This Citywire Switzerland article was written by Julien Serbit, portfolio manager at Geneva-based Prime Partners, and Jonathan Cohen, founder and CIO at RoboCap.
Among the post-crisis evolutions, thematic investments are playing an increasingly important role in asset management.
Robotics, artificial intelligence and automation will continue to be a prominent theme. It will certainly have one of the biggest impacts on our economies and societies.
However, investing in robotics is not possible without specific skills in the field. Only a ‘pure play’ approach - selecting companies that are mainly active in robotics - allows investors to gain real exposure to the potential of the theme.
‘Pure play’ benefits
Focusing strictly on portfolio construction, a pure plan manager can build his or her expertise in a smaller, more clearly defined universe, resulting in economies of scope. A more concentrated portfolio means the manager can get to know the companies in greater detail, and selection will have a larger impact.
The portfolio will exhibit lower beta as selections have more idiosyncratic risks and less market risk than conglomerates, achieving real diversification.
In robotics, this investment universe would consist of 150-170 listed companies that would have an average beta to the MSCI World of 0.6-0.7 versus 1-1.2 for conglomerates.
In terms of opportunities and alpha generation, takeover targets tend to be smaller companies that can be acquired by larger counterparts willing to gain market share or new technologies. Conversely, IPOs are more frequent within small and mid caps than large caps, representing a key source of expansion for the investment universe. Since 2016, robotics takeovers have been in small to mid caps with the exception of Mobileye. The IPO market was exclusively small and mid caps.
These smaller capitalisations tend to be less covered by brokers and therefore less efficiently priced. Those benefits come at the cost of a smaller capacity for the strategy. However, they can be offset if the liquidity terms of the fund match the opportunity, and if the manager is incentivised by the performance and not only by the size of the assets under management.
It would simply not be possible to take advantage of it in an ETF format that would need to include larger and less pure companies.
Playing the advent of the robots should become a mega trend in the next couple of years, but it remains a matter for specialists at the moment. If an investor wants to avoid the dilution of investing in conglomerates, which are not pure players of the robotics theme, he or she should stay up to date with the most innovative companies.
The fascinating world of automation and all the potential impacts it will have on our lives needs to be considered while remembering that we are still in the infancy of the phenomenon.
In our view, it is crucial to invest in pure players that could be the Google or Apple of tomorrow, and avoid conglomerates that are still shackled to yesterday’s economy.