The developed world is in the midst of a transformation every bit as potent as the industrial revolution.
But instead of coal fuelling a steam-driven advance, data is at the heart of this particular phase of change.
This mass of information, which is harnessed and interpreted by the huge processing power at our disposal, is the fuel, for want of a better word, that is powering robotics, automation and artificial intelligence (RAAI).
Shining a light on this brave new world is ROBO GLOBAL. Its principals know the arena intimately, having developed the first index that tracks RAAI stocks.
We’ll see later how the index can benefit engaged private investors and provide them with diversified exposure to the sector.
But first it is worth looking at how the ROBO GLOBAL Index emerged and has developed as well as the rigour and discipline behind it.
Synthesis of more than seven years' work
It is the synthesis of more than seven years' work, reveals Richard Lightbound, the head of Europe, the Middle East and Asia at ROBO GLOBAL and was borne of an early desire by a group of motivated investors to benefit from the financial upside of what back in 2013 was a nascent revolution.
Robotisation and automation (enhanced by machine learning) in areas as diverse as agriculture and healthcare will save time and money for the beneficiaries. It stands to reason, then, the pathfinders in these industries will be sought after by investors.
Well, it did to Lightbound and his colleagues when they were starting out; less so the pin-striped brigade of the Square Mile or Wall Street, which saw the sector as niche at best (although that mindset has since changed).
Undeterred, the ROBO team ploughed on. They knew they didn’t know enough to become expert in the RAAI sector, so they recruited a panel of robotics experts, mainly PhDs, who were not only big wheels in their particular areas of expertise (for example, advising at government level) but who also had commercial success.
Today, there are nine advisers with a collective 200 years' robotics experience.
They augment a full-time team that goes out and identifies potential constituent stocks for the index. Potential index members pass through a series of quality filters before becoming eligible for index membership.
Database of 1,000 companies
From a standing start four years ago ROBO now has a database of 1,000 companies.
Its focus is relatively narrow in that it assesses companies in eight sub-sectors: energy, consumer products, food & agriculture, 3D printing, security, healthcare, logistics and manufacturing.
It is also interested in four core technology areas: integration, actuation, sensing and computer processing and AI.
It also sets revenue thresholds for the businesses it invests in to ensure, commercially at least, they are at the races.
And it splits out its constituents into pure-play RAAI stocks and hybrids. The former will derive 80% or more of its annual sales from its given area, be it automation or the latest advance in minimally invasive surgery.
The latter category consists of those companies where the direction of travel is towards robotics, automation and AI. An example Lightbound gives is John Deere, the tractor-maker. When mentioned in the same breath as automation and AI it makes sense.
Of course, John Deere’s future resides with driverless vehicles. If the UK's Autodrive Project can get cars to traverse the streets of Milton Keynes – concrete cows and all - then nursing a large piece of agricultural equipment around a 20-acre field in the middle of nowhere should be eminently achievable.
In the ROBO world the pure-play stocks - companies such as Oceanengineering Inc and iRobot Corp - have an approximate 2% weighting in the 88-strong ROBO index. The hybrids are individually at about 1%.
Quarterly updates see the weightings of all companies reset to the 2% and 1% also making way for more companies to join. This ‘sell-high-buy-low’ approach has served the ROBO GLOBAL Index well and helped contribute to a 47% rise in its value last year.
Over the four years since its inception it has returned a compound annual 17%, comfortably outperforming all its benchmarks. In other words, anyone who had been following ROBO GLOBAL’s approach would have been financially handsomely rewarded.
ROBO used for ETFs
The index is licensed to financial institutions as well as used extensively by the research community. These financial institutions use the index as a basis for exchange traded funds, also known as ETFs.
An ETF is a collective investment, so, in this particular example, the fund would buy shares in a basket of RAAI companies using the shopping list supplied by ROBO GLOBAL. Investors would then be able to buy shares in the ETF, benefiting from a diversified but high-growth, geographically well-spread exposure to an emerging sector.
ROBO provides its expertise to Legal & General Investment Managements’ US$1.3 billion ROBO Global Robotics and Automation GO UCITS ETF.
Assets under management that track the ROBO index add up to over US$4bn, which isn’t bad given total assets for what is still a niche sector in terms of size is only US$30bn; however, the growth is likely to be exponential.
Lightbound points out that the Vision Fund, run by Japanese tech giant SoftBank, is investing US$100bn in robotics, AI and the internet of things. Its follow-on investment vehicles are likely to be far bigger at US$880bn (or 1 trillion yen).
“This is part of a crazy arms race,” says Lightbound. “I can see multiple zeros being added to the size of the industry.”