This article first appeared in Personal Wealth, The Edge Malaysia Weekly on September 4, 2017 - September 10, 2017
Robotics is poised to disrupt a broad spectrum of industries, particularly the consumer sector, as the demand for applications such as self-driving cars and home devices increases globally. This presents an investment opportunity for those who wish to take advantage of this growth.
A June report by the Boston Consulting Group (BCG) estimates that the global market for robotics will be US$87 billion by 2025, which is an upwards revision from its previous projection of US$67 billion in 2014. “Why the market is growing so strong overall is because the technology is advancing significantly while costs have been drastically reduced. That is an important requirement,” Daniel Küpper, partner and managing director at BCG and one of the authors of the report, tells Personal Wealth in a recent interview.
As many countries face the challenges of ageing societies and high labour costs, the need to automate in industries becomes more prominent. Küpper says the trend is already observed in countries such as China and India.
“In countries like China, they have made huge progress in robotics because they want to keep their competitiveness and they realise that salaries are skyrocketing. So, they are looking for an opportunity to improve productivity, and that priority is made clear in the Made in China 2025 strategy. As the cost of robotics continues to fall, from a financial perspective, countries such as India (with low labour costs) will also have a clear business case for going into robotics,” he says.
Initially, the interest in robotics was limited to the industrial and military sectors where robots execute dirty, repetitive and hazardous tasks. But with falling prices and rapidly advancing capabilities, robots have penetrated virtually every sector, says the BCG report. Industries from retail and healthcare to food processing and agriculture may see more robotics-fuelled changes in the coming years.
The ability of automation to drive productivity and save labour costs has spurred employers and governments to invest in robotics. A January report by the McKinsey Global Institute estimates that automation will raise productivity growth globally by 0.8% to 1.4% annually.
Almost every occupation has a partial automation potential, McKinsey points out, and close to US$15 trillion in wages can be saved if half of all activities people are paid to do currently are done by robots.
THE OPPORTUNITY TO INVEST
Investors are taking note of the transformative potential of robotics. Already, there has been record inflows into robotics-themed exchange-traded funds (ETFs) and mutual funds, from an estimated US$5 billion to US$9 billion over the last 12 months, according to an April report by Bank of America Merrill Lynch.
The US-based ROBO ETF was the first ETF to track robotics and automation stocks. It was listed on the Nasdaq in 2013. The ETF tracks the ROBO Global Robotics and Automation UCITS Index, which currently has more than US$1.8 billion tracking it. The index is listed in five European markets as well as South Korea and Taiwan.
According to ROBO Global — the provider of the ROBO Global Robotics and Automation UCITS Index — in its most recent report, its index is up 26% year to date. This compares with the Nasdaq, MSCI All Country World Index and S&P 500, which rose 18%, 12% and 10% respectively during the period.
ROBO Global CEO Richard Lightbound says investing through an index gives you broader exposure to the industry compared with stock picking. “We don’t think you should get overexposed to any particular company, but you should make sure that you have end-to-end coverage of the ecosystem because there are going to be some enormous winners here. But frankly, who knows what that is going to be right now?
“That is what we try to do with the index. Rather than adopt an active strategy, we thought it was best to go the index route and really understand the opportunities and spread our bets across the different technology areas, applications and sub-sectors. Having done that, we then looked at the different markets.”
Lightbound points out that so far, eight companies on the index have been acquired by other players. This indicates that ROBO Global has chosen the right stocks to track.
The ROBO Global Robotics and Automation UCITS Index comprises 40% bellwether companies, which are established players in their field, and 60% non-bellwether companies, defined as those with a distinct portion of their business and revenue in robotics and automation with huge growth potential.
“What is most interesting for investors is the bucket of companies we call non-bellwethers. They tend to be much smaller but emerging companies, and they are difficult to find unless you really understand the robotics and automation industry,” says Lightbound.
“These companies are less covered by the financial community, and they are often misunderstood unless you have a robotics expert looking at them. We feel that investors should not just get exposure to pure-play robotics companies, they should also understand the non-bellwether category and get exposure there as well.”
ROBO Global’s index currently tracks 83 stocks, 77% of which are small and mid-cap counters. It also has a database of almost 1,000 listed and unlisted companies globally that it monitors.
“A lot of these private companies are potential takeover targets and some of our index and non-index members may also be initial public offering candidates at some stage. We are tracking them to understand the trends in the industry because if a lot of funding is going to a particular technology in the private industry, it probably means it is going to be very relevant to the overall industry. So, we may look at the public companies already in that space,” says Lightbound.
ROBO Global charges a management fee of 0.95%, which is higher than most ETF providers. Rahul Bhushan — product specialist at ETF Securities, the provider of the ROBO ETFs in Europe — says this is because it recently switched from a swap-based ETF to a physical replication based on investor demand.
“That has been positive from the type of responses we have seen from investors. It is also important to remember that ultimately, this is quite a specialist ETF, so we are not really in the business of fee wars with other ETF providers. What we really feel here is that there is a robust degree of intellectual property embedded in the index by way of the ROBO Global team and that is really the key selling point,” says Bhushan.
Other ETFs that are tracking the robotics and automation sector include the Global X Robotics and Artificial Intelligence ETF and BlackRock’s iShares Automation and Robotics UCITS ETF, which were launched last year. The Global X ETF, which is listed on the Nasdaq, tracks 30 stocks and has US$175.79 million under management while the BlackRock ETF tracks 103 counters and has a fund size of US$707.21 million.
The decision whether to invest through robotics-themed ETFs or actively managed funds depends on investors’ resources and risk appetites. Investors who prefer a more focused approach may find an actively managed fund more suitable.
Pictet Asset Management, for instance, has an actively managed robotics sub-fund, Pictet — Robotics, which it launched in 2015. The sub-fund is registered in Austria, Belgium, Cyprus, Denmark, Finland, France, Germany, Greece, Italy, Liechtenstein, Luxembourg, the Netherlands, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the UK. Meanwhile, European
multi-specialist asset manager Candriam Investors Group launched a Robotics and Innovative Technology Fund last year. It is available in Austria, France, Germany, Italy, Luxembourg, the Netherlands, Portugal, Spain and the UK.
INVESTMENT RISKS
Those who wish to ride the robotics and automation investment theme should be aware of the risks involved and carefully select companies with potential.
Julian Chillingworth, chief investment officer at UK-based Rathbone Unit Trust Management, compares the current popularity of robotics and technology to the dotcom boom at the turn of the century, which saw many investors put money in internet start-ups that did not actually have any revenue. So, when the stock market crashed, the investors lost out as well.
“Right now, technology is probably as dominant as it was in the steam age or the dotcom boom. IT makes up almost a quarter of the S&P 500 index, where the five largest companies are computing giants and online innovators. These businesses are central to the accelerating changes in people’s lives and marketplaces around the world. But the suddenness of their rise hints at how precarious their dominance may turn out to be,” says Chillingworth in an email interview.
He adds that investors should remember that new technology with fantastic demand and prospects does not mean it will be a profitable investment. “At the moment, technology has become the place for venture capitalists, stock market investors and new graduates. This attention means many founders can set hefty values on their creations — and investors will jump at it.
“This phenomenon can be seen in public markets too, with some promising and exciting tech firms hitting eye-watering levels, despite burning through cash quicker than a young football star. These blue-sky ideas can suck up a lot of money. Past experience tells us that some will make it very big, but many others will fade into obscurity (or even go bang overnight).”
He suggests that investors diversify their holdings and do their due diligence before putting money into such stocks. “Spreading your investment to include interesting start-ups, reigning industry behemoths and different technology sectors is a good idea. Also, you should put a lot of thought into the business model of the latest tech darling — Is it truly unique? Does it have an enduring advantage, or could it be overtaken or competed into obsolescence?
“Finally, can it actually make money? And is the company structured in a way that it allows minority shareholders to share in the proceeds?”
Chillingworth recommends using actively managed funds over ETFs. “That is because passive options, such as market-capitalisation-weighted ETFs, would be forced to build larger and larger positions in yesterday’s winners and those blue-sky ventures that are pushed ever higher by investors’ hopes and greed. Again, because of the increasingly binary outcomes in this sector, we feel it is pivotal to have the ability to assess an investment and avoid it if the risks are too great.”
Some observers have commented that indices, such as that provided by ROBO Global, may have low liquidity because many of the companies they track have low trading activity. According to the index provider, the ROBO Global Robotics and Automation UCITS Index only has 1.78% of overlap with the S&P 500 index and 1.8% with the MSCI World Index.
Lightbound says the company guards against such liquidity issues by adding strict filters to the member selection process. “We actually have quite a high liquidity filter already within the index methodology. Any new companies coming into the index must have a three-month daily average volume of more than US$1 million, so it is quite a high bar. We work very closely with all of our major partners such as ETF Securities to really get their input, for instance, if we are approaching any liquidity issues with any particular members of the index.”
The member companies also need to have a market capitalisation of more than US$200 million to be included in the index.
ROBOTICS AND AUTOMATION TRENDS
Robotic applications are becoming common in all industries. For example, the healthcare sector is already seeing technological disruption in the form of robotic surgeries while the logistics industry requires robotics and big data to integrate with its distribution systems.
ROBO Global identifies 12 sub-sectors on its ecosystem. In the technology sector, companies are involved in consumer products, food and agriculture, 3D printing, security, healthcare, logistics automation, manufacturing and energy. In the applications sector, there are companies that deploy technology in actuation, sensing, integration and computing, processing and artificial intelligence.
According to ROBO Global’s August results report, the consumer products sub-sector saw the highest returns over the past year, followed by actuation and logistics automation. The company notes that the improving conditions of the global manufacturing environment is driving growth in factory automation spending and that the logistics automation and artificial intelligence sub-sectors are high performers.
Lightbound says the company hopes to explore partnerships in Asia and Australia. “You will certainly see more activity in Asia going forward. Not only are there a lot of robotics activities in Asia, but also investor interest. I think investors in Asia love new technology and that is what this is all about. Things like artificial intelligence and deep learning are the really interesting opportunities at the moment.”
The BCG report says the consumer market is the key driver of growth in the robotics industry. Küpper observes that there are four major trends. “Trend number one is smart robots that are able to communicate with the environment. Trend number two is robots that are able to collaborate with humans. The third trend is when we combine different technologies together to achieve Industry 4.0 while the fourth, which is beginning to emerge, is robots mounted on automatic guided vehicles.”
Alexandre Mouthon, senior client portfolio manager at Pictet Asset Management, says in an email interview that the mobile internet is fuelling opportunities across robotics, digital and security strategies by enabling online education, gaming and services such as e-wallets. The need to counter cybersecurity risk, meanwhile, promotes the growth of network monitoring solutions or even biometric technologies.
“In the robotics space, mobile internet will allow a better integration of digital apps and production tools to move towards the long-awaited Industry 4.0 that will allow the faster production of customised goods at a very low cost. The robotics market is expected to grow at about 36% per year until 2020, combining industrial and non-industrial applications,” he says.
Chillingworth expects the next decade to be driven by widespread application of wireless sensors, from monitoring traffic conditions to tracking the flow of water through utility pipes. The current decade has been dominated by cloud technology, where remote storage of data and software is revolutionising the way businesses are run. The next decade will see the rise of actuation, where robotic devices will use big data to make decisions and take action.
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