In this exclusive interview, we sit down with Jeremie Capron, Managing Director of Research for ROBO Global to discuss the company’s unique index, and the opportunities it presents to investors.
1. We’ve read the A.I. revenue opportunity could reach $60B by 2025. Does this estimate include robotics automation in your opinion as part of that forecast or do you have a separate figure you would estimate the industry opportunity could reach from a revenue standpoint?
Without knowing the specifics behind the figure you’ve cited, I would have to guess that this estimate does not include robotics automation as part of the forecast. In fact, we estimate the total annual revenue generated by robotics automation currently sits at around $60 billion today. This $60 billion figure includes equipment, like industrial robots, surgical robots, and the systems that control the robotics equipment, as well as the accompanying services like maintenance and installations.
Revenue generated by A.I. is much more difficult to estimate because most A.I. service providers do not disclose their financials. But we think it’s already a multibillion dollar market today. Over time, we believe A.I. will have an economic impact that is measured in trillions, not billions, of dollars. This sentiment is backed up by a few big names in technology.
Bill Gates predicted nearly ten years ago that robotic systems will become a nearly ubiquitous part of our lives like computers and the internet. Jeff Bezos recently said
A.I. is now in a renaissance period, and that it will eventually have dramatic effects on the economy. Consulting firm Accenture also estimated that the impact of AI on labor productivity in developed economies will be as high as
40 percent by 2035.
While both subsectors are already playing a large role in today’s economy, it’s safe to say both robotics automation and A.I. will be a massive part of our economy’s future.
2. How do you determine how much of the index should be allocated to A.I. and Robotics? Is there a certain split ratio you prefer to maintain or do you just identify the best opportunities regardless of their exact focus to either of the explosive niches?
We want the ROBO Global Robotics & Automation Index to help investors capture the growth and returns opportunity presented by the robotics and A.I revolution. We deliver that with a mix of companies that are pure-plays on robotics or A.I. as well as companies that are more diversified, meaning they have a smaller percentage of revenue generated along these themes. But in the latter case we look for companies where the robotics & A.I. business is growing at a faster pace than the rest of the portfolio and represents a key earnings driver. Overall, we estimate the index’s revenue exposure to robotics, automation and A.I. to be greater than 50 percent.
3. Can you walk us through some of the most recent additions to the index’s top holdings and what was the catalyst or metrics that attracted your adding them to the index.
We constantly monitor for new robotics, automation and A.I. companies. Considering we only add public companies to the index, opportunities to add new names mostly arise when new companies come to market via an IPO or a spinoff. We also add companies when their business models shift to incorporate more revenue from robotics and A.I or when their technologies become relevant.
We recently added a few companies in the logistics automation subsector. KION Group, a Germany-based company, is one good example. Historically, this company was known primarily as a forklift provider, but it recently acquired DEMATIC, the largest logistics automation company in the U.S. The company now has approximately 40 percent of its revenue coming from automations. Due to this revenue, along with the company’s solid fundamentals and robust growth prospects, we added KION to the index in the second quarter of this year.
Xilinx is another company we added to the index after measuring its direct exposure to the machine learning and A.I. theme. Xilinx is the leader in providing programmable logic chips that are a key enabler of machine learning and edge computing. While Xilinx does not provide A.I. solutions per se, it does provide the tools that make A.I. possible, which is why we first took a look at the company.
4. Also, can you point out recent names that you dropped from the index and what were those catalysts for heading to the exits for those positions?
The main catalyst for dropping companies from the index results from M&A activity. Sometimes portfolio companies are acquired by a much larger entity that only has a small percentage of its overall revenue exposure to the robotics automation and A.I. theme. For example, Mobileye is an autonomous driving company recently acquired by Intel. Arcam is another example of a 3D printing company that was acquired by GE. After these deals were completed, we dropped the companies from the index.
Another reason for exclusion could be a portfolio company making an acquisition of another company that reduces the entity’s total percentage of revenue earned from robotics or A.I. We also have strict market cap and liquidity minimums that companies included in the index must meet.
5. At what point will a position get too large a percentage holding and what is the strategy in trimming a name that continues to deliver but your diversification alarm bells force you to stay disciplined and continue to spread the index’s bets?
We have a very strict approach to index construction that utilizes an equal-weight methodology. We don’t want to play concentrated positions and instead seek to provide diversified exposure to the broad robotics automation and A.I. space. Stocks either have a 1 percent weight or a 1.8 percent weight depending on the percentage of their revenue derived from robotics and A.I. For example, if a stock jumps 50 percent in value over a short period of time, we will trim this stock at the quarterly rebalance and bring it back to its 1 percent or 1.8 percent weight in an effort to maintain this equal-weighted approach. The result is that the index generally buys low and sells high.
We believe a diversified approach is best because we’re still in the very early stages of the robotics and A.I. revolution. It is extremely difficult to predict which applications will take off and which will be less successful, and more importantly, when. Spreading our bets across the value chain vastly increases our chances of picking a winner while providing the best risk-adjusted returns to our clients with this low-volatility approach.
6. ESG Social Responsibility is a fairly new investing concept. Can you elaborate how it plays a part of the index’s approach?
Our theme of robotics automation and A.I. is almost naturally a positive force in terms of environmental, social and governance factors. Efficiencies gleaned from these technologies can help alleviate some of the world’s largest challenges, like the aging population, inefficiencies in the health care system, high pollution levels, demand for scarce resources and other safety and health concerns. Robotics automation and A.I. have the power to address all of these challenges in a positive manner primarily by driving productivity and efficiency higher.
We’re very committed to maintaining an investment approach that incorporates ESG values and we exclude companies that do not meet our ESG policy.
7. If you had to make a bold bet, which of the two areas do you see accelerating way past the other when it comes to Robotics Automation and A.I. technology?
It’s impossible to guess which area will accelerate the most and when, which is why we believe the index approach is best when investing in these spaces. Who knew that certain 3D printing stocks would go through a hype cycle in 2013 and 2014, only to collapse shortly after? These movements are unpredictable, and a primary example of why we do not want to make concentrated bets on certain robotics automation or A.I. technology companies.
The equal-weighted index approach not only increases the investor’s chances of picking one of the positive outliers, it also minimizes risk by spreading out the bets across the subsectors. At ROBO, we want to provide the best risk-adjusted returns for investors and believe this is the most effective way to do so.
8. What, if any roadblocks do you see as things that could stall the growth of companies you specifically target?
We believe that the genie is out of the bottle. The robotics, automation and A.I. revolution is unstoppable. The technology is progressing exponentially. Meanwhile, costs are coming down. Political backlash could be one hindrance to the space’s growth. Whenever a disruptive technology emerges, there are typically some subsequent disruptions in the job market. While we are yet to see any significant disruptions in the job market, in time there could potentially be a stricter regulatory framework around the deployment of robotics automation or the pursuit of A.I. Today it is quite the opposite and governments around the world have been largely supportive of investments in robotics, automation and A.I., including in countries such as China, where social and political stability is always the top priority.
Outside of political backlash, there isn’t much else we see preventing these companies from becoming pervasive aspects of our economy. The efficiencies these technologies can add to industries across the economy are undeniable and still in the early stages. In other words, we believe the genie is out of the bottle, and the sky is the limit.
Jeremie Capron is the Managing Director of Research and serves on the Index Committee. Jeremie joined ROBO Global in 2017 with more than ten years’ experience as an equity research analyst in Asia, Europe and the United States, with a focus on industrial technology. Most recently, he led CLSA’s industrial research out of New York. For the prior seven years he served as a Senior Research Analyst with CLSA in Singapore and Japan, receiving a No.1 stock picker award from Nikkei/Starmine and ranking No.1 for Japan Materials Research in Asiamoney Brokers’ Poll for three consecutive years. Before that he was a project manager with Veolia Environment in Europe and Asia. Jeremie is a Chartered Financial Analyst (CFA), holds a Master’s Degree in Science and Executive Engineering from the École des Mines de Paris, FINRA series 7, 63, 87 and is fluent in French and Japanese.
The Robo Global Robotics & Automation Index ETF (ROBO) was unchanged in premarket trading Wednesday. Year-to-date, ROBO has gained 42.97%, versus a 16.71% rise in the benchmark S&P 500 index during the same period.