Fidelity's Welo: Forget Tech; AI to Have Greater Impact on Industrials

July 12, 2018 — 2:06 PM EDT

Technology companies may believe that they have cornered the market for artificial intelligence, but investors may want to set their sights toward industrial companies to get some AI exposure.

That's according to Tobias Welo, manager of the Fidelity Select Industrials Portfolio, who sees AI as a long-time driver of growth for the industrials sector. "If you look at who the winners and losers are in robotics, it was won by the industrial companies," said the Fidelity Investments portfolio manager in a recent interview with Investopedia, noting that artificial intelligence plays a big role in robotics and automation. "These traditional industrial companies – whether its Honeywell International Inc. (HON) or Rockwell Automation Inc. (ROK) – will continue to be leaders even as robotics and automation evolves."

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AI Will Drive Productivity for Industrial Companies

One of the reasons Welo thinks AI will be a big opportunity for industrial companies is that it will boost productivity, which means less money being wasted. "Productivity has declined some, and AI and data analytics will be the next leg of U.S and global productivity," said Welo. "The last wave of productivity for industrial companies was moving manufacturing to emerging markets to reduce the cost of labor. The next leg is AI."

Welo noted that incorporating AI into industrial companies' processes will offset higher inflation, notably wage inflation. After all, downtime is extremely costly for industrial companies, and if AI-enabled sensors and software can run some processes more efficiently, it could help companies minimize this issue. The fund manager pointed to a gas turbine as one example. If a company can use AI to anticipate a potential failure, that could bring a massive benefit to that business. Among the AI applications, Welo said that the most promising ones are those that help industrial companies produce better-quality products at a lower cost, improve on-time deliveries and reduce downtime.

Searching for AI Industrial Winners

As a result of his bullishness on the impact that AI will have on industrials, Welo said that Honeywell International is a top 10 holding in the Fidelity Select Industrials Portfolio. Honeywell is leading in data warehouse automation, with that business seeing revenue growth north of 20%, not to mention the company's high margins. "Honeywell has always been a leader in automation and investing in software. I think this put them in a really good position," the fund manager said. "I'm trying to identify companies like Honeywell that have been investing and leaders in this area."

Another company in the fund that is benefiting from AI is Deere & Company (DE), which makes agricultural, construction and forestry machinery, among other things, and is known for its John Deere tractors. In September, Deere paid $305 million to acquire Blue River Technology, a maker of crop-spraying technology that relies on machine learning, as a way to enter the AI agricultural market. That investment was a long-term play given the company's technology can detect different types of weeds and pests while operating a tractor. "Agriculture is always focused on the environmental implications. They don't want to over fertilize or pesticide. This is a small investment but with very long-term implications" said Welo.

Ultimately, Welo said that he is trying to pick those industrial companies that will benefit from AI over the long run, and he has a time horizon of three to five years, if not more, for the investments in the fund. Other top holdings in the Fidelity Select Industrials Portfolio include United Technologies Corporation (UTX), General Electric Company (GE) and Northrop Grumman Corporation (NOC). The fund manager noted that he is looking to find the big areas of the market and the big companies that play in those areas as well as the smaller businesses that stand to benefit from the technology. "I'm looking across all the companies and saying who is making the right investments and who do I think will win."