The rise of the machines isn’t just a theme for science fiction writers. It is rapidly becoming an important trend for fund managers, advisers and investors looking to construct portfolios. In recent months, there have been a flurry of fund launches, all focused on the theme of robotics and increased automation.
These funds are aiming to capitalise on what they see as a “mega-trend”, with the potential to disrupt existing industries, deliver cost-savings and efficiencies, and drive corporate profits for the next few decades.
This over-arching theme includes a number of different areas: from industrial robots, artificial intelligence, nanotechnology, automated data systems, wearable tech and healthcare solutions. This latter trend, for example, has seen sophisticated robots perform routine surgical procedures.
Advisers and investors looking at this burgeoning industry need to ask themselves two questions: do they agree that robotics could change the way companies do business in future — and if so, what’s the best way to gain exposure to this sector?
Robotics: A global mega-trend?
Industrial robots are nothing new – car manufacturers have been using them in assembly lines for 20 years. In the past though, growth in this sector has been checked by a combination of high development costs and the robots’ relative inflexibility: most could only do one or two repeatable tasks, making their applications more limited.
But in the past five years there has been a transformation in this area, with many big names – such as Google and Amazon – investing heavily into the sector.
As the graph below shows, the number of companies deploying industrial robots has risen in recent years, and this acceleration is expected to continue, according to the International Federation of Robotics.
Evidence of increased automation is all around us: from self-service tills in supermarkets to the automatic braking systems that are now included as standard on most new cars. It is perhaps not surprising that recent research from the University of Indiana showed that of the five million jobs lost in US manufacturing in the decade up to 2010, 85 per cent were lost to robots.
Patrick Mattar at iShares Capital Markets, BlackRock — which has developed its own robotics index — says: “Many previous operational constraints have been reduced by rapid technological breakthroughs during the last few years, and costs are falling too, which is allowing for new, wider applications.”
Tom Riley, a fund manager at Axa Framlington’s Robotech fund, points out that these breakthroughs have been driven by technological advances in electronics and semi-conductors that helped powered the revolution in smart phones.
He says: “Robots are becoming more responsive. Many companies are developing vision sensors or electronic systems that allow robots to process more information about their environment.
“This has two advantages: it enables robots to work safely alongside humans, meaning we’re seeing rapid growth in the development of these so-called ‘co-bots’.
“It also allows them to be used more intelligently, and in a wider range of roles. As a result we are seeing them deployed across different industries.”
As Riley points out, it has been the automative and aerospace industries that have previously driven growth in this robotics sector.
But lower costs and more intelligent design mean there is increased demand from other sectors, particularly healthcare and transport.
This is good news for those looking to construct funds that play on this theme — and for the investors that buy into them. It means that any robotic-themed fund now offers a degree of diversification, at least at sector and sub-sector level.
These funds don’t just invest in the companies developing the hardware and robotic solutions, they also invest in the companies that are developing commercial applications for this technology, which may not be included in more sector-specific tech funds.
However, while these funds are investing in semi-conductor processing, wireless mobile technology and bio-tech companies, it is worth noting that, for now at least, the bedrock of these investments remain the industrial and automative sectors — with many of the biggest holdings being in companies that manufacture factory robots and industrial machine parts.
Investing in a thematic fund – like robotics – also offers global exposure. Traditionally much of the growth in robotics came from developed countries, particularly the US and Japan. But in a recent white paper, BlackRock points out countries such as Taiwan, Korea and China are increasingly important markets for the development of robotic technology.
The firm says: “A combination of the manufacturing-led nature of these countries, ageing demographics and rising levels of education all have resulted in fewer workers willing to take lower-paid manufacturing jobs.” This is likely to create opportunities for increased automation of many manual jobs.
It adds this growth has already been seen in South Korea, which is working to position itself as a leading producer of robots and related technologies: since 2008 the Korean robot industry has achieved impressive average annual growth rates of some 21 per cent.
Of course, the exact exposure to different sectors and global markets will vary, depending on the fund or index used. These will also change as markets and this nascent technology develops.
Do you need a robo-themed fund?
Many investors will already have substantial exposure to the tech sector — either through sector-specific tech funds, or more general global funds. The latter are likely to have substantial holdings in tech giants like Apple, Microsoft, Google and Amazon, as well as multinationals like Nestle and Reckitt Benckiser, which look set to benefit from increased automation.
Should these investors also be looking at more focused robotic funds, or does this risk an over-concentration in certain assets? Not everyone agrees these narrowly-themed funds are suitable for all investors. Fergus Shaw, a partner at Cerno Capital, points out these themed funds “are at risk from the short half-lives of much of this technology”.
He says: “Building robots can be very capital-intensive, so the important question is whether a company can generate sufficient return of each iteration of a robot to keep shareholders happy, as well as provide additional investment in the next generation of robots. Although in the short term there may be profits to be made, in terms of a longer-term investment, we believe that investing in companies who benefit from these related efficiency gains will ultimately generate higher returns for our clients.”
He says building a diversified portfolio of high quality businesses that focus on returns to shareholders is likely to give you exposure to companies that use, or take advantage of, robotic technology in order to improve efficiency levels.
But Richard Lightbound, chief executive of Robo Global, which launched the first robotic themed index, said a robotic fund can offer exposure to the “high growth” end of this industry, which won’t be captured by those with a general exposure to larger multinationals and established tech companies.
Darius McDermott, managing director of Chelsea Financial Services, says these funds are a good way of getting exposure to growth areas, and have a role to play as part of a more balanced portfolio. “Arguably robotics is not a new thing. But more and more industries are following suit. As the minimum wage increases the temptation will be for more and more companies to replace the workforce with robots. Robotics are the future so it’s an exciting area but with that excitement will come risk and volatility.”
Robotic funds versus tech funds
Lightbound points out that a robotic fund is a very different beast to a more sector-specific tech fund.
Technology funds today tend to be dominated by the big names that appear on the Nasdaq index, he said. In contrast, a pure robotics fund should be more focused on small to medium cap businesses. “This is where we expect to see the growth in this emerging industry,” he said.
The Robo Global index, for example, has 40 per cent exposure to small caps, 37 per cent exposure to mid-caps and just 24 per cent in large caps.
When designing the Robo Global index, Lightbound says they were looking to capture growth across 13 different sub-sectors of the robotic industry, as identified by industry experts within their team. “It is smaller companies that are developing the technologies that the larger corporations want. We’re looking to invest in these at an earlier stage to maximise growth prospects.”
For investors — and their advisers — this may all seem reminiscent of the dotcom boom of the late 1990s, which saw a rash of new tech funds launched to capitalise on rising valuations and increased interest in this sector. The question, perhaps, isn’t how similar robo funds and tech funds are today — but whether there are similarities to the first wave of tech funds that launched 20 years ago.
With the benefit of hindsight, it is possible to see that fortunes were to be made from those who invested early into companies like Google or Apple. But many investors lost far more investing in other start-up tech firms who failed to turn their ideas into commercially viable or sustainable businesses.
Fund managers in this sector claim they have learned lessons from this early hype and subsequent bust of many dotcom companies. There are a number of ways funds in this space are trying to mitigate these risks.
Many of the tech funds were invested in smaller start-ups. As the figures above show, although there is a focus on smaller caps, this is balanced with investments in larger more established companies, that are using robotic technology to maintain a competitive “moat”, improve their market position or drive customers engagement.
For example, Axa Framlington’s Robotech fund invests in Amazon, which acquired robotic firm Kiva Systems in 2012. As a result it can now deploy robots in the company’s vast warehouses. These robots lift shelves and bring them to the employees who select the chosen items to send out.
Riley says: “This is part of a huge drive to improve productivity, efficiency and accuracy. What’s interesting is that as part of this deal Kiva has stopped supplying its tech to competitors, which should help Amazon maintain its dominant position in the market.”
Riley adds his Robotech fund is not focused on start-up business that need seed money to develop “blue-sky” ideas. These tend to be more the preserve of private equity.
As with other funds in this sector, including the ETFs, these funds are focused on listed companies, which meet minimum liquidity standards.
He says: “We’re investing in real robotic technology that has practical and commercial applications today, although some of these products and services may be at an early stage of their development.” For example, he points out there are already 750,000 surgical procedures undertaken globally each year using robotic surgery techniques.
But even with some exposure to larger companies, these robotic funds have a bias towards smaller companies which means returns are likely to be volatile. As with any thematic investment there is also the risk that stocks are quite correlated, so a downturn can be reflected across the portfolio.
When investing in robotic companies Riley says there are two considerations to bear in mind: it may a substantial time for products to become commercially successful, but when this does happen the number of end markets it can play into is often far greater than originally thought.
In other words, investors should be prepared to be patient, but those who are could reap significant rewards.
Investors should ensure they look under the bonnet of any prospective robo fund. There are significant differences between the handful of funds currently available, and as this trend develops this divergence is likely to increase. Other investment houses may be keen to cash in and launch their own robotic funds. There is the danger that these may become a “marketing label”, without necessarily being such a pure play on this emerging industry.
Howie Li, an executive director at ETF Securities, which offers the Robo Global ETF, says: “I don’t think this is a fad. We see it as a mega-trend and our index enables investors to get exposure to this trend. But there is the danger that others could launch such funds which aren’t based on such a robust classification system.”
Lightbound adds some fund managers may have a tendency to “play it safe” and rely on large or super-large tech stocks in the portfolio, even if their returns from robotics is relatively small. “Google, for example, has invested significant amounts in robotics, but the vast majority of its revenue still comes from advertising,” he notes.
Potential investors need to ask themselves whether they require a specialist robotic funds to access such stocks, and look at whether the underlying portfolio duplicates existing holdings.