Candriam’s Johan Van der Biest on how thematic investment screening and robust financial analysis can unearth market-leading technology at sensible prices
WELCOME
Johan Van der Biest, manager of the Equities L Robotics and Innovative Technology Fund at Candriam Global Investors, reveals how advanced robots are revolutionising the manufacturing process and what the integration of internet-connected machines means for all sectors. Van der Biest also discusses the Fund’s investment strategy, including how the team narrow down a global universe of 10,000+ companies into a portfolio of 30 to 50 stocks.
THE INTERVIEW
new industrial revolution
Investing in a
Johan Van der Biest,
Global Technology Manager
Number of global industrial robot 1973- 2019 (millions)
Technology has revolutionised manufacturing processes and now it’s set to change the way we live. Today robots can handle delicate objects or precisely position an 800kg car body. And they are connected to the broader manufacturing ecosystem – sharing data and programming, and constantly reporting performance.
Inevitably, assets in robotics-focused funds have leaped. Candriam Investors Group, a leading European multi-specialist asset manager with €107bn of assets under management, are one of the few fund houses tapping into this. In 2016 the group launched a Robotics and Innovative Technology fund to invest in the long term, cyclical changes being brought about by developments in robotics. The roadmap for world-changing new applications has never been as obvious and this will result in superior earnings growth for the industry. The use of machine learning and artificial intelligence (AI), big data technology, virtual reality, 5G technology, the Internet of Things and programmatic advertising are just a few examples of trends Candriam are investing in. “Advanced robots will be the cornerstone of the fourth industrial revolution, a technology which will generate substantial wealth for far-sighted investors”, says Johan Van der Biest, senior fund manager at Candriam. “We are only at 20% to 30% into what will be possible in the field of robotics. Soon we will see the integration of smart, internet-connected machines facilitating our daily lives.”
Market drivers
Global economic growth is also helping the robotics boom. Companies are starting to invest more and more in capital expenditure – and many argue this is a capital expenditure-driven cycle. Other potential growth drivers, adds Van der Biest, relate to policy making in China and the US. “In terms of developing robotic processes, China is far behind the other industrialised countries. In their ‘Made in China 2025’ plan they explicitly mention that they target 300 robots per 10,000 workers –almost 10 times their current robotisation degree. The US are still a long way behind Korea, Japan and Germany in terms of robotisation. So if Mr Trump ever wants to relocate manufacturing back into the US, he will not have any other choice than to invest heavily in robotisation and automation.”
Of all the forces driving this disruption, demographic change is among the most powerful. Van Der Biest says: “The demographic angle is a long-term market driver behind all this. We see an ageing population and a shrinking active population and in order to cope with this we will have to robotise as much as we can.” The rise in computational power and storage capacity has enabled companies to develop new technologies in double quick time. These technologies will impact all sectors, which means that the end market for IT and robotics companies is growing dramatically. Van der Biest explains: “We really are in the midst of a technological evolution. All the progress the industry made up to 2012 in terms of computational power and storage capacity is nothing compared to the progress we’ve made in the past five years. That’s exactly why we think investors should adapt to this new paradigm.”
Attracting investors
Value and wealth in the sector has been created for years and this is likely to accelerate. Technology companies excite investors, but investors want to make sure they are not over-paying. Increasingly, value resides in the more innovative companies. Nvidia, for instance, a US semiconductor company, has used AI to teach an autonomous car to drive and Tesla, Mercedes, Audi, Volvo and BMW have already adopted this technology. Another example is Yaskawa, a robot producer whose industrial robots are themselves manufactured by robots. “Opportunities also exist in known brands, which have reinvented themselves to benefit from this automation trend,” says Van der Biest. “These include Delphi, formerly a unit of General Motors and now a prominent independent player in autonomous and electrical vehicles.
“John Deere, the largest producer of agricultural equipment, is reinventing its legacy products and has become one of the most important players in precision farming. They have built autonomous tractors, which are equipped with sophisticated software to optimise fuel consumption, measure nutrient application and work out the most efficient planting patterns. These and other innovative technology companies have significantly outperformed over the last decade, returning more than 200% to investors, while the MSCI World is up only 50%. “Given the level of free cash flow generation and surplus cash on the balance sheet, and given the superior margin and revenue growth profile, we consider this outperformance is well deserved and we expect it to continue going forward.”
Source: IFR World Robotics 2016
MACRO OUTLOOK
Trends in robotics
CASE STUDY: Disruptive winners
Disruptive technologies are impacting all sectors and the global robotics market is expected to grow by 10% yearly until 2025 (Boston CG).
Robots have been among the biggest beneficiaries of disruptive technology. Avoiding disruptees like Cisco is as important as selecting disruptors like Arista. Companies embracing innovate and disruptive technologies are more efficient, more profitable and produce structural revenue growth.
Gaining exposure to the secular growth theme of robotics and automation is not a bet on the far future. Value and wealth in the sector has been created for years and this is likely to accelerate as the “fourth industrial revolution” becomes a significant driver of the global economy.
Robotics and automation stocks have consistently outperformed and equity investors have taken notice of the opportunity. Candriam perform sophisticated screenings on thousands of companies worldwide and assess which companies derive meaningful revenues from robotics and/or innovative technologies.
3Y performance: Arista Networks vs Cisco Systems
Robotics and automation index vs MSCI World on 10Y horizon
SECTOR PERFORMANCE: Investors take notice
Source: Bloomberg as at 31/05/2017
MSCI World Index
ROBO Index
Source: FactSet Research Systems as at 31/05/2017
Cisco Systems
Arista Networks
Candriam Equities L Robotics and Innovative Technology Fund
How Candriam invests: Sector and retail distribution
How Candriam invests: Thematic exposure
What is your investment process?
When did you launch the fund and what is it designed to do?
I have been managing a traditional technology fund with a benchmark-driven approach for over 20 years. Especially during the last few years, it became clear that many companies were slow to absorb new and innovative technologies such as the move to the Cloud, the move to mobile, the move to the Internet of Things and the move to AI-driven applications. In particular I’m thinking of bellwether enterprises like Intel, IBM and Cisco – companies that have for several years produced no top line growth at all. So we decided to focus more directly on innovative companies inside the technology sector. One of the big beneficiaries of tech innovation has been robotics and that’s what led us to redesign our traditional IT fund into a robotics and innovative technology fund. We did that on December 1 last year.
For the second stage we perform a fundamental analysis on these 80 to 120 stocks based on four factors: innovation, management, financials and competition. On top of that, we create individual discounted cash flow (DCF) models to check whether there is any upside. In the third phase, we construct a portfolio of between 30 and 50 stocks. We use a Sharpe Optimisation to balance risk and expected return. Currently we have 47 stocks in the portfolio and the volatility profile of the portfolio hardly differs from the MSCI World.
What is the sector outlook for 2017 and beyond, are the fundamentals still strong?
Going forward one of the most important factors to evaluate is economic activity. If we observe that global economic activity continues to go well then I think there might be some further upside. The really negative scenario for me is if for one reason or another we start to see some recession danger in the US. That would really hamper our cyclical approach but we don’t see any indications of such a scenario currently. Apart from that, I don’t think that we can exclude a technical correction because our fund, the indices and the IT sector in general has been outperforming on every single horizon – be it one year, three years, five years or ten years. Everyone is really over-invested in IT and so, for me, it would not be illogical to have a small technical correction. Such a correction would be an ideal timing to initiate or add positions to this strategy.
Where are you seeing the best valuations in the market?
That’s a difficult question because we don’t really ask whether smart factory, for example, is overvalued or undervalued. As I’ve mentioned our decisions are bottom-up. But of course, in general, after a huge run for the robotics and automation index – as we’ve seen recently – it starts to become more difficult to identify clear upside and that’s something we also see in our individual DCF models. In the sensors and mechatronics area there are still some excellent names with nice upside but in terms of industrial robots and service robots, those valuations are starting to become rather stretched.
What is your level of exposure to certain industry sectors and regions?
Our investment process is completely bottom-up, which means that the industry weights and the regional weights are the result of this bottom-up strategy. So we do not actively manage our regional exposures or our sector and thematic exposures. Currently the portfolio has around 70% in IT, 20% in industrials, 5% in consumer discretionary and 5% in healthcare. Once again, this is completely the result of our bottom-up driven approach and the same goes for the regional allocation. Currently we are more or less around 55% in the US, 20% in Japan, and the rest in Europe and emerging markets.
We have a three-stage investment process. The first stage is thematic screening which is a review of robotics and innovative technology to establish which companies are getting into this area. The second stage is a more traditional fundamental analysis and the third stage is the portfolio construction itself. Probably the most important is stage one. For companies to be considered during the thematic screening we require that at least 30% of their current revenues directly relate to one of our nine sub-themes. These are: industrial robots, service robots, smart factory, security, sensors & mechatronics, artificial intelligence, big data, security, virtual reality, leapfrogging technology. That’s the way we narrow down a global universe of 10,000+ companies into a universe of between 80 and 120 stocks.
FUND Q&A
'For companies to be considered during the thematic screening we require that at least 30% of their current revenues directly relate to one of our nine sub-themes'
Data as at 31/05/2017
Leapfrogging technology
VR/AR
Security
I.o.T/Big data
A.I
Sensory mechatronics
Smart factory
Service robots
Industrial robots
0.9%
17.6%
3.7%
16%
3.8%
18.1%
28.6%
7%
5.4%
52%
4%
19%
25%
Americas
Middle East/ Africa
Pacific Rim
Europe
67%
6%
5%
22%
Information technology
Healthcare
Consumer discretionary
Industrials
Retail
Sector
Johan has been a senior equity fund manager at Candriam since 2003. He began his career in 1991 as a fund manager at Bank BACOB, becoming a senior equity fund manager at Cordius Asset Management in 1998. He joined Candriam in his current role in 2003. Johan has a commercial engineering degree with a specialisation in finance from the Katholieke Universiteit Leuven in Belgium.
Chris joined Candriam in in October 2015 after 11 years at Fidelity. He is responsible for driving distribution across institutional, wholesale and retail investor segments. Beginning his career at Lloyds Banking Group, he moved to Prudential and then Fidelity where he worked on banking distribution, platform development and investment trusts before growing the Wealth business following the changes brought about by RDR.
Chris Davies, Head of UK Distribution
Johan Van der Biest, Senior Equity Fund Manager
CONTACT US
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