Is the AI Boom a Game-Changer for Pension Funds—or Just Smoke and Mirrors? Buckle up, because the artificial intelligence frenzy is dividing investors like never before, and Michael Taylor from Baillie Gifford has some eye-opening insights on where the real opportunities lie.
December 5, 2025
Picture this: The rush into artificial intelligence investments has investors in a frenzy, with even the most experienced pros wondering if we're witnessing a groundbreaking shift in the economy or simply chasing an overpriced illusion. But according to Michael Taylor, a seasoned investment manager and partner at Baillie Gifford, fixating on whether AI is a "bubble" might be missing the bigger picture entirely. In fact, he calls it a paradoxical notion, suggesting that the technology's true potential could be revolutionary, reshaping industries from healthcare to scientific discovery by harnessing massive amounts of data and smart automation.
Taylor paints an optimistic view, emphasizing that AI's impact isn't fleeting—it's structural and built to last. He points out that the tech's ability to tackle complex problems efficiently makes it indispensable in fields like finance, where algorithms can predict market trends, or medicine, where AI might accelerate drug discovery by analyzing billions of data points. This isn't just hype; it's about real, transformative demand that's only starting to unfold. As Taylor puts it, the industry has been held back by chip shortages, but as use cases expand—from self-driving cars to personalized education platforms—we're looking at a bright, long-term horizon.
But here's where it gets controversial... Not every company riding the AI wave justifies its lofty stock price, Taylor warns. Instead of blindly jumping into the hype, savvy investors should focus on discernment—cherry-picking the gems rather than spraying investments across the board. After years of dominance by a handful of tech giants, the playing field is broadening, giving active fund managers like Taylor a chance to spotlight hidden treasures in the AI ecosystem that others overlook.
For Baillie Gifford, the sweet spot is spotting companies that are tough to duplicate and hold key positions in the AI pipeline, where profits tend to pile up. Take Nvidia and TSMC, for instance—they're gatekeepers in the world of advanced chip creation and production. Nvidia excels at designing top-tier graphics processing units (GPUs), those powerful chips that handle the heavy lifting in AI computations, like training neural networks to recognize patterns in images or language. TSMC, on the other hand, is the unrivaled factory churning out these chips. As Taylor notes, "There is no other company that can design cutting-edge GPUs like they can. There are no other company that can make them like TSMC, which is the foundry." It's a classic bottleneck, where specialized expertise creates unbeatable advantages.
Yet, Taylor cautions that while supply can ramp up, true pricing power often resides elsewhere. That's why his team is scouting less flashy parts of the chain. And this is the part most people miss... The most attractive bets might not be the headline grabbers but the unsung heroes enabling the whole operation. He highlights two prime areas ripe for investment.
First up: The semiconductor ecosystem, including firms that craft chips or supply the ultra-precise machinery needed to build them. These aren't just suppliers; they're the backbone of AI's hardware, armed with strong barriers to entry that protect their profits. While Nvidia and TSMC are famous choke points, Taylor's equally excited about niche players like Japan's Disco, a leader in the specialized tools for slicing, grinding, and polishing silicon wafers—the thin, flat disks of material that form the base of chips. This process demands extreme precision; even a tiny imperfection can ruin a chip's performance, crucial for the high-speed, energy-efficient semiconductors powering AI devices. Disco's monopoly here gives it significant leverage, as Taylor explains: "While the cutting of silicon wafers is really niche, having totally smooth silicon is going to be essential to get the sort of advanced semiconductor silicon chips that you require to enable the most important technology," and Disco "dominates that market."
Extending this logic, Taylor sees opportunities further along the chain, especially in supporting infrastructure that AI's data-heavy operations demand. Consider Comfort Systems, which specializes in installing HVAC (heating, ventilation, and air conditioning) systems. With AI data centers guzzling electricity and producing intense heat—like running thousands of computers 24/7—these facilities need robust cooling to avoid meltdowns. Taylor notes that skilled labor shortages in the U.S. are making expert installations a scarce resource, turning Comfort Systems into an essential player. It's a perfect fit for what Baillie Gifford seeks: companies that enable AI without being directly in the spotlight.
Taylor also shines a light on software and platforms that dominate distribution or cleverly integrate AI into their own workflows. Here, the big winners are the cloud titans and chip renters powering the ecosystem. "Some of the big beneficiaries at the moment will be those that rent the chips to the startups that are experimenting," Taylor says, naming Microsoft Azure, Amazon Web Services, and Google Cloud as the go-to platforms where most AI innovations launch. By investing in these hyperscale providers and their silicon suppliers, you can tap into a broad spectrum of AI progress without betting on unproven apps—think of it as owning the stage rather than guessing which actor will steal the show.
On the home front, Taylor cites Shopify as a standout example. This global e-commerce giant has pivoted away from traditional shipping hassles to embed itself in an AI-driven retail future. By leveraging machine learning for personalized shopping experiences or automated inventory, Shopify positions itself as a key link in the chain, benefiting from AI's growth.
Moreover, AI's reliance on physical worlds—like power grids and data centers—makes infrastructure experts valuable. Taylor praises Brookfield for its prowess in managing assets through economic ups and downs, a skill that's gold in a world where AI could cause fluctuating demand for energy and services. Imagine data centers popping up everywhere, straining power supplies; companies that navigate these cycles smoothly will thrive.
Even more intriguingly, Stella-Jones, a supplier of wood products like utility poles, stands to gain indirectly. With North America's aging electrical grid needing upgrades and the push toward renewable energy sources such as solar and wind farms, Taylor anticipates a prolonged boom in infrastructure reinforcement. Data centers, AI's hungry hubs, will only amplify this need—think of it as fortifying the roads for a fleet of high-speed vehicles.
"What we're looking for are companies that have one of two things," Taylor summarizes. "They have advantage distribution or can use it in their own internal operations… Part of the picture here is that we’re trying to pick stocks that are unique and hard to replicate, but at the moment they're enabling the transition. Where it's a little uncertain is how this technology is going to be used and who the winners from that will be."
Ultimately, Taylor is bullish on crafting long-term portfolios that mix carefully selected AI winners with diverse growth narratives, avoiding over-reliance on the obvious tech behemoths. Amid economic uncertainties, he believes anchoring in true structural trends—like AI alongside other enduring shifts—can provide stability and solid returns. "We think it's possible today to put together a portfolio that can really deliver strong earnings growth over the coming five years and therefore deliver for your underlying clients," he concludes.
But is Taylor's selective strategy the smart play, or should we all pile into the big names? And here's a controversial twist: Could AI's hype actually be underestimating its risks, like job displacement or ethical dilemmas? Do you see AI as a transformative force or an overhyped distraction? Agree or disagree—drop your thoughts in the comments and let's discuss!
