A new generation of portfolio strategists is coalescing around what has been nicknamed the 'halo trade': allocating capital to businesses positioned at the periphery of the artificial intelligence boom that benefit from AI demand without being directly exposed to the winner-takes-most risks of platform competition. The approach is reshaping how UK and global investors think about technology-era diversification.

An old investment problem in new clothes

The artificial intelligence capex cycle has driven one of the most concentrated equity rallies in recent memory, with a handful of US mega-cap technology companies accounting for a disproportionate share of index returns. For investors, the dilemma is familiar. Participate, and risk exposure to a small group of securities whose valuations have expanded in ways that may or may not be justified by future cash flows. Abstain, and watch the portfolio lag benchmarks while the underlying theme continues to grow. The so-called halo trade offers a middle path by identifying businesses that benefit from AI-related demand without depending on the success of any single AI platform.

The term has spread through investment commentary, broker notes and portfolio manager interviews over the past year, often defined differently by different users. At its core, the halo trade captures the idea that a large fraction of AI-related spending flows through suppliers, infrastructure providers, enabling industries and industries made more productive by AI adoption, rather than to the platform winners themselves. Positioning in these adjacent businesses offers exposure to the theme with a reduced dependence on the ultimate competitive outcome.

For UK-based investors, the halo trade is particularly relevant because the FTSE indices contain relatively few pure AI platform plays. The structural under-representation of mega-cap technology in the UK equity market has been a persistent headwind, but the halo framing offers a way of participating in the AI cycle through UK and international equities with more diverse business profiles. Global funds managed from London, including those at Baillie Gifford, Schroders, M and G and Abrdn, have each developed distinct approaches to the theme.

The layers of the halo

Thoughtful application of the halo trade involves recognising that AI-adjacent opportunities exist across several distinct layers of the economy. Each layer has its own investment characteristics, risk profile and horizon.

Infrastructure enablers: power, cooling, real estate

The first layer consists of infrastructure required to support AI compute at scale. Data centre capacity, with its specific requirements for power density, cooling, connectivity and physical security, has seen unprecedented demand growth. Companies building, owning or servicing data centres have been natural beneficiaries, as have providers of grid connections, backup power systems, high-density cooling solutions and speciality construction. Within the UK, real estate investment trusts with data centre exposure and engineering services firms involved in high-specification builds have attracted attention.

Power generation and transmission is an adjacent area. The electricity demand from AI compute is genuinely significant and is reshaping the load profile of grids in certain regions. Utilities, independent power producers and renewables developers positioned to supply the new demand stand to benefit. In the United States, the discussion of nuclear power, including small modular reactors, as a solution for hyperscaler power requirements has gained prominence, and UK investors with exposure to the sector have been evaluating equivalent domestic opportunities.

Semiconductor supply chain beyond the headline names

The second layer is the semiconductor supply chain. While the design and manufacture of leading-edge accelerators is concentrated in a small number of businesses, the ecosystem that supports them is broader. Manufacturing equipment providers, materials suppliers, test and packaging companies, and specialist logistics providers each have roles to play. For UK investors, direct exposure to the semiconductor equipment industry is limited on the FTSE, but global funds and sector-specialist ETFs offer access to the theme.

Enterprise software and productivity tools

The third layer is enterprise software, where AI features are increasingly embedded in products across categories from customer relationship management to design, coding, finance and human resources. Companies able to layer AI capabilities onto established enterprise relationships benefit from both new revenue streams and improved retention. Sage Group on the FTSE offers a UK angle on this theme, and global enterprise software names such as Microsoft, Salesforce, Adobe and SAP feature in many UK-managed global funds. The assessment of genuine competitive advantage within this layer requires detailed understanding of how AI is actually being deployed in specific categories.

AI-enhanced operating companies

The fourth layer, and arguably the most interesting for long-horizon investors, is companies outside the technology sector whose operating performance improves materially through AI adoption. Logistics operators optimising routing and warehousing, insurers refining underwriting and claims processing, banks automating compliance and customer service, and industrial companies deploying predictive maintenance are examples. The investment thesis here depends less on specific product purchases and more on operational leverage realised over time. For UK investors, this layer includes numerous FTSE constituents whose AI strategies are not headline features of their equity stories but nonetheless material to their medium-term performance.

Why 'AI-proof' matters

The accompanying concept of 'AI-proof' assets refers to businesses whose competitive positions are resilient to AI-driven disruption. These might include service businesses with deep physical footprints, infrastructure assets whose moats are regulatory or locational rather than informational, regulated utilities, and certain brand-driven consumer businesses. The thinking is not that AI has no effect on these businesses but that their core value proposition is not directly challenged by the broad availability of generative AI.

The concept has particular salience given concerns about sectors where generative AI poses clear substitution risks. Content generation, commoditised software development, certain aspects of legal and accounting work, and a range of information services face more direct competitive pressure. Investors are re-examining the terminal value assumptions embedded in valuations of businesses in these areas and, where assessments have moved, rotating into more resilient sectors.

The labour and productivity angle

At a deeper level, the halo and AI-proof concepts touch on the broader question of how AI will reshape the labour market, productivity growth and the distribution of economic returns. If AI delivers on even a fraction of the productivity gains being claimed by its most enthusiastic supporters, the effects will be felt across the economy. Identifying businesses that capture a disproportionate share of those gains, either through operational leverage or market positioning, is the essential task of equity investing in the AI era, and the halo framework is one useful lens for doing so.

UK-listed beneficiaries and global exposures

Within the FTSE, several businesses feature prominently in halo trade discussions. RELX, with its information and analytics businesses in legal, scientific, risk and exhibitions, has long been seen as a beneficiary of data and analytics trends, and its integration of AI features into its products has been a consistent theme. Experian and Equifax operate in a similar space. Sage Group offers enterprise software exposure. Diploma, Bunzl and other FTSE distribution businesses benefit from supply chain optimisation themes. Infrastructure names including National Grid and SSE have exposure to the power demand side of the story.

Global exposures accessed through UK-managed funds cover the wider technology landscape. Broadcom, TSMC, ASML, Applied Materials, Arista Networks, Vertiv, Eaton and the major hyperscalers all feature in halo trade portfolios. Access routes include both actively managed global equity funds and thematic ETFs, with the latter offering lower costs but sometimes less rigorous selection. Investor choice between these access routes is itself a live topic in UK wealth management, with the appropriate balance depending on risk appetite, time horizon and fee sensitivity.

Valuation discipline

A critical feature of a disciplined halo approach is valuation rigour. It is easy for the concept to degenerate into a broad justification for paying high multiples for any AI-adjacent business, and such an approach would undermine the original rationale for favouring adjacent exposures over direct platform bets. The most effective practitioners maintain conventional valuation frameworks, including discounted cash flow analysis, multiple comparisons and scenario-based assessments, rather than relying on narrative alone. The goal is to identify businesses whose fundamentals justify current prices even under conservative assumptions about AI-driven upside.

Risks and blind spots

The halo trade is not without risk. Infrastructure providers face execution challenges, with the speed of data centre build-out constrained by power availability, planning approvals and skilled labour. Power equipment providers may face boom-bust cycles if demand forecasts prove over-stated. Enterprise software businesses need to demonstrate that AI integration delivers real customer value rather than marketing-led feature additions. AI-enhanced operating companies need to actually deliver the productivity gains implicit in their valuations.

Concentration risk is a further consideration. Even a well-diversified halo portfolio can become effectively concentrated if a small number of businesses account for the majority of AI-linked value creation across their respective layers. Investors should monitor position sizes relative to conviction and ensure that diversification across layers is real rather than nominal. The correlation structure within the halo trade can also shift in response to broader market conditions, with all AI-exposed names moving together during risk-off periods.

Policy and regulatory risk

AI-related regulation is evolving rapidly. The EU AI Act, UK policy statements and US regulatory developments each shape the operating environment for AI businesses and their suppliers. Compliance costs, product restrictions and liability frameworks could alter the economics of specific layers of the halo. Anti-trust scrutiny of the major platforms also has implications for the wider ecosystem, with potential impacts on suppliers, customers and competitors.

Outlook: a framework, not a formula

The halo trade is most usefully thought of as a framework for structuring AI exposure rather than a specific recommendation. Different investors will populate the framework differently, reflecting their views on the probable path of AI adoption, the competitive dynamics of specific sectors and the appropriate level of risk. The framework's value lies in its discipline: it forces investors to consider the multiple layers through which AI affects business performance, rather than defaulting to exposure through a handful of mega-cap names.

For UK-based investors and wealth managers, the halo trade offers a constructive response to the underrepresentation of AI pure plays in domestic indices. Rather than lament the absence of domestic platform winners, investors can identify the FTSE and global businesses whose fundamentals and competitive positioning benefit from the AI cycle, and construct portfolios that capture the theme with appropriate diversification. As the AI cycle matures, the halo framework is likely to evolve, with different layers gaining prominence as the technology diffuses. What will not change is the value of a structured, valuation-disciplined approach to a theme that is simultaneously the most significant investment opportunity and the most concentrated source of risk facing global markets. The halo trade is one of several such frameworks, and its success will depend on rigorous execution rather than simple subscription to the label.