A key aspect of our approach to, and excitement for, investing in artificial intelligence (AI) is the potential it holds for businesses beyond the immediate technology providers, often away from the sector entirely. While the relatively small number of companies enabling this technology have gained much of the attention in 2023, we think there is hugely underappreciated opportunity for firms outside the technology supply chain to deploy AI to enhance revenue or profit growth beyond current expectations. This is a key differentiator for the Polar Capital Artificial Intelligence Fund as we invest in both enablers and beneficiaries of the theme.

The market preference for household names (Microsoft, Amazon etc) reflects the immediacy with which investors new to AI have approached the theme and is perhaps welcome as the opposite rash behaviour can be damaging. During previous periods of technological step change, the market has seen indiscriminate speculative allocation to stocks even remotely connected to the idea, which has been less the case this year. However, even as more businesses begin to explore how AI can enhance their propositions, we continue to see a marked concentration in the market’s attention to the enablers and relative disregard for possible end beneficiaries.

We are committed to delivering next generation data, analytics, modelling, and LSEG’s Workspace solutions to transform how firms connect, research, analyse, collaborate, and transact across the entire value chain. - Judson Althoff Executive Vice President and Chief Commercial Officer, Microsoft.

The market may be slow to act beyond headline names as it is still unclear what the full capability of new and burgeoning AI models will be. As we have touched on previously, a $6trn app economy would have been difficult to predict at the genesis of the smartphone. This can create uncertainty over the scale of the opportunity or best point of application for investors. Therefore, a tentative approach to solely AI enablers may be prudent where experience is lacking or where AI introduction appears a novelty rather than utility.

However, as active, bottom-up stock-pickers that have believed we would see such an inflection point in AI technologies for a number of years, we believe this gap is where the opportunity set lies. Our experience in AI gives us a firm grounding in the technology as well as the direction of travel, if not the full extent of its evolution.

An example of where we see demonstrable cost savings, scope for meaningful market share gain and new market creation, with associated revenue uplift, is in the partnership between Microsoft and the London Stock Exchange Group (LSEG).

London Stock Exchange and Microsoft: A case study in accretive AI use

Having entered into a 10-year strategic partnership in December 2022, Microsoft is overseeing the migration of LSEG’s data and analytics platforms on to the Microsoft Cloud, centred around its Bloomberg challenger Refinitiv, which delivers data to over 40,000 financial institutions in 190 countries¹.

Welcoming Refinitiv into the LSEG infrastructure has been an arduous integration but ultimately has matched a full financial data ecosystem with a centralised source of international stock market data. While it is not groundbreaking to expect synergies between data-rich companies, nor the updating of a traditional business with technology enhancements, it is the AI overlay from the Microsoft partnership that carries the real potential for LSEG.

LSEG are deeply partnered with Microsoft, with many parts of the new Workplace terminal built on the Microsoft Fabric data platform. The depth of this partnership could allow users to access the full, and often underappreciated, suite of LSEG data in the Microsoft Office suite and Teams, while also using Teams as a communication tool that marries existing internal usage with the external functionality of tools like Bloomberg’s IB.

Microsoft’s AI Copilot helps users scour LSEG’s vast data sets, deciding which to use, how to present them and making them easy to share. Source: Microsoft².

Having long occupied second place as a financial data platform, LSEG’s Refinitiv now has the opportunity to bring a better-than-Bloomberg experience to users of ubiquitous Windows products, being able to call on and interrogate massive datasets natively within the Windows ecosystem. The legacy Eikon terminals LSEG used to supply news and data to financial institutions are being replaced by a new Workspace product to allow this added functionality by early 2025, according to LSEG Chief Executive David Schwimmer³.

An interesting opportunity here is represented by the roughly 280 million Teams users⁴ worldwide who will have the option to receive news, data, and analytics from LSEG, on a subscription level and platform that matches their budgets and business needs. Bloomberg users paying $30,000 per year⁵ for the full Terminal functionality may find it more efficient to opt for a lower cost option, opening up the addressable audience to those currently priced out of a market-leading data source. This ‘liberation of data’ beyond the traditional terminal could drive greater consumption, while business models that prioritise and promote data usage at the expense of the terminal, rather than vice versa, could raise interesting questions for the industry.

…the scope to build on LSEG’s current user base of 400,000 could be material for revenue growth.

Native integration into existing workplace software offers a clear advantage for businesses and their users and means the scope to build on LSEG’s current user base of 400,000⁶ could be material for revenue growth. While the factors of new and variable subscription models, initial implementation costs, and rollout timelines makes it difficult to fully forecast savings and revenue gains, for us it is clear AI is a valuable and critical part of the equation here as opposed to simply finding efficiencies upon merging business units.

Further to sourcing data, the implementation of generative AI models will help the industry in producing insights, automating processes, and both back-testing and forecasting. For firms regularly creating reports, updating financial models, and discussing investment decisions based on data, the added functionality will therefore reduce preparation time, enhance efficiency, and allow for quicker and better-informed decision-making. The processing of large volumes of data is complemented by a greater ability to identify patterns and propose data-driven next steps, all while augmenting the ability to socialise research and organise discussion through collaboration tools, such as ready-made speech-to-text meeting insights.

Personalised service enhanced with scale

The initial feedback from the launch of Microsoft’s Copilot has shown that AI tools can enhance user productivity significantly. However, we also believe that AI-driven productivity enhancements and data management will also drive entirely new workflows over the longer term. Copilot-like technologies can free employees up to perform more value-add duties, business units can concentrate on building out the next stage of AI-aided functionality, while the models themselves can trigger new business processes. Ultimately, this is an example of routes towards incremental growth, enabled by the combination of generative AI and proprietary datasets.

To this end, the integration of Microsoft’s AI tools with LSEG’s full data suite not only betters those existing practices but opens the door to new modalities of work, accessed at a price point that suits each user – upending the basis on which their main competitor has led the market despite a higher price tag.

We expect corporate adoption of AI tools and services will continue to be explored and ultimately actioned, either for disruptive or defensive purposes, and we continue to believe some of the best opportunities in technological evolution will be found in the second-order use of a technology to create value far beyond its invention or initial implementation. This requires an active approach to unearthing specific opportunities for revenue enhancement, better efficiency, or an improvement in the product value proposition. We believe our experience, understanding of technology innovation cycles, and ability to move quickly in a rapidly evolving environment, stand us in good stead to identify the current and next best beneficiaries in AI alongside the household technology names.

[1]Financial Technology, Data, and Expertise | Refinitiv

[2]The era of generative AI: Driving transformation in financial services - Microsoft Industry Blogs

[3]LSEG's mixed first-half results send shares to 4-month low | Reuters

[4]Introducing the new Microsoft Teams | Microsoft 365 Blog

[5]Bosses grumble at 9% fee hike for Bloomberg terminals: ‘It’s a chunky expense. I’m not thrilled.’ (fnlondon.com)

[6]LSEG Data & Analytics | Financial Technology & Data | LSEG