Partner Series


What's Next for Robotics and AI?

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Finding the sweet spot in robotics and automation portfolio construction

In a market like robotics and automation, investors must strike a balance that gives them access to new technologies without being overly reliant on holding large, established players or overly exposed to recent IPOs that are long on promise but short on earnings.

For ROBO Global’s Managing Partner and Director of Research, Jeremie Capron, the sweet spot for investors is mid-cap stocks, with strong balance sheets, high margins and solid earnings histories. The tilt should definitely be towards quality.

ETF Securities’ ETFS ROBO Global Robotics and Automation ETF (ASX Code: ROBO) tracks ROBO Global’s Robotics & Automation Index.

Gemma Weeks, from ETF Securities, talks to Jeremie about how ROBO Global goes about finding this sweet spot.

Not your traditional ETF

ROBO Global’s approach is to provide a forward-looking exposure to a technology revolution. In terms of the portfolio composition, most ETFs are market cap weighted and they tend to over-represent already established large players.

It’s really important to understand that our indices support funds that are not your traditional ETFs. They are a combination of a research driven process for the selection of constituents, combined with the benefits of ETF investing and index investing in terms of the discipline around the buying and selling of securities.

I run the research team out of New York City, where I have a team of experts for specific areas of robotics and AI. We try to provide exposure to the entire value chain.

You'll find that there's a lot of small and mid-caps in there. And you'll find that most of the companies in the ROBO portfolio are not represented in an S&P 500 or global equity index, so the active share is very high.

The vast majority of the ROBO index members operate proven established business models. In most cases, they are very profitable, with strong balance sheets. If you look at ROBO through the traditional investment factors prism, what you'll find is that there's a pronounced tilt toward quality.

You'll find high margins, a high return on capital. And in terms of the balance sheet, you know, more than 60% of the ROBO portfolio has a positive net cash position.

Avoiding the interest rate trap

What you won’t see much of in the index is a lot of the recent IPOs that are not profitable yet and have made very ambitious forecasts.

Those stocks with earnings expectations that are relatively far out in the future will be particularly sensitive to a higher interest rate environment because they are highly leveraged and have relatively weak cash flow positions.

The robotics and automation business case is strengthening

We have on the one hand a real boom in consumer demand, especially in the US. And on the other hand, we have some supply bottlenecks. Both are good for automation businesses. Strong consumer demand means factories running full and companies are trying to invest in technology to increase their help, their efficiency and address the supply bottlenecks.

Another factor driving investment returns is that a lot of money is coming into this area. M&A is particularly active, with record M&A around the world and across industries. But it's most particularly the case in robotics and AI.