In human history there have been three industrial revolutions. The first, powered by steam, took place during the early 19th century in the UK, before spreading to other parts of Europe. Towards the end of that century, starting around 1870, European and North American economies underwent the second industrial revolution, based on the widespread adoption of electricity, improved telephone communication and, most notably, the introduction of the internal combustion engine. About a century later, during the 1980s, the third industrial revolution began with the advent of personal computers and the internet.
Each of these revolutions made people in general wealthier. However, they also provided handsome returns for those who invested in companies involved in either the development or the early application of the technologies that powered them.
Today we are widely thought to be on the cusp of a new industrial revolution. As with those that have gone before, the fourth revolution is being powered by advances in innovative areas of technology: battery technology, materials science, artificial intelligence (AI) and robotics. And as with the technologies of previous industrial revolutions, investors potentially have a lot to gain from exposure to these new developments.
However, unlike in previous industrial revolutions, gaining exposure to cutting-edge technologies is now a relatively simple process: focused investment vehicles such as investment trusts and exchange traded funds (ETFs) provide easy access. Nick Wood, head of investment fund research at Quilter Cheviot, says the rise of these new areas has been ‘coupled with the launch of several funds and ETFs targeting them’.
Robotics and AI are the most exciting and also the most controversial areas of cutting-edge technology. ‘With respect to AI and robotics,’ says Walter Price, portfolio manager of Allianz Technology trust, ‘we think this can be divided into two segments.’ The first is what Price calls robotic process automation. This involves using AI, machine learning and optical character recognition to automate the clerical tasks associated with many industries. Leading companies in this area include Accenture, Genpac and DXC. The second key area of AI and robotics is centred on new ways to do factory work, says Price.
These segments often overlap with other pioneering areas of the fourth industrial revolution. For instance, sophisticated vision systems from Cognex and Keyence are being used to guide ‘robots building electric cars from new materials and inspecting the batteries that will propel them ’.
To gain exposure to this area, Wood recommends the ROBO Global Robotics and Automation Index ETF. Launched at the end of 2014, this fund ‘gives broad global exposure to around 80 stocks focused on the entire robotics and automation value chain’. The fund’s holdings are diversified across different regions. ‘The portfolio includes companies covering more than 15 countries and 12 sub-sectors, with stocks initially bought at a 1 or 2 per cent weighting,’ says Wood.
As noted, advances in robotics and AI generally overlap with other areas of innovation: the development of new materials, for example. While conventional robots (and those in the popular imagination) are computer-like and mechanical in appearance and movement, a new generation of robots crafted out of newly developed materials is becoming more lifelike in their motion and form.
The new generation of robotic machines and AI computers will increasingly rely on synthetic materials with a close resemblance to living tissue, developed in an area of research sometimes called synthetic biology. Research into new materials is also being driven by the development of new types of transport. Price says: ‘New, lighter materials are needed for the next generation of cars.’
Wood says AI and robotics has seen a ‘good flow of investment’ lately. One of the best ways to gain exposure is through the recently launched Polar Capital Automation and Artificial Intelligence Accumulation fund, managed by Ben Rogoff, Xuesonj Zhao and Nick Evans.
Both Rogoff and Xuesonj have experience managing other Polar Capital technology-focused funds. Polar Capital Automation gives investors exposure to a wide range of technology-focused areas encompassed by the fourth industrial revolution. The fund’s holdings can be separated into three key areas: robotics, AI and materials science . A third of the fund’s holdings are in Japan, historically a pioneer in such technologies. An alternative fund with a similar focus is the Luxembourg-domiciled Candriam Robotics and Innovative Technology fund, a high-conviction portfolio of 30-50 disruptive technology stocks.
Innovative battery technology is another exciting investment area. New battery technology will be key to the mass adoption of electric cars. Many governments around the world plan to phase out petrol and diesel cars in favour of electric vehicles. However, for these plans to be realised, battery technology will have to improve. Note that this technology may well also have applications beyond cars. Wood suggests that it ‘will be key in reducing our environmental impact’.
This area is likely to see sustained growth. Price estimates that ‘the need for batteries will have to increase fivefold over the next five years if we are to have electric cars and trucks comprising 20 per cent of vehicle sales by 2025.’ He believes many forecasts for the timescale for the adoption of electric cars are too low. ‘As they move to higher utilisation, the costs of electric vehicles versus internal combustion engine vehicles flip because of the former’s lower costs of operation,’ he adds.
Many of the new batteries rely on lithium, a material mined primarily in Latin America. Unlike other mined commodities, lithium can’t be invested in directly. However, one ETF focusing on this area and performing extremely well is the US listed Global X Lithium and Battery Tech. The ETF has returned around 8 per cent on average over the past five years, and in 2017 performance surged by more than 59 per cent.
Old routes to new technolgy
You don’t have to invest in pure technology plays to gain exposure to the fruits of the fourth industrial revolution. Many conventional funds, with holdings across a variety of sectors, now have exposure to the sector.
Scottish Mortgage Investment Trust, for example, has around 15 per cent direct exposure, says Wood. This fund is a particularly good choice for investors wishing to play the battery technology angle. Scottish Mortgage holds around 7 per cent in Elon Musk’s Tesla, which produces electric cars and the new battery technology needed to power them.
The Baillie Gifford Japanese fund is another way to gain exposure to new technologies. Many Japan-focused funds are likely to hold cutting-edge technology companies. Wood says: ‘A number of Japanese companies have exposure to the new-technology theme, such as world-leading robotics company Fanuc.’ Baillie Gifford Japanese has more than 20 per cent of its funds invested in a number of new-technology companies, including the aforementioned Fanuc, as well as Toyota Motor (hybrid vehicles) and Sumitomo Metal Mining (the biggest supplier of cathode materials for Panasonic lithium-ion batteries used by Tesla).’
Closer to home, new technology is also a theme for Neil Woodford’s Woodford Equity Income fund, which invests in companies such as IP Group, a company that specialises in the commercialisation of intellectual property rights relating to discoveries made in universities.
Only for the long term
Of course, as with all hot, new investment themes, cutting-edge technology plays come with risk. Investors in revolutionary technologies may get their fingers burned. Excitement surrounding a development can sometimes mean a lack of applications for it in the real world may be overlooked. To put that into context, important though the early phase of laying railway track in the UK in the 1840s was, many investors in railway shares lost money in the speculative mania of the period.
Such an episode is unlikely to be repeated today, but similar scenarios have unfolded in more recent times, notably in the field of biotech. This was once a promising new area for investors. US biotech stocks soared by nearly 600 per cent between 2009 and 2015 – three times the gains made by the rest of the US stock market – before they started to tumble in 2016.
Wood says the high level of hype attached to new technology often attracts means investors should consider whether they might be buying in at the top of the market. An investment niche may have done well, but it may have ‘already done far too well’. Many of the best investments in the space have already seen their valuations pushed fairly high. ‘Investors should note that 2017 was a very good year for these themes as a whole and that valuations are higher than a year ago.’
That being the case, he adds, investors in cutting-edge technologies should only buy for the long term. He says: ‘Think how it might change our lives. This is a long-term theme.’ Ultimately, investors should avoid the mistake of buying into hot investment themes for the short term. ‘Don’t buy in with the mentality of a quick trade out.’
Indeed, many technology areas connected with the fourth industrial revolution have already seen minor investment manias come and go. ‘The key is to see this investment area as one with long-term potential,’ says Wood. ‘Active managers still view long-term growth opportunities as attractive and believe the valuations of many companies mean they warrant continued investment.’
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