The Shape of ThingS To Come

Authored by: Robert Kluchko August 2017

Once viewed as little more than science-fiction fantasy, artificial intelligence (AI) now holds

the potential to reshape the relationship between humans and machines and drive a new

wave of economic growth over the next two decades. Here, we assess the financial and

social benefits AI could bring to the global economy and wider investment community.

The development of AI—computer systems that can think intelligently and learn as

humans do—continues to generate global excitement and controversy, dividing public

opinion. Some fear the development of intelligent machines poses a greater threat to

humanity than climate change.1 Others remain optimistic AI can bring huge benefits

including the scope to boost productivity, revolutionize the workplace and unleash a new

wave of global economic growth.

While AI seems revolutionary, so-called narrow or weak AI—involving non-sentient

artificial intelligence systems focusing on single dedicated tasks—has existed for well

over a decade. In 1997, Deep Blue, a chess-playing computer designed by IBM, famously

beat then world champion Garry Kasparov.2 More recently, IBM’s supercomputer Watson

“won” the TV quiz show Jeopardy! and has since been used to support fields as diverse as

health care and dress design.3

As AI continues to make strides into the home and workplace, global consulting firm

Accenture has said it believes the technology has the potential to double annual

economic growth rates across major economies including the U.S., Germany and Japan by

2035, adding an estimated $814 billion to the U.K. economy alone.4 The firm also predicts

AI can bring huge benefits including the scope to boost productivity, revolutionize the workplace and unleash a new wave of global economic growth.

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the impact of AI technologies and its integration with the internet of things (IoT) could

boost business productivity by as much as 40% and fundamentally change the way work

is done.

The Potential Economic Impact of AI*

Source: Accenture and Frontier Economics as of 9/28/16; Accenture report: “Why Artificial Intelligence is the Future of Growth;” www.accenture.com/futureofai. *Reflective of the growth rates Accenture/Frontier Economics analyzed.

We believe AI is a game changer and are closely watching developments in this field,

focusing on thematic technology strategies. When you consider some of the related

innovation taking place in areas such as so-called deep learning, predictive analytics, “big

data,” IoT and even virtual and augmented reality, you begin to realize the huge economic

and social potential AI carries.

Market BreakthroughThe swift adoption of smartphones and, more recently, wearable technologies is evidence

that technological barriers are disintegrating as innovation reshapes everyday life

worldwide and opens new channels for AI integration. Consumers now trust technology

with information and duties once reserved for banks and, in some cases, governments.

The development and speed of technological change are now moving forward

exponentially, and change that would once have taken over a century can be completed in

a fraction of that time. Connectivity across networks and devices is improving at a rapid

rate, and with underlying technologies becoming cheaper, its popularity is increasing.

This wide adoption of deep and reinforced learning technology is accelerating AI’s

growth trajectory. Smart homes and even smart cities are starting to develop with huge

implications for sectors such as health care and transportation. The way we live and work

could see fundamental change.

Smart homes and even smart cities are starting to develop with huge implications for sectors such as health care and transportation. The way we live and work could see fundamental change.

UnitedStates

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Sweden Netherlands

Germany Austria France Japan Belgium Spain Italy

Baseline AI Steady State

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2.1

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2.5

3.9

1.7

3.6

1.6

3.2

1.4

3.0

1.4

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1.7

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1.6

2.7

1.7

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1.8

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The Many Applications of AI: Consumer Products Benefiting from the Use of AI

At a household level, Amazon’s Alexa and the 2017 launch of Google Home5—AI speakers

able to control home appliances and respond to commands—in the U.S. and U.K. are just

two indications of the likely shape of things to come for AI applications in domestic life.

In industry, pioneering car manufacturer Tesla already applies AI to support the predictive

and self-driving features of some of its latest models,6 despite previous warnings by

founder Elon Musk that the technology was probably humanity’s “biggest existential

threat.”7 In February, car giant Ford Motor also announced plans to invest $1 billion over

five years in Argo AI, an artificial intelligence start-up focused on developing autonomous

vehicle technology.8

Hopes and FearsWhere there are opportunities, however, there are often threats. Some fear a more

widespread application of AI could replace human employees, creating damaging new

levels of unemployment. A 2017 report by consulting firm PwC9 found that up to 30%

of jobs in the U.K. alone were under threat from AI and that, in some sectors, up to half

the jobs could disappear.10 AI advocates insist it can bring genuine advantages, boosting

productivity and replacing routine, monotonous manual jobs with machines, while freeing

up workers for more sophisticated, creative and higher-skilled tasks. By maximizing

technological efficiencies, AI also has the potential to impact individual’s work/life

balance in a meaningfully positive way, particularly in the U.S. and Japan.

Consumer products benefitting from the use of AI

Industries creating new market opportunities with AI

CONNECTED CARS ANDAUTONOMOUS VEHICLES

SMART HOMES

AUGMENTED ANDVIRTUAL REALITY

3D SCANNING ANDPRINTING APPLICATIONS

VIRTUAL PERSONALASSISTANTS

WEARABLETECHNOLOGY

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U.K. and U.S. Jobs Potentially at High Risk of Automation

United StatesUnited Kingdom

PwC AGZFO

35

10

30

47

9

38

Pot

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obs

at H

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0%

10%

20%

30%

40%

50%

Source: PricewaterhouseCoopers analysis; FO; AGZ as of 3/24/17.

The likelihood of automation from robotics and AI appears highest in sectors such as

transportation, manufacturing, medical diagnostics, wholesale and retail and lower in

jobs requiring more empathy, interaction and human skills such as education, health and

social work and arts and entertainment.

Across the AI universe, computing strength, reach and capacity are expanding rapidly.

According to Accenture, global data has grown more than 50% annually since 2010 as

more devices around us have become connected.11 Against this backdrop, some analysts

predict AI could soon align with other related developments such as robotics and spawn a

connective revolution in the technology we use and how we interact with it.

Industries Creating New Market Opportunities with AI

Consumer products benefitting from the use of AI

Industries creating new market opportunities with AI

CONNECTED CARS ANDAUTONOMOUS VEHICLES

SMART HOMES

AUGMENTED ANDVIRTUAL REALITY

3D SCANNING ANDPRINTING APPLICATIONS

VIRTUAL PERSONALASSISTANTS

WEARABLETECHNOLOGY

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Bridging New FrontiersAI could, over time, also lead to the creation of entirely new markets that wouldn’t

previously have been feasible. From a social and employment perspective, the potentially

transformative powers of automation and AI are so great they have also prompted some

policymakers to consider devising forms of universal basic income or even a “robot tax”

to support those whose jobs have been automated.12 From a policy perspective, AI holds

potential for governments to develop new digital infrastructure and skills and is winning

growing support from policymakers across developed nations. February saw the British

government pledge £17.3 million for AI and robotics research to be carried out by U.K.

universities as part of its wider digital strategy.13

What Is Artificial Intelligence Technology?

In March, the Canadian government separately announced funding of a Pan-Canadian

AI Strategy for research and talent that will cement Canada’s position as a world leader

in the field.14 The C$125 million strategy is designed to attract and retain top academic

talent in Canada, increase the number of post-graduate trainees and researchers

studying AI and promote collaboration between Canada’s main centers of expertise in

Montreal, Toronto-Waterloo and Edmonton.

The U.S. government also remains supportive of developments in AI and last year

published a major report Preparing for the Future of Artificial Intelligence, which included

recommendations for specific further actions. A companion National Artificial Intelligence

Research and Development Strategic Plan was also released, laying out a strategic plan for

federally funded research and development in AI.15

Analyze Dataand integrating new information from its environment via:

Offer Predictive Insightsand make decisions

Advise On Which Action To Be Takenand implement those decisions in a way that is trusted

» DEEP LEARNING

» IMAGE RECOGNITION

» MACHINE LEARNING (DATA MINING)

» NATURAL LANGUAGE GENERATION OR PROCESSING

» REASONING OR EVIDENCE BASED

While exact definitions of AI Technology vary widely, we define it as technology that can:

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Investment PotentialWhile accurately valuing potential investment opportunities in the AI space can prove

somewhat challenging, investment interest in the sector—and in companies that utilize

AI—is growing among both institutional investors and venture capitalists, with some even

seeking ways to apply AI to their investment management techniques and strategies.16

According to figures from software and data analysis specialist CB Insights, global

artificial intelligence equity funding surpassed $6.6 billion across 1,241 deals from 2011

to the first quarter of 2016.17

We have identified an AI investment universe about $14 trillion in size, including 750

stocks, mainly comprised of U.S. companies. We anticipate exponential growth in the

market with the potential for increased AI application in areas such as retail,

transportation, health care, manufacturing and agriculture. The development and

adoption of so-called natural language processing, or conversational user interfaces,

and its inclusion in everyday items such as smartphones is a likely driver of future

market growth.

Much will ultimately depend on how humanity manages the development and

implementation of AI. While doubts persist about its potential dangers, AI developers

could find themselves increasingly walking a tightrope between implementing its

benefits and addressing any moral and ethical concerns.

We are going to places we haven’t gone before, and in doing so, unanswered questions

come into play on ethical dimensions—how much free will AI embodies in machines and

what this is used for. These are topics that will come up more frequently as AI becomes a

part of our daily lives. The hope is we can exploit the potential benefits of AI and harness it

in a way that fosters not only greater prosperity but also helps us to enjoy a better quality

of life.

We anticipate exponential growth in the market with the potential for increased AI application.

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End Notes1The Guardian. Artificial intelligence: ‘We’re like children playing with a bomb’. 6/12/16.2BBC. Artificial Intelligence dictionary: How to speak AI. 9/13/15.3MIT Technology Review. IBM’s Watson is everywhere – but what is it? 10/27/16.4Accenture. Why artificial intelligence is the future of growth. 9/28/16.5Telegraph. Google Home: AI speaker to launch in the U.K. next week. 3/28/17.6Forbes. Powerful Examples Of Artificial Intelligence In Use Today. 1/10/17.7The Guardian. Elon Musk: artificial intelligence is our biggest existential threat. 10/27/14.8Telegraph. How Ford will create a new generation of driverless cars. 2/27/17.9PwC. Consumer spending prospects and the impact of automation on jobs. 3/23/17.10BBC. Robots to affect up to 30% of U.K. jobs, says PwC. 3/24/17.11Accenture. Why artificial intelligence is the future of growth. 9/28/16.12The Guardian. Robots could displace 10m British workers. 3/24/17.13BBC. U.K. robotics research gets £17.3m pledge. 2/26/17.14Canadian Institute for Advanced Research (CIFAR) news release. Canada funds $125 million Pan-Canadian

Artificial Intelligence Strategy. 3/22/17.15The White House. The Administration’s Report on the Future of Artificial Intelligence. 10/12/16.16Fortune. Robots Are Replacing Humans at All These Wall Street Firms. 3/30/17.17CNBC. Here are the best stock plays for artificial intelligence bulls. 11/3/16.

DisclosureAny statements of opinion constitute only current opinions of The Boston Company Asset Management, LLC (TBCAM), which are subject to change and which TBCAM does not undertake to update. Due to, among other things, the volatile nature of the markets and the investment areas discussed herein, they may only be suitable for certain investors. This publication or any portion thereof may not be copied or distributed without prior written approval from TBCAM. Statements are correct as of the date of the material only. This document may not be used for the purpose of an offer or solicitation in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or not authorized. The information in this publication is for general information only and is not intended to provide specific investment advice or recommendations for any purchase or sale of any specific security. Some information contained herein has been obtained from third-party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information. Listed securities are being presented for illustrative purposes only. This is not a recommendation to buy, sell, or hold these securities. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.

Robert KluchkoDirector, Portfolio Manager

Robert is a portfolio manager and a senior quantitative analyst at The Boston Company, bringing extensive global and emerging equity experience and insights to the investment process. He serves as co-portfolio manager of the thematic Global FinTech Equity and Internet of Things strategies as well as the US Disciplined Small Mid Cap strategy. Robert joined The Boston Company from our affiliate Standish Mellon Asset Management in 2003 when the Standish equity investment teams merged with The Boston Company. Previously at The Boston Company, Robert was a research analyst for the US Large Cap Core team and the Market Neutral strategy. Preceding that role, he worked as an equity research associate at Standish Ayer & Wood. He also served as a calculation analyst at John Hancock Financial. Robert received a B.A. from Canisius College and an M.B.A. from the Questrom School of Business at Boston University.

www.thebostoncompany.com