likely to be much higher among larger companies that people would invest in.

What avoiding AI would mean

An investor avoiding AI plays would likely be left with slower, but hopefully steadier, growth. Over the past decade, the S&P 500 has returned 295% in terms of sterling. If you remove the technology sector, it would have returned 198%. If you had a pot worth £10,000 that you invested at the start of the decade, it would mean the difference between a £39,534 pot with tech investments, or a £29,811 pot without tech investments, not including platform fees.

Funds that track an index but exclude tech are not common. Instead, investors wanting to avoid tech will need to create their own exposures by looking to regions and sectors that are distanced from the theme.

Consumer staples and healthcare could be the main focuses here, but again, they haven’t seen near the level of returns as the tech industry in recent years. A sector with potentially more promising growth could be financials, which can benefit from higher interest rates. You can find funds that invest in these sectors, especially when it comes to healthcare and financials. But many of the healthcare funds will have a focus on biotechnology, so you’ll need to check they don’t hold too much exposure to the AI theme inadvertently.

The growth in these areas is generally much slower than what is seen in technology, even including financials. For those that have become accustomed to the growth rates of technology in the past decade, it will be important to temper expectations for growth if you are looking to exit the sector. Of course, there can be pickups in other areas.

Investing by regions is often easier than trying to parse together a portfolio of funds dedicated to different sectors. UK and Europe have gained attention for being areas with a relatively small AI presence. For example, the iShares Core FTSE 100 UCITS ETF holds just a 0.96% exposure to the technology sector, and 2.48% to communication services, which is another area that can sometimes feature AI names. Instead, the largest allocation is financials, at 27%.

For those looking to Europe, the Amundi MSCI Europe UCITS ETF has a bit higher allocation to technology, at 9.5%. This is primarily from ASML, which is a semiconductor equipment provider and therefore does hold exposure to the AI theme. But financial services have a much larger presence here, at 26%.

You don’t need to fully commit to the AI camp, or against it. Plenty of investors will continue with the approach of a balanced portfolio, retaining exposure to the tech theme but balancing it with allocations in the UK and mainland Europe or individual sectors. If you’re feeling uneasy about knowing where to strike that balance yourself, you can look at multi-asset funds, where professionals take care of managing the allocation and reducing exposure to a single theme. Remember that AI is not the only investment risk. There are also risks that come along with being too cautious or investing heavily in smaller companies to avoid big themes.

Does avoiding AI mean protection in a sell-off?

Even investments that don’t have AI as a primary focus would likely be impacted by an AI sell-off, though perhaps to a smaller degree. When the biggest names in the market are the ones to take a tumble, there’s likely to be a ripple effect as investors try to recoup losses and take the money they can. Investors tend to sell the most liquid stocks and those where they still have profits first in a tumble.

But people will still need the basics, which means areas like consumer staples and healthcare could provide some relief from the turmoil. Just because there’s a market crash, we don’t stop buying loo roll, and perhaps a few more paracetamol tablets than usual to deal with the financial headaches.