The robotics industry is a growing segment of the equities market that currently offers excellent investment opportunities based on current valuations.
Technology has a tendency to go through a ‘hype-curve’ when investor optimism leads to runaway valuations. The classic reference point is the dot.com bubble at the turn of the century, when tech stocks saw their price to earnings ratios spike above 60x. Whilst valuations for robotics were north of 30x in 2010 they have since fallen, suggesting that the sector is on the right side of the hype-curve.
As James Butterfill (pictured), Executive Director – Head of Research & Investment Strategy, at ETF Securities, points out: “Valuations of robotics companies are trading at an average of 19x price earnings; by comparison, the average growth company in the MSCI World Index is trading at 22x price earnings. The tech boom in the early noughties saw valuations go through the roof. However, we do not believe there is any threat of a bubble emerging in robotics.”
To give investors access to these areas of the market, last year ETF Securities launched Europe’s first technology-focused smart beta ETFs: ETFS ISE Cyber Security GO UCITS ETF, and ROBO Global® Robotics and Automation GO UCITS ETF.
Rather than follow a market cap-weighted approach, both ETFs use a modified equal weighting methodology in order to give sufficient investment weighting to early growth companies.
Butterfill says that robotics is still in the early stages of what he refers to as a megatrend. He points out several encouraging signs:
- Increased M&A activity – more cash is being channeled into robotics deals
- Government initiatives – China, for example, plans to double its industrial robots by 2020. In Japan, a third of the Government’s spend on robotics is to be invested in ‘carebots’ to look after the elderly
- Lower processing power costs – as technology continues to advance, processors are becoming more powerful and efficient to produce. Over the last decade, processing costs have fallen 27 per cent and are, says Butterfill, “forecast to fall a further 22 per cent over the next 10 years.”
- Rising revenues – robotics revenues in the manufacturing sector have risen to nearly USD12billion globally; a 29 per cent increase on 2014. There are 66 robots per 10,000 employees in global manufacturing at present. By comparison, in the Japanese auto industry there are 1,520 robots per 10,000 employees; this gives some indication of further robotics growth.
North America accounts for 41 per cent of geographical weighting in ROBO Global® Robotics and Automation GO UCITS ETF, with 33 per cent weighting to Asia including Japan. The biggest sector weightings are in industrials (47 per cent) and information technology (35 per cent).
“We look for intelligent alternatives for our clients and robotics and automation fit that criteria,” adds Butterfill.
With respect to cybersecurity, Butterfill emphasizes the point that this is an industry undergoing rapid expansion and as such investors should think about gaining exposure to this area of the market sooner rather than later.
On a valuation basis, cybersecurity stocks are trading at around 37x price earnings. This is higher than robotics, and whilst valuations are higher than they were 12 months, cybersecurity still represents an attractive growth play for investors to consider.
Although not a new industry, cybersecurity has seen incredible change in recent years. Last year, the estimated costs of cybersecurity to the global economy totaled USD400billion; or 0.5 per cent of global GDP.
Cyber attacks have risen 61 per cent year-on-year since 2009 (based on PwC data in September 2014) and have continued to grow in scale and sophistication throughout 2015, with Talk Talk and the US Office of Personnel Management just a couple of high-profile examples.
To underscore the scale of the issue, it is estimated that the cybersecurity sector will grow from USD107billion to USD170billion over the next five years (source: Marketsandmarkets.com, Cyber Security Market By Solution – Global Forecast to 2020).
“Cybersecurity, in essence, is a technology solution, but if you look at historical data cybersecurity firms do not behave like other technology firms. This is partly because their revenue base is incredibly diverse; it’s not just technology firms that are buying cybersecurity solutions, but companies operating in all markets and sectors,” says Butterfill, who notes that whilst robotics is possibly more sensitive to the economic cycle, “I would say the cybersecurity sector is less sensitive.”
ETFS ISE Cyber Security GO UCITS ETF tracks the ISE Cyber Security UCITS Index Total Net Return using a rules-based systematic model developed by ISE ETF Ventures in partnership with ETF Securities. Each cybersecurity company has to have a USD200million market cap or greater with an average daily turnover of at least USD0.5million.
“We equal weight both the cyber and robotics ETFs. In the technology space it’s important to do this because you can identify a sub-sector in robotics, for example, which you think is going to be successful but knowing which companies are going to be successful is not so straightforward. You don’t want a small company to be under-represented as it could impact performance,” says Butterfill, who concludes:
“Smart beta, to us, is where you’ve taken the investment process from a successful active fund manager and translated it into a systematic computer-driven model. That is what we are trying to produce with the cyber and robotics ETFs. If you had to single out a factor in both of these products it would be a growth factor.”
To find out more, please visit etfsecurities.com