During the Inside ETFs 2018 Conference, kendrawilkinson.info got a chance to speak with Travis Briggs (CEO), Jeremie Capron (Head of Research) and Chris Buck (Head of Sales) of ROBO Global. ROBO Global is an index, advisory and research company focused on helping investors capture the unique opportunities of fast-growing robotics, automation and artificial intelligence (RAAI) companies around the world. Read this Q&A to find out more.
kendrawilkinson.info: Let’s ask all three of you. Please tell me about yourselves and the trajectory that led you to be part of ROBO Global.
Travis Briggs (T.B.): I’ve spent the last 20 years in the financial services and most of that has either been managing portfolios or building the wealth departments. ROBO Global came about as a combination of a multitude of factors.
The primary one was the recognition that robotics, automation and AI represented a multi-decade type of opportunity. There were macro-factors in play that, in our minds, even five years ago, suggested that this is really an inevitable trend. It’s going to be difficult to predict how it plays out. But it’s something that was identified as a high-growth opportunity for investors. So that was step one.
Step two was when you look at it from an investor’s perspective, how do you make sure you build a portfolio that captures that growth? And so, from day one, we have differentiated ourselves as a firm. We went out to put together a team that not only knows finance, but also a team of partners and advisory board members who know robotics and automation.
So, if you look at five of our partners and our nine-person strategic advisory board, with over 200 years of robotics experience and five PhDs, we’ve put together a group that really cannot only define what the space looks like, but also predict where it’s going.
As I mentioned, part of the challenge is capturing the growth that we think is inherent in robotics and automation, but you also need to make sure you do it in a diversified manner. And so the result was, when we launched the index in August of 2013, it was essentially an industry classification system that captured the entire value chain or ecosystem of robotics and automation and AI (RAAI).
When you look at the industry classification system, you see that it’s divided into two buckets.
- One is enabling technologies, which includes all the components that allow robotics and automation to actually take place. So, think about sensors, processing, machine vision, computing, AI and actuation. It’s all those components that most people don’t associate with robotics yet, but they are an integral part in allowing the growth curve to continue.
- The other bucket is the applications. You have eight sub-sectors that include, for example, industrial manufacturing, logistics automation, healthcare, consumer products, food and agriculture.
I know that was more than you asked, but I thought I’d just jump in and give you the background as well.
Jeremie Capron (J.C.): I’m Jeremie Capron, Director of Research. I joined ROBO Global just under a year ago, after investing and researching the factory automation and robotics industry for more than ten years.
I was a Wall Street analyst, advising portfolio managers around the world on their investments in Japanese and Asian companies and, more recently, in the U.S. So, I’ve spent a long time in Japan where I basically became familiar with some of the leading providers of automation and robotics solutions. I was always very impressed with what ROBO Global was doing – their commitment to the theme, and their approach, which was very research-driven. It’s not only about putting together a group of stocks that can express the theme but also about digging deep into the industry, hiring some of the better-known thought leaders in the industry to have a systematic approach and trying to really define the industry and find the best companies within it.
Chris Buck (C.B.): I’m Chris Buck and I joined ROBO Global in the summer of 2016. I came from BlackRock capital markets. So I look after the capital markets.
Not only are we forward-thinking, looking through the windshield for identifying the trends, we’re also looking to make sure the return experience for investors is consistent with the index. If you build a model portfolio that’s great on paper but it’s not investable, it’s not good enough. I look after that part of the business including liquidity and other things that make ETFs tightly tracked into an index. I just spent thirty years at big investment banks, running sales departments and covering all trading-related services, research and training.
ROBO Global® Robotics & Automation Index
kendrawilkinson.info: ROBO Global has one index right now. Could you talk about it?
J.C.: We have a very strict approach to index construction. As I said, it’s research-driven. So we start from a database of a thousand companies that are involved in robotics and automation. Using our industry classification, we basically screen those companies for their revenue within twelve categories. So, we look for companies that have a minimum revenue threshold within our theme.
Now we also look for companies that are technology and market leaders, basically, the best of breed players from all around the world. Of these 1,000 companies, there are about 300 that are public. Then we apply the minimum revenue thresholds and the quality filters, including our ESG policy, which screens out the companies that may be involved with controversial weapons. That takes us down to an index of about 100 companies. And now some of the more traditional quality filters come into play, which you will see for most traditional ETFs. We have a minimum market cap: two hundred million dollars and a minimum daily liquidity that’s a million dollars in daily trading value.
So, that takes you down to 88 companies. It’s a pretty stable index. You’ll find, on average, we have perhaps one, two or three changes every quarter. We rebalance quarterly. That’s one of the fundamental pillars of our investment strategy. We want to provide investors with a smooth ride through the cycle. We don’t want to make any bets on specific robotics segments. We want to spread our bets across the entire value chain.
We also want to make sure that we have this systematic buying and selling every quarter. We bring the ratings back to the original one and two percent. So, every quarter, the index naturally sells the winners and buys the losers, so we buy low and sell high. And, again, it’s about stability and providing investors with a smooth ride through the cycle.
T.B.: The only thing I would add is that you mentioned one ETF but actually the index is licensed out to five ETFs. So there’s an ETF that trades on the London Stock Exchange and also one each in Korea, Australia, Canada and New York.
Implications of Artificial Intelligence (AI)
kendrawilkinson.info: Given AI is a bit of a controversial topic, especially when we’re talking about humanoid robots. Where do you stand on the spectrum of the implications of AI on society at large? Will AI take our jobs or is it an existential threat?
T.B.: I’ll jump on it first. I think we all probably would have some input on this. First and foremost, I think we’re a long way from AI being any sort of existential threat or creating any type of self-created, nefarious activity. I do think AI can be used for harm, but I don’t think you’re going to see a point where AI is simulating human thinking.
The best way to think about AI or artificial intelligence is that it’s a prediction machine. You put in data and it’s able to churn massive amounts of data through its algorithms and then spit out an answer. So, if you’re looking at a million pictures of a cat, it all of a sudden gets very good at knowing what a cat looks like. Or, if, say, you’re looking at a Cat scan, it begins to be able to tell which tumor is benign and which tumor is malignant with increasing accuracy.
The reason you’ve seen such a resurgence of AI, and an interest in AI particularly in the last two years, is because only in the last two or three years have we been able to store massive amounts of data. The amount of data is the electricity that feeds AI.
J.C.: At ROBO, we think AI leads to the next technological revolution. And, combined with robotics, we think AI empowers robots to do a lot more things than what we’ve seen up until today. We think it’s probably bigger than the internet, in terms of the impact it’s going to have on society and on businesses of all forms.
AI is coming out of the realm of science fiction and becoming real and touching every part of our lives. In the area we’ve invested, in robotics, you are essentially and dramatically expanding the range of potential applications of automation. So, you’re moving from automating a simple manual task to more advanced tasks that humans have been doing for a long time. But also automating tasks that humans simply could not do before. You’re really augmenting the global range of possibilities.
We need to embrace it, just like society embraced all prior technological revolutions. If you look at the industrial revolution, or more recently, communication, mobile and now digital, Big Data, every time we have come out stronger and wealthier as a society. And we come out with more and very different jobs not fewer jobs. And I think it won’t be different this time. I am always worried when people tell me, “it’s different this time.”
T.B.: We all agree that we envision a future of machine and human collaboration. And we think that the collaboration between the human and the machine is only going to increase productivity. When you think about if it will replace a job? AI and robotics replace tasks around jobs more often than completely replacing jobs. At the same time, they create jobs. So, we’re very optimistic about the developments of the technology and where we’re going.
Check out our list of Artificial Intelligence (AI) ETFs.
kendrawilkinson.info: Are there any new plans for a new index with a focus on other growth opportunities?
T.B.: We decided to build a team around robotics and AI because we recognize that area is a massively booming opportunity for investors. And, so what we’ve done with our first product is to try and capture the entire value chain of robotics and automation and AI. I could envision us launching other products that are peeling off certain segments of that space, whether it be a particular need of an investor or certain areas that we see that could present a diversified and unique opportunity set
Let me give you an example. When we launched in 2013, it was predominantly robotics and automation. You can go back in the papers and see that there’s obviously AI in the peripheral, but it just wasn’t talked about much. As I mentioned just a little while ago, in the last eighteen months, AI has embedded itself right in the middle of robotics and automation and you really can’t have a serious talk about either without talking about how AI is going to be integral. We see other products spinning out of this space, but our first and foremost goal is to be the global leaders in understanding RAAI for investors.
Downward Trend in Fees
kendrawilkinson.info: Let’s talk about the general ETF industry. Many issuers such as Vanguard and BlackRock are cutting management fees. Where do you see this fees war headed? Do you see the fees being lowered only for major issuers?
C.B.: Having come from BlackRock and having done some of the bigger jobs, I can say that when you look at building thoughtful portfolios to solve specific investment issues, whether it’s low volatility, funding child’s education or building a retirement nest egg, you don’t want everything in a LifePath fund, which at the core is going to be your main beta exposure. There’s been a drive toward making it really efficient.
What we think we deliver is a consistently performing, high-value return experience for clients, which means our investments in our products are re-invested into the company to make it better for investors. People are likely at the core to build portfolios. ROBO typically has expressed a view on global growth through automation. Some people look at it as a theme, a lot of people use it as a diversifier. You look at our correlations any day: rolling correlations to S&P and NASDAQ are very low considering what people would think of the technology fund.
To investors, their overall portfolio has been going down. So, we don’t really envision us fighting the fee war because people are using us as a way to earn excess return. They’re using us as a diversifier to mitigate risks and they’re using us from the U.S. to diversify against home bias. People are technically under-invested in emerging markets and non-U.S. portfolios. A lot of the innovation in our index is occurring outside the States. Sixty percent of our portfolio is non-U.S., and that’s not a country allocation decision. It’s literally where the innovation is occurring.
So it’s a great diversifier. I think the core assets will continue to compress. But I think we’re at a point now where it’s not going to continue to go much lower.
Being aware of risks and costs are important regardless of your ETF investing strategy. Read The Hidden Risks and Costs of ETFs to find out more.
Geographic Exposure of ROBO Global Index
kendrawilkinson.info: I would think the big countries are Japan and South Korea. They’re more innovative in that space as far as I know. Actually, I didn’t check the exact exposure of this index but what countries is ROBO Global exposed to?
J.C.: It’s still the U.S. It’s very vibrant in terms of innovation, particularly around the Southwest. The U.S. is really leading the track on the computing and AI side.
In terms of the index and country exposure, we have just under forty percent in the U.S. and then you have Japan, which is just under thirty percent. Japan historically has been a leader in factory robotics. Think about companies like Fanuc, a global leader in industrial robotics, and Keyence, a global leader in sensors for factories. And then you have a raft of providers of highly engineered components. They’re the components that make robots fast and accurate. For example, the speed reducers or the linear motion guides. So, Japan is a very big allocation.
Then you have Germany at number three. Again, think about how you engineer products and how Germany is really good at that. Then we have a total of fourteen different countries represented. It’s truly diverse. We go where the innovation begins and we’ll screen companies all around the world to make sure we get the right ones in there, rather than have a predetermined country allocation.
Active vs. Passive Debate
kendrawilkinson.info: In the ETF space, or the investment industry in general, there’s a huge shift from active investing to more passive management. Why do you think that is? Do you think this trend will continue?
C.B.: From an active perspective, at least in the States, we have a benchmark for performance attribution. The underperformance benchmark has been written about a lot. So, we see kind of a barbell approach. You have your beta, the high conviction approach, where you look at total return. A lot of people look at the liquid alternatives and also real estate.
On the other side, we have the cost-effective beta. Then, around cost-effective beta, people will layer in more high conviction, thematic or broad mega-trends, which is certainly what we’re in. We believe we’re probably one of three or four mega-trends and that’s somewhat of a no-brainer in terms of multi-decade experience. That’s really from a valuation perspective, and not a stretch by any means.
The middle is where, traditionally, investors have paid a lot of fees. The underperformers are getting squeezed out into the high conviction beta. So we continue to see that. I think in the U.S. there’s still ten or eleven trillion dollars in active funds? ETFs are three trillion dollars? I don’t know where it’s going to end up but there’s probably, actually, certainly more to go.
Future of the ETF Industry
kendrawilkinson.info: You have the opinion that global AI is a trending theme and it’s going to be one of the bigger investments all over the world. What are some other investment trends you’re seeing?
C.B.: To go back to the other point again, people are building a portfolio. That’s what’s great about the functionality of ETFs as a technology. You can build very thoughtful portfolios that are laser-focused on your risk tolerance. So, I think there’s going to be a continued proliferation of unique and differentiated kinds of return streams. That combined with whatever the risk tolerance is will kind of manufacture better, more bespoke, customized portfolios that could be done on a mass scale. So, I continue to see mass customization.
We see a lot of Millennials and a lot of retail investors getting really smart about building portfolios. They’re beginning to understand risk. They’re beginning to understand volatility. They’re beginning to understand concentration risk. I think a lot of providers understand that they’re well-intentioned, very thoughtful and informing. I think our consumer is much more informed now than they were five to ten years ago, and that’s ultimately a benefit. So, we kind of see the trend for unique firms like ours to continue to have more of a massive option. So, I think that trend will continue.
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Need of Investor Education
kendrawilkinson.info: I have the last question here, then we can talk about anything else you’d like to add. What are some key insights you’ve gained from the ETF conference?
J.C.: We’re introducing you to the world of ETFs that come from the institutional side of the finance industry and are priced with the level of innovation around ETFs, plus a lot of smart, brilliant people. It’s very vibrant. There’s a lot of energy, which you don’t find in, perhaps, the institutional side of our industry. So, I’m quite impressed with that.
C.B.: I think it goes back to your point about leveling the playing field. The democratization of investing can help people. We’ve started to attract really, really brilliant people into the space. I think some of the speakers were talking about the future return streams and, last night, the guy was saying it’s kind of bi-modal. What he was saying is: is there a bubble? The markets have been pretty rocky. Now with ETFs, you can identify with a laser-focus the particular revenue stream that you have high conviction about. Certainly, our view is that even though our fund is up fifty percent for basically the past fifty-two weeks, the earnings are growing. And where we are today is where we were a year ago before earning fifty percent from a valuation perspective. But the earnings of our index and median earnings are tremendous. The momentum is tremendous. So, I think there’s going to be a continued attraction in identifying the hybrid narratives. And to your point about innovation: there are a lot of people taking different perspectives.
I think the more you guys educate people on the alternatives available, the more people will take a particular view and express a portfolio the way that they want and that meets their needs. So, thank you for covering our space.
kendrawilkinson.info: Glad to do it. It’s actually an interesting topic for me.
T.B.: What have you seen that was interesting at the ETF conference?
kendrawilkinson.info: It’s similar to last year. One thing I did notice that’s a little bit different than last year is that there is coverage on bitcoin. Bitcoin is the cryptocurrency that’s emerging and, to me, that’s another interesting topic that is seeing exposure right now.
C.B.: I think there’s also been more of a focus on what they call thematic ETFs. If you look at a Morningstar Box, you see a lot of these unique exposures. People don’t know where to put them, so they get thrown into the other bucket. After some of these, like ROBO Global, have started gaining a lot of trust from investors, people are starting to look at more of the other non-core players. It’s been really interesting this year. I’ve also seen more focus on Bitcoin. I think it’ll continue to develop. It’s exciting.
T.B.: Circling back to your second-to-last question on what themes we see coming out, you kind of hit something now that Spider is celebrating its twenty-fifth birthday. The field has been around long enough that the major asset classes are covered. You know, unless you’re a dominant player in one of those core areas, it’s really difficult to come in and compete. And, so, if you’re going to get in and plug into the ETF world then you need to find a unique value proposition for investors. So, in that vein, I think you’ll see a continued strain of unique, customized thematic ETFs that are really designed to capture a different segment of the market.
And as those come out, I think it’s important for investors to look at where those are coming from. How those portfolios are being built. How they’re being maintained and what the constituents look like.
C.B.: And if there’s one word that I hope you guys continue to hear: It’s not about the wrapper, it’s about the exposure. It’s about the index methodology. It’s about what is the engine that’s driving the ETF. So, continue to write about the exposure. Because I still think people, from a wealth-management perspective, hear: “Oh, it’s a name!” And when they kind of buy the name, they really don’t know what they’re investing in. So, I think the option going forward is, beyond a market-capped rated index, if you’re going to purchase something at some level, there should be firms like yours that help educate. The gatekeepers and the model performers have their own people that are doing due diligence, but, by far, I just encourage you guys to continue to help people look under the hood. Understand risk. Understand concentration risk.
Because there’s a lot of really good marketing firms that are just like, “Hey look at us!” And I remember several times in the nineties some firms had maybe twenty names, and then when they went up, the more money went in. The more money went in, the more they went up. And if you’re not having the diversified basket and learning the market terms then there can be more volatility than I think people might expect.
The Bottom Line
The ROBO Global team believes that robotics, automation and AI represent a multi-decade growth opportunity. Investors, especially Millennials, are getting really smart about building portfolios and increasingly looking for more focused and thematic ETFs rather than just broad market-based ETFs. ROBO Global, with its research-driven approach, aims to add value by being the pioneer in the space of robotics, automation and AI, and by providing index and advisory services.
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