How to plug into robotics megatrend via ASX

Photo of Gemma Weeks, ETF Securities By Gemma Weeks, ETF Securities

min read

Why artificial intelligence could be a game changer for investors – and how to get exposure.

Look at the world around you and what do you see? Automatically operating traffic lights, someone using Siri to get directions to the local pharmacist, or your car automatically slowing down because the sensors detect a change in speed of the car in front?

They are all everyday examples of the growing prevalence of robotics, automation and artificial intelligence (RAAI). We are at the beginning of the next revolution for mankind, similar to the agricultural and industrial revolutions. This revolution is characterised by robots and artificial intelligence rising from mere factory usage to becoming inextricably woven into the fabric of life.

This article looks at this mega trend in more detail and, crucially, how you can invest in it.

Most investors are aware of the growth in RAAI. Not a day goes past without a mention of driverless cars or robots replacing factory workers. However, many people do not realise how broadly applicable the technologies are. John Deere, best known for the tractors it produces for farming, now sells more driverless tractors – known as agribots – than traditionally manned vehicles.

What about medicine? Here you have developments like the Da Vinci machine, an advanced robot that can perform surgery under the close supervision of a team of doctors. From 2010 to 2016 the number of procedures performed by the machines rose from 250,000 worldwide to approximately 800,000.

A further industry not commonly considered by investors that is benefiting from RAAI is 3D printing. This is when a printer creates a fully detailed replica of a design, allowing manufacturers such as metal factories to finesse designs with little time between concept to production, making them far more competitive and quicker to respond to the market than those without this technology.

The applications are broad and ever expanding as the world becomes increasingly founded on technology and a global network. Indeed, Robo Global, the world’s first index provider focusing on RAAI, estimates the size of the robotics industry will increase from $64 billion today to $1.2 trillion by 2025. Put in perspective, that is an approximate 1900 per cent increase in eight years.

Including RAAI exposure in portfolios

How can investors get access to this mega trend and is it risky?

Taking the second question first, RAAI investing is risky because many of the technologies and applications are new and rapidly evolving. This means companies with a specific edge in RAAI development can accrue revenues very quickly as other companies that require such technology place orders. But equally, almost overnight the frontrunners can become obsolete if the technology does not evolve for user needs or another company develops a better solution.

Taking a theoretical example, the fortunes of a manufacturer of a driverless car sensing component that reacts within a millisecond to external events and has a big contract with say, Toyota, may turn negative quickly if another company produces the same technology with a response rate of a microsecond.

Investors should therefore recognise there are risks involved in such a sector, but this does not mean it’s not possible to still take an exposure.

Additionally, with such risks there is an expectation that the long-term performance taken to compensate for that risk is significantly higher than many other opportunities.

Benefits of fund approach to robotics

The best way to mitigate part of this risk is to buy RAAI companies through a fund structure. This generally means that by having a number of companies in the sector there is a strong element of diversification, which reduces risk. The fund will either have exposure to RAAI as part of several different themes, or have RAAI as the exclusive focus. Investors then need to make a choice as to whether they buy it as an active or passive fund.

The ETFS ROBO Global Robotics and Automation ETF (ASX Code: ROBO) is a combination of the two philosophies. The investment committee that forms part of the ROBO Global board (the index provider for the fund) is made up of nine members, all senior academics or entrepreneurs in the various RAAI fields.

They actively filter the world of eligible RAAI companies to ensure they meet multiple requirements, including that their main source of revenue is from RAAI activity (as opposed to say, Rolls Royce, which has RAAI technology but is only less than 10 per cent of revenue). They also make sure there is a broad coverage within the two RAAI sub-sectors of technology (integration, etc.) and applications (healthcare, 3d printing, security, etc.).

They also ensure the companies are categorised as either bellwether or non-bellwether. The former are considered the stalwarts of the RAAI industry and unlikely to be quick to lose their competitive advantage, and are therefore given a 2 per cent allocation each for 20 companies, compared with the latter, which are considered more as emerging companies and given a 1 per cent allocation each over 60 companies.

An ETF is one way of gaining access. Another is via an active manager, with companies such as Magellan declaring their keen interest in RAAI as a means of driving their funds’ performance.

In summary, this area of investment has many of the properties that make it worthy of close consideration as a minor allocation in a portfolio, with the view to creating material outperformance over the long term versus most other more mature sectors.

Funds represent a less risky method of access to selecting stocks and, now, Australians can access this as a specific, focused allocation via ASX with the ticker code ROBO.

About the author

Gemma Weeks is a distribution associate at ETF Securities, a leading global ETF issuer.

From ASX

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