Quantitative Equity Research-Quantified Thematics AI Infrastructure Best Positioned vs. Service Disruption

Summary of Key Points from the Conference Call Industry Overview - The focus is on the AI industry, specifically the themes of AI Adopters and AI Infrastructure. Concerns regarding AI disruption are affecting various service industries, including financial advisory and brokerage [2][4]. Core Insights - AI Disruption Concerns: Market fears about AI disruption have expanded beyond software to include a broader range of service industries. This has led investors to reassess the earnings durability of service-oriented business models, impacting their performance [2]. - Service Exposure: The concept of 'service exposure' has emerged as a critical factor influencing thematic performance. The analysis categorizes 25 GICS Industry Groups into Service and Non-Service categories, revealing that portfolios with higher service exposure have underperformed [3]. - Performance Metrics: The AI Adopters sub-theme has a service exposure of 53%, significantly higher than other themes. This high exposure introduces uncertainty regarding competitive dynamics and pricing sustainability, which is reflected in current market pricing [4]. - AI Infrastructure: In contrast, the AI Infrastructure theme has the lowest service exposure at 14% and has shown the strongest year-to-date performance. This theme is less vulnerable to service disruption risks and benefits from ongoing capital expenditure and demand for compute, semiconductors, and enabling hardware [5]. Quantitative Analysis - Six quantitative lenses are used to evaluate the attractiveness of themes: 1. Information ratio 2. Earnings revision breadth 3. Bottom-up estimates 4. Valuation 5. Mutual fund positioning 6. Factor exposures - AI Infrastructure stands out with strong risk-adjusted performance, favorable earnings revisions, and positive fund positioning among outperforming mutual funds [6]. Additional Insights - The year-to-date performance of thematic portfolios is inversely related to their service exposure, indicating that lower service exposure correlates with better performance [3][8]. - The report emphasizes the importance of being selective within the AI Adopters theme, recommending a focus on companies that possess pricing power to navigate the uncertainties introduced by AI adoption [4]. Conclusion - The analysis indicates a clear distinction between the performance and risk profiles of AI Adopters and AI Infrastructure. Investors are advised to consider service exposure as a key factor in their investment decisions within the AI sector [2][5].