SINGAPORE (May 20): Smart mobility is becoming a reality as technology continues to advance. Ride-sharing, for example, has become mainstream, thanks to the ubiquity of smartphones. On the other hand, fully electric vehicles (EVs) have yet to follow suit, despite the fact that an increasing number of hybrid vehicles is rolling off assembly lines. This comes as battery technology continues to improve, giving better mileage on a single charge.
Now, the buzz surrounding autonomous vehicles (AVs) is building up as the race to roll out 5G connectivity intensifies. The next generation of connectivity promises to be the catalyst to make AVs a reality.
Against this backdrop, BNY Mellon Investment Management (BNY Mellon IM) launched the BNY Mellon Mobility Innovation Fund in Singapore last August. The fund, which is available to Singapore retail investors, seeks to outperform the MSCI All Country World Mid Cap Index based on a smart mobility theme. It targets four sub-themes: connectivity, AVs, sharing and electrification.
Under these sub-themes, BNY Mellon IM has identified 10 technology clusters of interest. They are gesture/voice recognition, user interface, autonomous solutions, sensors/ semiconductors, backend and cybersecurity, telematics, parking and mobility optimisation, electrification/energy storage, vehicle leasing/fleet management and sharing solutions. Together, the clusters represent just over 1,000 stocks, according to the fund house, which managed assets totalling US$1.7 trillion ($2.3 trillion) as at Dec 31, 2018.
BNY Mellon IM had initially planned to establish a fund based solely on the theme of AVs, at the request of a Japanese client who wanted a dedicated investment play in this space. However, as the fund’s investment team was creating the universe of stocks, they realised that mobility innovation’s prospects lay in more than just AVs, and covered areas such as EVs and ride sharing. Furthermore, the investment opportunities available included companies not traditionally associated with automotive technology.
“[These] are new sources of participation [in automotive technology], which we find really appealing,” George Saffaye, global investment strategist at BNY Mellon IM and part of the fund’s investment team, tells The Edge Singapore in a recent interview. “So we proposed a bigger [investment theme] to the client instead of just focusing on AVs. [And] the client embraced it.” As at March 31, the fund’s top three sector allocations were auto components (17.4%), electronic equipment instruments and components (16.4%), and semiconductors and semiconductor equipment (14.4%), according to its factsheet. Its top three holdings are US software manufacturer Splunk Technology (4.3%), US equipment manufacturer Keysight Technologies (4.1%) and Russian interactive media and services provider Yandex (4.1%). From a geographical perspective, slightly more than half of the fund’s holdings are in North America, while just over one-fifth are in Asia-Pacific.
Saffaye says the rapid advancements in smart mobility are presenting many attractive investment opportunities. He notes that automobiles are on the cusp of revolutionary change after more than a century using fossil fuels. “We are looking at the biggest transformation probably since the horse and buggy gave way to the automobile.”
Not yet on the bandwagon
Few other houses have a fund dedicated to smart mobility, however. They include Credit Suisse Asset Management (CSAM), Hermes Investment Management (Hermes IM) and Janus Henderson.
“We are actually looking at transportation technology opportunities in many of our thematic equity funds. However… because these pure-play opportunities are still fairly limited in that space, we have not launched a dedicated strategy on transportation technology,” say Angus Muirhead, senior portfolio manager of CS (Lux) Global Robotics Equity Fund, and Patrick Kolb, senior portfolio manager of CS (Lux) Global Security Equity Fund, in a joint email.
Tim Crockford, lead portfolio manager of Impact Opportunities Equity Fund, says many of the key players of smart mobility have yet to record significant positive cash flow. Some were affected by the slowdown in automotive sales growth last year.
This makes “transport technology too volatile for a specific thematic fund”, he reasons. The biggest obstacle is, perhaps, the inaccurate predictions for when EVs and AVs will become mainstream. Its proponents failed to factor in the practical aspects of developing and adopting the technologies, which have caused delays in getting the vehicles on the road.
Crockford says fully autonomous vehicles are still far from becoming a reality. “Our concern is less about vehicle technology and the rollout of 5G networks that will enable it, and more about regulation and how governments allow the rollout in cities, given [the] obvious safety hazards. This will, therefore, impact the ability of companies in this space to scale quickly,” he adds.
Muirhead and Kolb agree. “Some level of automation is already available in the latest generation of [AVs]. For the highest level of automation in cars to become mainstream, we may have to wait a few more years, but within a decade, we expect this change to happen with a fairly high probability. Regulators might delay the adoption in some locations, but the rise of fully autonomous cars seems inevitable at this point in [the] foreseeable future,” they say.
Saffaye agrees. He reckons that over the next decade, AVs would probably operate in limited areas, starting in big cities before moving out to suburban and rural areas. “The mainstream part is the challenging question,” he concedes.
EVs, however, may have a less bumpy road ahead. Crockford sees them penetrating the market more quickly. Muirhead and Kolb note that competitive EVs are already in the market and growing faster than the combustion engine market.
Still, there are challenges for EVs in the form of cost and infrastructure. “We need to see parity between the capital cost of buying an EV [and] the cost of running one. While electricity prices may be lower than [those of] petrol and diesel, as demand increases, so will electricity prices, and therefore the cost of running an EV could escalate,” Crockford says. He adds that more fast-charging stations need to be installed to soothe what is described as “range anxiety”.
“Investors are prone to underestimating the pain of adoption and have unrealistic expectations for companies in these new areas of technology and those are often used to justify excessive valuations. This has been evident with [EVs], which have taken longer to take off than investors expected. The challenges of driving range, charging networks and higher costs were underestimated,” says Richard Clode, portfolio manager of Janus Henderson Global Technology Fund. On the macro front, the tussle between the US and China for the upper hand in the technology race is a significant challenge for investments in smart mobility.
China’s Huawei Technologies, for one, has been caught in the crossfire between the two nations. In addition, the trade war escalated this month after US President Donald Trump tweeted that the US would raise tariffs from 10% to 25% on US$200 billion worth of Chinese imports. The US also plans to slap a 25% tariff on a further US$300 billion worth of Chinese imports. In response, China’s State Council said it would increase tariffs on US$60 billion worth of US imports.
Saffaye says these factors are forcing the BNY Mellon IM fund to discount stocks with a “political overhang” despite their sound fundamentals. “Companies don’t just operate in their single country; they have operations globally,” he says. “It is a very convoluted situation. We need [to] hope [for the trade tensions to be diffused] and expect this to be resolved at some time. But in the meantime, we will navigate [the situation].”
Opportunities in smart mobility
While fund houses — apart from BNY Mellon IM — are choosing not to establish a dedicated fund for now, they are not shunning opportunities in smart mobility. “In many of our funds, investors will find some exposure to transportation technologies. For example, within our [CS (Lux) Global Security Equity Fund], we have about 15% allocation to transportation safety names as a sub-theme. In our [CS (Lux) Global Robotics Equity Fund], we have an allocation to companies that provide technology for future AVs,” say Muirhead and Kolb.
Hermes IM has adopted the same approach. “While the theme of transport technology presents exciting investment opportunities, we believe it should be part of a broader, diversified portfolio to offer clients a balanced strategy that can weather short-term cycles,” says Crockford.
For example, the Hermes fund is invested in German automotive systems manufacturer Hella, which develops smart lighting systems for vehicles. These components help vehicles to process and communicate information, thereby improving safety and reducing energy consumption, says Crockford.
Hella also makes camera and radar components that increase the safety of AVs. And the company has plans to be a component aggregator that sells car systems, which include hardware and software components made by other manufacturers. “Whilst companies such as Apple have similar platforms, this will be the first for this sector,” says Crockford.
Other opportunities include cybersecurity and the building of infrastructure for smart mobility. According to Muirhead and Kolb, data generated by vehicle sensors and other connected devices will increase exponentially. They estimate that the average AV will process about 4,000GB of data a day by 2020, compared with the 1.5GB of data processed by the average internet user. “This is where we see opportunities at the moment — by investing in pure-play companies that are providing the sensors, data security and infrastructure.”
For his part, Saffaye sees the convergence of ride-sharing, EVs and AV, resulting in the greatest optimisation. “You take out the gas, take out the driver, your operating cost will go down,” he says. “Currently, ride-sharing isn’t available everywhere because you need drivers. But if your ride-sharing operators have a fleet of AVs waiting, you don’t have to worry about the drivers. That is our future.”
