Exponential Investor talked to Karen Kharmandarian, the lead manager at Pictet Robotics. Kharmandarian is responsible for a $1.2 billion fund which started in October 2015.
Q: You are the lead manager of the robotics fund here at Pictet. When did you start this fund, and why?
A: We launched in October 2015, and we’re managing $1.2bn in assets.
The reason we launched this product is that we think we’re at inflection point when it comes to robotics. We are witnessing technological advances that are really enabling a new generation of smart robots to come to market. At the same time, we have prices coming down quite significantly. When you have this combination of technological advances and prices coming down, you have a product, a technology, a service that can really become ubiquitous.
Q: You mention an estimate of 10% growth in your presentation. What do you base that on?
A: The 10% we mention in the presentation is the potential of the robotics market – not the fund’s return. We’re providing these numbers from the Boston Consulting Group. They expect 10% per annum growth in robotics over the next decade, which in itself is quite significant growth when you compare that to the expectations for world GDP growth of pretty much 3% per annum. We’re talking about three to four times the expected world GDP growth.
We believe, as fund managers, that these numbers are quite conservative. It’s always difficult to figure out what new services and applications can be developed out of a new technology. Back in the 80s, for instance, it was very difficult to predict what the potential for mobile phones could have been.
Q: What sort of returns are you expecting this year, for the full year?
A: it’s very difficult to predict, because it’s so obviously reliant on market evolutions. But what we provide to investors is the conviction that gaining exposure to robotics would provide them with excess returns versus the broader market. We use the MSCI World Index as a reference, a proxy for equity markets over the medium to long term. Robots and automation devices are really permeating the business world and our daily lives. You want exposure to this secular growth by being long-term investors. We’re convinced that we’ll be outperforming the MSCI World over this next three- to five-year time horizon.
Q: Outperforming by how much? What returns are you promising to investors? You’ve got $1.2bn under management. That’s quite a lot of money. You’ve managed to persuade investors to put money in your fund – on what promise?
A: What we expect is to provide them with very significant excess returns versus the market over three to five years. That’s the recommended time horizon for investors to really leverage on this secular growth, because it’s going to unfold over time.
Robotics in the industrial field is already well developed, but we have a new generation of robots coming to market, what we call collaborative robots, where the potential is really in terms of consumer and services applications. That’s really just starting, and there are tremendous growth opportunities. It’s going to take time really to become, from a revenue generation perspective, as significant as industrial automation is today. That’s why we recommend having a medium- to long-term perspective when considering robotics.
Q: What are the specific arguments that you’ve brought to attract the $1.2bn in assets that you have under management? Where do you see growth?
A: These robots are taking different shapes and forms. We’re not only talking about the humanoid robots that people have in mind, but well-established companies with growth opportunities. All thematic funds at Pictet are based on what we call mega-trends: long-term trends that are shaping our societies and our economies.
When it comes to robotics, there are five of these mega-trends that we play. Technological innovation is one, obviously. Another is demographics, a very powerful mega-trend.
Population is ageing across the globe, even in developing countries – India being the only exception that I can see. China has major issues in terms of demographics. You have this disequilibrium between the active population and the inactive population. In China, they’re really struggling to find people working on their production lines today because of the one-child policy. The move from the rural areas into cities has already been done, pretty much. Wage growth has been quite significant – 13% per annum since 2006. So in terms of competitiveness, they’re facing some issues. The only way they can really sustain their growth and find a way to sustain production is to automate their operations.
That’s a very significant and powerful trend that we see across the globe.
Q: Robotics is also very big in the healthcare field, right?
A: Yes, absolutely. Healthcare is already a big chunk of the robotics market, first in terms of surgery robots.
Our top position is a company called Intuitive Surgical. It manufactures the Da Vinci robot. Typically, what it does is laparoscopic operations. The operation is controlled by a surgeon at a distance, and the robot performs the operation. It’s used for many different types of operations, and there are already three million of these operations worldwide. It’s quite well established, and it brings benefits to the surgeon as well as to the patient: You have less pain, less blood loss, a shorter hospital stay, and much fewer complications after the operation, so you don’t need to go back to the hospital. In terms of cost, it’s also very efficient over time, and quite beneficial for welfare systems when you can lower the social security cost in a given country.
Q: I recently interviewed Professor Kaspar Althoefer of King’s College, London, who as you may know designed and tested a surgical robot. He said the Da Vinci is a very expensive tool.
A: Absolutely. The Da Vinci is pretty much the high end when it comes to robotics surgery. The robot, depending on the type of model you consider, costs between $1m and $1.5m, so it’s quite a significant investment. But a hospital or clinic can make it profitable over time, because you typically use this robot over ten or 15 or even 20 years sometimes.
You have new competition coming towards the lower end of this market, with less sophisticated devices that are more specialised and more focused on certain types of operations, and that are trying to grab market share from Intuitive Surgical.
So far, however, Intuitive Surgical has sold close to 4,000 of these robots worldwide, including in developing countries that you wouldn’t expect might afford to pay this type of price. They don’t have any real competition. It’s a quasi-monopoly today. Once the installed base is complete, then you can benefit from the instruments that you sell over time with the robot, and all the maintenance. At Intuitive Surgical, they already derive 70% of their revenues from instruments, after-sales and maintenance, which is obviously higher-margin than just selling the robot itself.
Q: If we were to talk about another aspect of demographics, do you see growth in robots aiding the elderly in their daily chores?
A: Yes. There’s also a huge potential there. Japan is probably the primary example of a society that is ageing quite fast. If you want to have your parents or grandparents living independently in their own home instead of going into special care facilities, which cost a lot, these robots can be companions and assistants, and also make sure that nothing serious happens in the house. They can give alerts when there’s something going wrong and emergency aid is needed for these people.
The driverless car has very significant potential in terms of an addressable market for robotics. Think of people who are unable to drive because they don’t have the use of their legs or their arms. Driverless cars can provide the autonomy and mobility that they don’t have today. They can go shopping, have independence.
Q: Can you talk about some of the other areas where robotics shows promise? You mention sustainability.
A: Yes. Sustainability is really a contribution to better use of the scarce resources that we have on this planet.
Think of a car manufacturer. The use of metal and the level of scrap metal, if you have fully automated your process, is very minimal – whereas if you don’t have robots, you lose pretty much nine-tenths of the metal used to manufacture the car. With a robot, it’s only 2% of scrap metal out of the total metal you used initially. You can save in terms of costs and competitiveness, and your time to market is also reduced.
Think of companies like Adidas and Nike that are reshoring their production facilities closer to their customers to be able to adapt to the evolution of demand without relying on the Chinese companies that are manufacturing that for them. You can save in terms of transportation costs, in terms of CO2 footprint for the planet, but also have a production process which is much more efficient, using fewer resources.
The other benefit I see is that, today, you have people wanting more and more customised products. You don’t want the same product as your neighbour. How can companies adjust to this evolution of demand in a profitable way without automating? It’s nearly impossible.
Nike and Adidas have understood the evolution of demand by reshoring these production facilities in Europe and the US. By fully automating the process, they can really address that evolution of demand in a profitable way. So if you’re ordering your sneakers online, you can choose pretty much the colour of the shoe lace, and you can have a special sign on the side of the shoe – your name, for instance. The back end of the shoe is a different colour, whatever [colour] you choose. And they can really deliver that to you in a profitable way. They’ve understood that they needed to adapt their business model from mass production to mass customization by automating the process.
Just as Uber or AirBnB have disrupted taxi drivers and hotels, many industries, if they don’t adjust their business model toward this mass customization to correspond to the evolution of demand, face the risk of having a newcomer disrupting them by providing more customized products in a more profitable way. They risk losing a lot of market share.
Q: What about knowledge? How is robotics having an impact there?
A: Robots can move away from traditional industries into more and more services. In terms of education, you can have services for people where they interact with robots more and more to get access to knowledge. It can really be in remote areas. You don’t have to be in the same city for that. Robots can have telepresence systems, also. It’s another way to have access to resources that are not around you.
Q: Obviously there’s a human cost to this. The processes that you describe, pretty much all of them, eliminate the human being. What is the effect in terms of job loss?
A: That’s a very hotly debated topic all over the press. It’s true that these systems are more and more capable, and are not only displacing low-skilled jobs, but going into more and more sophisticated and white-collar type of jobs – even in terms of legal and medical work. They can come up with much better diagnoses of a disease of a patient than a traditional doctor would come up with, because they have this trove of data that they have access to, whereas the traditional doctor would have pretty much 40 years of experience before retiring, and the experience of his neighbouring colleagues, but that’s pretty much it.
From a job perspective, you have two camps. One is the camp of optimists who say: ‘We’ve gone through different revolutions – agriculture, industrial revolution – and every time, people have adapted with transitions to new jobs, new activities. In the process, we’ve also created wealth and improved living standards.’
You have the camp of pessimists who say: ‘Yes, that’s right, but in the past it was always targeted towards one sector at a time, and you had a long time to transition from one to the other, and to see the change coming, and to adapt. This time around, you have a general-purpose technology which is affecting a lot of sectors at the same time, and very rapidly. So the time for transition is much shorter, and the new businesses that are created are more efficient from a job perspective right from inception.’ Net net, they expect job destruction.
What I foresee is a different division of labour between what robots will be doing and what humans will be doing. The augmentation of the capacities of people by robots is something I can see clearly, whether in industry with these collaborative robots, or in services, with algorithms that can really help doctors or radiotherapists, for instance. It’s difficult to foresee what jobs and services will be created – just like when typewriters were displaced, it was difficult to envision the IT ecosystem that would be developed around computers and smartphones. We’ve created a lot of jobs thanks to that.
Q: So you’re occupying the middle ground on this.
A: Yes. I can see all the potential that these new technologies are bringing, and what jobs can be created out of that. I also see that we’re going to be more and more efficient. In a sense, that’s also the goal of automation and robotics: make any existing activity more efficient. Yet by doing so, we will also be creating new activities.
So net, net, I tend to think that we will be displacing jobs. But that’s not something we should be worried about.
Q: What are some of your biggest shareholdings, besides Intuitive Surgical?
A: We have some companies in industrial automation – such as FANUC in Japan or Kuka in Germany. These are two companies which are pretty much pure plays in industrial robotics. They used to manufacture the traditional robots that you have in mind when you think of car manufacturing, for instance the big robots. They’re moving into this new generation of collaborative robots – working alongside humans without any potential to cause harm to a human colleague, because they have sensors that can feel any resistance and, if a person comes around them, will stop immediately to avoid harming them. They are much more capable, much smarter, and they have huge potential in terms of growth, especially for SMEs, because SMEs are not automated at all: only 1% of them are automated.
This new generation of robots is much cheaper. You don’t need an engineer to program them. For SMEs that don’t have engineers, that’s obviously a key element. Also, you can go to break-even on this type of robots in 4 to 6 months. With the old generation of robots, you needed two to four years.
Q: How much do they cost?
A: This new generation of robots costs between $20,000 and $25,000 entry price, and $60,000 to $80,000 for the high end. That compares to hundreds of thousands of dollars and sometimes millions for traditional robots, depending on the type of robot.
We also play everything that has to do with machine vision. Robots need more and more sensing capabilities to navigate in an unstructured world, because they are moving away from traditional production lines where they were bolted into the ground. They’re becoming more and more mobile and autonomous. For that, they need sensing systems: machine vision, image recognition systems, sensors, gripping systems, natural language processing and generation capabilities. All of these technologies are really key enablers for this new generation of robots. If you have companies that are at the forefront of these technologies, that’s going to be a recipe for success.
We have two of them in the portfolio, part of our top ten. One is Keyence. It’s a Japanese company. The other one is the equivalent of Keyence in the US, and it’s called Cognex. They provide machine vision technologies for this new generation of robots.
Q: If we were to list the top five stocks in your portfolio, which ones would they be?
A: Intuitive Surgical represents 4.6% of the fund. Combined, the top ten positions represent one-third of the portfolio, and the portfolio itself is made up of 50 stocks. The idea for us when managing this portfolio is to have between 40 and 60 stocks at any time out of an investable universe of about 200 companies. We feel that 40 to 60 stocks is the right range to have a diversified portfolio to mitigate any potential risk of being proven wrong on one company, and to avoid harming the performance of the overall portfolio. At the same time, it’s concentrated enough to reflect the highest conviction that we have in this theme.
Q: You are a higher-risk portfolio than the typical share portfolio, aren’t you?
A: Yes.
Q: Why is that?
A: Because the companies we’re investing in are mostly into enabling technologies. We’re talking about companies that are manufacturing a new generation of processors and chips, software that is really critical for this new generation of robots. These types of companies typically have much higher growth, but also higher volatility. So that’s contributing to this higher Beta that we have compared to the MSCI World Index.
Q: Academics say that it’s senseless to expect robots to match people. In real life, the robot is able to do one, two, three of the things you and I can do but it stops there: they’re more of a complementary force. Do you agree?
A: That’s the case for the time being. What we see with collaborative robots is that it’s really about augmenting the capabilities of people rather than replacing them.
Robots will be doing things we do today. They will be doing it much better and much faster than we do, and producing goods of consistent quality. We will be focusing on things that we do much better than they do, especially because we have this capability of changing tasks rapidly and adapt and understand things, which is very basic for us but very difficult for robots. Longer term – 2050 and beyond – with all the improvements in technology and capacity, they will be doing more and more of the things that we are [currently] much better than they are at doing.
I was talking to a professor of robotics yesterday. For the time being, the trend is towards having algorithms that have the capacity of basic animals. We’re approaching that level. To get from the brain of an animal to the brain of a human will take probably two or three decades. Again, we’re talking about 2050 or 2060 where these devices can have the same type of capacity as a human brain.
That doesn’t mean that you should be worried about these robots taking over the world and displacing people. They’re not terminators. I don’t think these types of dystopian views are something we should be worried about.
Q: Speaking for myself, at the moment – unless it’s through the iPhone – I don’t really see a robot playing a role in my everyday life. How is that going to change?
A: As a person at home, you will have some of these robot vacuum cleaners such as the Roomba – the new generation is quite sophisticated – or lawn mowers. Now, you also have prototypes of robot cooks. Moley Robotics want to bring it to market next year or the year after.
Q: The robot will do your cooking?
A: Yes. This robot is in your kitchen. It downloads recipes from the Internet, watches videos of human cooks making recipes. When you put all the ingredients on the side, the robot can replicate what he’s seen on YouTube.
Q: So it grabs the ingredients…
A: And cooks. It’s very much in the early stages. But you can expect that in 10 or 15 years’ time, robots will be doing such domestic chores – elderly care, child oversight, education.
If I were to tell you 25 years ago that, in 25 years’ time, you would be spending eight years in front of a screen at work, then going back home to watch videos and play games on your smartphone, then doing things on an iPad before going to sleep, you would’ve said “No way, it’s impossible.” Today, that’s the case.
It’s always difficult to envision what the implications can be, ten or 15 years down the road. When it comes to discussing robotics with people, it’s always something futuristic. When it becomes something part of their daily life, it’s no longer robotics, it’s something normal.
Take drones. In Switzerland, the Swiss post is already using these drones for delivery of parcels of up to one kilogramme in mountain areas and areas that are not so densely populated. We have a test phase over the next five years where they will be delivering parcels of up to five kilos and into more and more densely populated areas. That’s going to possibly happen in many, many countries and radically change the way you see your city.
And we’ll be moving towards driverless cars: more and more autonomous vehicles, semi-autonomous at the beginning. Even in tough conditions of heavy rain and snow, you have so many technologies embedded in these cars – radars, GPS, ultrasound – that when one is failing because of weather conditions, the other one is good enough to have these cars driving safely on the road. It’s just a question of regulation and legal aspects for driverless cars: who’s responsible in case of an accident? Is it the passenger, the car manufacturer or the technology provider? Things like that have to be worked out.
In the next five to ten years, you’ll start seeing some of these cars on the road.
Whether it’s vacuuming your sitting room… driving you to work… or performing a surgical procedure… robots will soon play a significant role in your life.
Technology has now reached the point where robots are capable of matching humans in many tasks – and of doing them better – hence money is pouring into the sector.
Our new report will get you up to speed on where the growth opportunities are. click here to signup to Exponential Investor and we’ll send your our latest report on robotics straight away.
