SINGAPORE (Oct 7): The word “robot” was coined in a Czech science-fiction novel in 1920. The term was derived from the Czech word “robota”, which means forced labour. In the novel, the robots were a group of artificial people who were initially happy to work for humans. They subsequently rebelled against their human masters, leading to the extinction of the human race.
Today, robots continue to capture the imagination of science-fiction authors and movie producers. They have also become efficient tools in many industries, especially in automotive manufacturing. Although none have become intelligent yet, robots have become smarter and cheaper than before. These positive trends are attracting the attention of fund managers.
Take, for instance, Thematics Asset Management, which launched the Thematics AI and Robotics Fund last December. The fund invests in companies that focus on the provision of products and services powered by artificial intelligence (AI) and/or robotics. It identifies companies with an attractive risk/return profile driven by secular trends and meeting environmental, social and governance criteria. The fund is available to both Singapore retail and accredited investors.
Karen Kharmandarian, chief investment officer and senior portfolio manager of the Thematics AI and Robotics Fund, says the world is approaching an inflection point at which robots will become ubiquitous. In the past, robots were basic machines that usually performed specific tasks that were dull, dirty, dangerous and demanding, he says. These robots were usually found in factories and had little to no direct human interaction.
But robots of today have become connected through the cloud and internet of things, thus allowing them to be integrated across value chains and organisations, he says. They are also smarter, as the rise of AI enables them to learn and improve. Moreover, robots have developed vision and spatial awareness that enables them to react to the environment and collaborate with humans.
At the same time, the costs of building, operating and maintaining robots have come down significantly, according to Angus Muirhead, lead portfolio manager of the Credit Suisse (Lux) Global Robotics Equity fund, which is available only to local accredited investors. He says the cost of technology has historically become cheaper over time, which is no different for robots, he explains.
Volkswagen, for example, uses a combination of robots and human workers to manufacture its vehicles. In 2016, the company’s cost of robots per hour — including utilisation, maintenance and depreciation — was lower than the cost of workers per hour in China, according to Muirhead. Today, the cost of robots per hour is even cheaper, while the cost of workers per hour continues to climb, he says. As robots become more widespread in usage, the economies of scale achieved will increasingly lower their costs, he adds.
According to Muirhead, the next generation of robots, which are collaborative, are superior to traditional ones. He says the industrial robots made by companies such as Mitsubishi Corp, KUKA and ABB are expensive. They can cost US$50,000 to US$300,000 a unit, and double the amount if it comes programmed. The programming usually takes one to three months to complete.
Collaborative robots, however, are cheaper and cost between US$10,000 and US$20,000. They usually require minimal programming, as they can be taught by being moved around to do all kinds of tasks. This is useful for small manufacturers that require flexibility to make hundreds of thousands of different products.
Kharmandarian: We are talking about market opportunities that are worth about US$500 billion, and growing 17% a year
Muirhead says the next generation of robots, which are collaborative, are cheaper and more fl exible than traditional ones
Comprehensive versus purist
So, how are fund managers investing in robots? Kharmandarian says his fund invests based on the combined theme of AI and robotics, as he reckons the lines between them are blurring. This is because the AI algorithms are seldom developed as a product in itself, but are embedded in other products such as robots.
Investing in AI and robots allows the fund to diversify its risks. Although robots and automated processes have been making inroads in many new applications and industries, most of the addressable market is still in the industrial automation space. This makes investing in robots sensitive to economic cycles, industrial production and capital expenditure cycles, says Kharmandarian.
By including AI in the overall theme, the fund adds different drivers and exposure to other verticals and business models, such as software-as-a-service. “[Overall,] we are talking about market opportunities that are worth about US$500 billion [$692.5 billion], and growing 17% a year. So, we have a promising theme,” he tells The Edge Singapore in an interview.
Kharmandarian says most of the opportunities reside on the AI side, as traditional robots are already well established and mature, albeit growing at a slower pace. In particular, the healthcare industry is the most attractive, he says. The AI, in this instance, does not refer only to surgical robots but also to the technology to process vast amounts of medical data. For example, the AI can be trained to diagnose medical problems using MRI and X-ray scans. “They are better than humans in identifying cancer,” he says.
As at Aug 30, the Thematics fund had more than 40 stock holdings worth US$66.8 million. Its top three segment allocations are factory automation (29.5%), medical automation (17.3%) and design software (17.1%). Its top three holdings are Japan industrial robot manufacturer FANUC Corp (3.6%), US enterprise software developer Salesforce.com (3.5%) and the common shares of Google parent, Alphabet (3.3%). The fund has returned 16.5% as at Aug 30 and 18.9% since inception. Including maximum sales charges, however, the return figures would be 11.8% and 14.2% respectively. This compares to the fund’s benchmark’s 13.8% and 15.1% respectively.
About a third of the companies invested in by the fund are those with a market capitalisation of US$10 billion and below. These companies, which Kharmandarian deems as small- to mid-cap stocks in the robot universe, present opportunities for upside potential, he says. This is because they are less covered by the sell-side research and are not well understood by the wider market. “This is where we think we can add some additional alpha for investors by identifying [these] gems and adding [them] to the portfolio,” he says.
On the other hand, Muirhead adopts a purist approach. He says the Credit Suisse fund will invest only in companies that are involved solely in robots, both software and hardware. “If I’m telling my investors I’m investing in robots, every position I take — all of the companies I invest in — need to be [involved in] robots only. So, I can’t buy Intel Corp, Nvidia Corp and Microsoft Corp, [which do other things too],” he says.
Muirhead sees opportunities in supply chain management as a result of the popularity of e-commerce. As supply chain solution providers require more warehouses to store and retrieve the necessary items, robots are increasingly depended upon to execute these tasks. Yet, only 10% of warehouses are automated. So, the opportunities are aplenty, he says. “E-commerce is so popular, but it is causing a problem for the distributors,” he says. “So, they need to spend more to make the systems smarter.”
Like Kharmandarian, Muirhead also sees opportunities in the healthcare industry, particularly in the R&D segment. He notes that many of the laboratory processes are currently conducted manually, such as inserting liquid into test tubes with multipipette guns. These tasks take up 20% to 30% of the technicians’ time in the lab, which Muirhead stresses are ripe for automation using robots.
Similarly, the agriculture industry is ripe for automation using robots, he adds. Currently, many tractors and harvesting machines are operated by humans, but this equipment can be automated with robots, as the area of the harvest field is usually fixed. So, why has automation not set in? “The reason we get is that the tractor weighs 10 tonnes. If something goes wrong, it will drive through trees and houses. No one wants the risk and liability. But a big kill switch could be installed, right?” shrugs Muirhead. “This is the reason I get whenever I visit [agriculture equipment manufacturer] Deere & Co.”
Long-term play
While the investing opportunities in robots appear attractive, many technology companies are notorious for being loss-making, especially those that are at the forefront of new disruptive technologies. That does not seem to be the case for Kharmandarian, who notes that the percentage of loss-making companies in the robot universe is only in the mid-single digits.
“When I designed the universe of stocks in this space, I was expecting a large portion of my universe to be non-profitable. I was quite positively surprised that many of them are already profitable,” he says. Even their balance sheets are robust, as most of the companies are in a net cash position, he adds.
Tariffs imposed on goods traded between the US and China could also hamper the performance of robot funds, which could be short term. Kharmandarian concedes that the trade war has had a negative impact on market sentiment, as the management of some companies has sent out cautious statements. He has yet to see trade tensions having an impact on real activity and numbers, though. “We are monitoring the situation closely. Hopefully, tensions will come to an end soon,” he says.
Ultimately, Kharmandarian says, investing in robots is a long-term play. “For us, it is a theme that is just starting. We are [investing] in the early days of AI and robots. We don’t design strategies for the next three to four years. This is for 10 to 20 years’ time.”
