The search for investment ideas and the fear of missing out have left too many investors chasing a handful of tech darlings, resulting in overextended valuations. As FAANG stock growth slackens, Wall Street is now eyeing robotics, automation and artificial intelligence to capture the upside from the wave of disruptive innovation.
“We created the first benchmark index to track companies on a global basis that focus on robotics, automation and artificial intelligence, which we refer to by the acronym RAAI,” Travis Briggs, CEO of ROBO Global US, told Proactive Investors.
“It was created because we came across an investment that we recognized was going to be a multi-decade growth opportunity,” added the Wall Street veteran, who started as an analyst with Bank of America, before stepping into the hedge fund industry.
Since its inception in 2013, the ROBO Global Robotics & Automation Index has grown significantly. Over the last five years it has returned a compound annual 19%, comfortably outperforming other benchmarks.
To put it into perspective, the benchmark ROBO index is to the robotics, automation and artificial intelligence universe what the Morgan Stanley Capital International (MSCI) Index is to investors who want an exposure to emerging markets.
The ROBO index is used as a performance benchmark for funds and market growth. The index is also licensed to financial institutions and used extensively by the research community. Financial institutions use the ROBO index as a basis for exchange-traded funds, also known as ETFs.
To develop the first index that tracks RAAI stocks, ROBO Global started from scratch by building out the ecosystem and defining the entire value chain of robotics and automation.
“To get this off the ground, it was critical to bring in not only the financial experts but the industry experts — the entrepreneurs and pioneers in the field that could help us really define the universe of robotics and automation. And the result is interesting,” said Briggs.
“We ended up with a classification system of 12 different subsectors, dividing the value chain into two primary categories — technologies and applications,” he added.
Rise of the robots
Half the index is made up of companies that are linked to the enabling technologies of robotics and automation. Those enabling technologies include sensors, processors, machine vision, computing, AI and actuation, which is a set of components that allow robots to move.
The other half of the index, he said, is made up of the "end market" or applications — the applications consist of end-use robotics.
“There you see where robotics is penetrating different areas of the economy. Industrial manufacturing all the way to logistics automation, health care, consumer products, energy, precision agriculture and even into 3D printing and surveillance,” explained Briggs.
Star-studded strategic advisory team
To create the index, ROBO Global tapped into a panel of experts, mainly Ph.Ds, who are entrepreneurs, academics and rock stars in the RAAI universe. Today, there are 10 advisors who augment a full-time team that goes out and identifies potential stocks for the index.
Kiva Systems co-founder Raffaello D'Andrea is on the advisory board and has strong street cred — he sold Kiva to Amazon.com Inc (NASDAQ:AMZN) in 2012. Kiva's robots automate the picking and packing at Amazon warehouses. The robots — 16 inches tall and almost 320 pounds — can move at 5 mph, hauling packages that weigh up to 698 pounds.
Notably, ROBO Global recently expanded its advisory board to include well-known roboticist Daniela Rus, the director of MIT’s groundbreaking Computer Science and Artificial Intelligence Lab (CSAIL).
“The ROBO Global advisory board is a dream team of robotics and AI professionals who are on the front lines of these disruptive technologies,” said Rus, who is an Engelberger Robotics award winner.
It's the team that ROBO Global has been able to put together that differentiates the product and gives it the ability to really understand where the puck is going in robotics and artificial intelligence.
Diversification is a battle cry
From a standing start five years ago, ROBO Global now has a database of 1,000 companies compiled with the help of its in-house team and the strategic advisory board. It has a proprietary database of 300 publicly traded companies that they use for selecting companies for the index. In addition, the database includes 700 private companies, as ROBO finds it helpful to monitor for IPOs, acquisitions and technology breakthroughs.
“I think what’s compelling is that collectively you end up with an index of 12 subsectors, 87 different companies from 15 countries. It is global in nature: 40% US, 60% international so it is very diverse,” said Briggs.
“The result is a broad index. We've captured the entire value chain, allowing the investor to experience the smoothest, least volatile ride as the industry continues to expand,” he added.
In the ROBO world the pure-play stocks — companies such as Intuitive Surgical (NASDAQ:ISRG) and iRobot Corp (NASDAQ:IRBT) — have an approximate 2% weighting in the 87-strong ROBO index. The hybrids are individually at about 1%.
Quarterly updates see the weightings of all companies reset to approximately 2% and approximately 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 46% rise in its value last year.
Separating out the wheat from the chaff
Potential index members pass through a series of quality filters before becoming eligible for index membership.
“We'll start with 300 companies and put them through a few of the market filters: revenue purity, classification fit, minimum revenue threshold. We do have an Environmental, Social and Governance policy. We apply three additional screens: minimum market cap, liquidity, limit the percentage of ownership, and the free float of the companies,” said Briggs.
As a result, it’s a very stable index and investors typically don’t see more than two or three changes to the portfolio in a quarter. Small and mid-cap companies comprise at least 75% of the index.
ROBO index popular with ETFs
Since it’s the first major index in the robotics, automation and AI space, the ROBO index has several low-cost ETFs tied to it at the hip.
Assets under management that track the ROBO Global index add up to US$3.8bn and include ETFs in the US, London, and licensed products in Asia (two in Korea), one in Australia, and a relationship in Taiwan.
ROBO Global provides its expertise to the ROBO Global Robotics and Automation Index ETF (NYSEARCA:ROBO) which traded 0.69% higher to US$40.51 midday Tuesday. It has US$2.1bn assets under management and the ETF provider is Exchange Traded Concepts.
ROBO also provides its expertise to Legal & General Investment Management's US$1.2bn ROBO Global Robotics and Automation GO UCITS ETF.
These index ETFs seek to track the ROBO Global benchmark index as closely as possible and minimize tracking error.
“We have several companies in the index that provide the picks and shovels to Amazon,” said Briggs.
Logistics automation has been the best-performing subsector in the index as it’s anchored by explosive growth in e-commerce. Healthcare is also driving growth with robotic surgeries becoming more widely adopted.
Fortunately for investors, since ROBO Global offers “a multi-decade growth opportunity” there’s no such thing as being late to the party.
“We are in the first inning of this significant inflection point in what I would call the growth curve of RAAI,” said Briggs.
Contact Uttara Choudhury at email@example.com