Investors looking to identify sectors where artificial intelligence (AI) is less likely to cause disruption should consider companies with heavy assets and low obsolescence (HALO), which is emerging as a new investment theme, an Australian asset management firm has stated.
ECP Asset Management investment principal Annabelle Miller noted AI has impacted technology-based sectors, but more traditional asset-heavy markets will not be as heavily affected and still offer solid returns.
“In recent years, asset-light companies, such as software and services, demonstrated the ability to generate revenue and accelerate growth without the need for physical assets and infrastructure,” Miller said.
“AI has proven it can easily disrupt companies built on intangible intellectual property, particularly in the software space.
“What AI cannot do is disrupt those businesses which monetise services through a scaled physical asset or piece of infrastructure. Think about pipelines, powerlines or businesses monetising large installed bases of equipment.”
She indicated sectors where HALO opportunities exist include logistics and salvage, industrial engineering, life sciences, semiconductors, materials and mining, and consumer staples.
“As AI continues to disrupt, there are companies which investors should consider that have low risk of AI replication or disruption and high barriers to entry,” she added.
“Furthermore, many of these businesses will benefit from integrating AI tools into their workflows to improve efficiency and productivity of their physical asset base.”
An example of a HALO-style business is German life sciences firm Sartorius Stedim Biotech, which does not produce pharmaceuticals, but partners with drug companies to assist in the manufacturing process for them.
According to Miller the firm was involved from the clinical development phase through to commercial production and thus was embedded in the process, and regardless of how many drugs were formulated by AI, they still had to be manufactured in a physical facility.
Another example she identified was Taiwan Semiconductor Manufacturing Company (TSMC), which holds a monopoly in the production and development of advanced semiconductors, which have widespread uses, including in AI data centres.
“While semiconductor designs change, the need for a high-end foundry does not. TSMC is entrenched in their customer’s product roadmaps, locking them into their physical manufacturing ecosystem,” she acknowledged.