Q3 2022 In Review: ROBO Global Innovation Indices

     

    The ROBO Global indices declined in line with global equities in Q3 in the face of high inflation and jumbo rate hikes to end the quarter 42%-50% below their all-time highs in 2021. The Robotics & Automation Index (ticker: ROBO) lost 7%, the Artificial Intelligence Index (ticker: THNQ) dropped 4%, and the Healthcare Technology & Innovation Index (ticker: HTEC) declined 6%. Valuations have compressed well below long-term historical averages. In this report, we discuss major trends and big movers across our portfolios.

     

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    Webinar Transcript:

    Jeremie Capron:

    Hello everyone and welcome to ROBO Global's October 2022 investor call. My name is Jeremie Capron, I'm the director of research and I'm talking to you from New York. And with me today my colleagues Bill Studebaker and Zeno Mercer. We will start with a brief reminder of what we do at ROBO Global and then we'll share some thoughts about what's happening in the markets. And then we'll take a closer look at each of the three index portfolios, ROBO, THNQ and HTEC. And of course we'll be taking your questions, so feel free to type them into the Q and A box at the bottom of your screen.

    So let me start with this quick overview of ROBO Global. We are research and investment advisory company that's focused on robotics, AI and healthcare technologies. And we manage three primary index portfolios that are tracked by nearly $3 billion in assets. Those are primarily in ETFs. And our first index portfolio is ROBO, that was the first robotics and automation index and it started almost nine years ago in 2013. And the second one is THNQ, T-H-N-Q, that is the artificial intelligence index. And the third one is HTEC, the healthcare technology and innovation index. And you can see here the annualized returns since inception of each index as of the end of September, 2022.

    So these portfolios, they combine research with the benefits of index investing in the ETF wrapper. They're composed of best in class companies from all around the world. The small, mid and large caps that we research and we score on various metrics, and the highest scoring stocks make it into the portfolios. Then we rebalance every quarter and the result is portfolios that have a very low overlap with broad equity indices like DSNP 500 or the NASDAQ and other global equity indices.

    Okay, so let's talk about what we are seeing in the markets. And the elephant in the room here is that the world's best companies at the forefront of robotics, of AI, of healthcare technology as represented by the ROBO global indices, they are now trading 40 to 50% below their 2021 highs. Yes, a lot of stocks are on sale right now. Global equities are down more than 25% this year, but these are not your average stocks here. Again, we're talking about the technology and market leaders. They're companies that are typically very profitable and growing much faster than the economy. In fact, when we look at their balance sheets, we find that a majority of the companies in the ROBO, the AI and the healthcare tech index, they have more cash than debt. And so they have a positive net cash position.

    And more importantly, many of these companies are relative beneficiaries of the current environment. When you think about the problems that we are facing today in the global economy, we have the labor shortages, we have rising costs across the board. The one clear and straightforward response from business leaders is automation and business leaders and corporations are making it a top priority. In fact, and Bill will come back to that shortly, demand for automation today is at record highs and growing and there is more demand for robots and automation that providers can supply.

    And at the same time, this down market in equities, we believe is giving investors an opportunity to invest in these companies at a discount. In fact, the three portfolios are now trading significantly below historical average valuations and we'll come back to that. So let's look at robotics and automation first, and for that I'll pass it on to Bill Studebaker.

     

    Bill Studebaker:

    Good morning everyone. Thank you for the time and interest. Jeremie, thanks for the introduction. Just to follow up on Jeremie's comments, we certainly know that the third quarter was a difficult period for investors. And September was a powerful illustration of just how difficult it can be to be focused on the longer term horizons, particularly when the market is constantly being tripped up by a confluence of issues and events. And we understand that these are challenging times. At the same time as Jeremie commented, the down market is giving investors really a welcome opportunity to take advantage of deep discounts and invest in companies that we see they're delivering on the necessary automation technologies.

    And we believe, as Jeremie also commented, that this has created an environment, it's kind of a perfect storm for investors, to increase exposure to a supercycle for automation and demand for automation technologies, as I'll comment shortly in more detail, has never been higher and the issues that are decreasing equity prices that we're all somewhat familiar with, the labor shortages, the compressed margins, the supply chain bottlenecks and the need to reduce operating costs are significantly increasing the need for adoption. And as we potentially go into a recessionary environment, we think businesses are going to be very keen to want to spend on efficiency and automation.

    As you can see for the quarter, the ROBO index declined about 7%, which is a similar decline for global equities, which has resulted in valuations that have compressed well below our historical averages. And the broad weakness was represented in 10 of our 11 sub sectors that we invested that had shown losses. And importantly though, as we look into the fourth quarter beyond, we see a great opportunity for investors to sharpen their pencil and add to this, what we believe, is inevitable automation theme. That's on sale like much of the market.

    And we see a huge discrepancy as where stock prices are, stock prices are 40, 50% off their all time highs despite the robust fundamentals of automation that we'll touch on shortly. And many of our constituents really are firing on all cylinders and can't make enough to meet the demand. As you can see here on the valuations, the PE is 12% cheaper than our historical average. And I do want to underscore that our valuation is based on PE, many other tech exposures are based on price of sales, and in many cases are arguably over owned and overvalued. I do want to make the comment that less than 3% of ROBO is in the S&P 500. So this is a unique exposure that still is very under owned and underappreciated by much of the market and we think that is an opportunity.

    Next slide please. So from an EV to sales standpoint, you can see that we're trading pretty close to parity to historical valuations. So ROBO is trading around 2.7 times EV to sales. Again, the context of where technology trades, I mean, Adobe just made a purchase of an AI asset for 40 times trailing EV to sales. So that hopefully gives you some context that I would not say that we're hardly overvalued. In particular, I think our valuation of our portfolio has evolved pretty significantly over the years and has become much growthier, so that's kind of skewed the valuation of the upside. So I would argue that even at 2.7 times relative to the past, our valuation is pretty cheap.

    And just as a build on to that, what we've seen here in the market, we've had three consecutive quarter declines in the ROBO index and that's really kind of an unprecedented development since we launched the index back in 2013. And it's only comparable to the back test going back to '08, '09. And importantly though, earnings estimates, I know that that's maybe kind of the elephant in the room, that people think the earnings estimates are going to come down dramatically. We certainly have not seen that yet. For 2022 and 2023, earnings estimates have only been cut by about one to 3% of the last three months and just 6% over the last year. And this I think is a reflection of the strength and demand for automation technologies and solutions.

    And really importantly, the ability for ROBO companies to cope with rising costs and supply chain challenges. Many of these companies have been around for many years and have had the skill set to adapt to and manage different economic environments and to be able to pass on and prices. And I think importantly, the revenue estimates have seen actually positive upgrades over the last three and 12 months and point to about a 12% sales growth for 2022 and about 9% for 2023. Although the market is skeptical that estimates won't come under more pressure, that so far has been the report card.

    Next slide please. So as Jeremy kind of alluded to, ROBO is designed to be diversified, it's designed to be invested in the best of breed technology companies globally across the ecosystem of the technology. So what makes the robot or automation work? And then the applications, where is automation being deployed? Unfortunately, this drawdown, as we all know, has been somewhat violent and extreme and has resulted in the most significant drawdown we've seen. Despite the fact that 50% of the portfolio has what we see as a real value, that being exposed to industrial automation, logistics automation, healthcare. Not to mention, as Jeremie alluded to, that roughly around 60% of portfolio has a net cash position and no debt. So these companies are well positioned to weather the storm, like they did during Covid.

    And this industry is importantly historically grown the top line two to three times that of the market and we expect that to continue. Not to mention year to date, FX has been about an 800 basis point headwind and the move in the dollar really has been somewhat parabolic and we think there is likely to be a reversion of mean and there could be a favorable tailwind as we begin to move into 2023 and beyond.

    In terms of the big stock moves, we've had a couple fortunes to the upside, not enough of course, iRobot was up 57% in the quarter, as many of you are aware, they are a leader in consumer robotics and they agreed to be acquired by Amazon in an all cash transaction for 1.7 billion. This does importantly represent the 28th takeout since we launched ROBO back in 2013. And while we can't forecast what the MA environment's going to look like, many of our companies are, again, leaders in their industry. And as asset prices come down, we think that they certainly become more favorable in the eyes of strategic and financial buyers.

    Luminar Technology also had a decent move to the upside. They are a leader in lidar technology for cars and trucks. The stock was, I think the performance was somewhat supported by the conviction of insiders. The CEO did purchase upwards of $6 million in the quarter. But importantly what's really moving the stock is their commercial success with announcements. They announced partnerships with Mercedes and Nissan, which intend to integrate their technology in most of their vehicles by 2023, or I'm sorry, 2030. So we do expect to see more progress here on the commercial front.

    Then in terms of the sectors that we really remain highly convicted on, one area to highlight is industrial automation. And an earlier comment on that Jeremie also did is that industrial automation really is firing on all cylinders to meet demand. And Yaskawa, which is a large industrial robot manufacturer, just announced recently that their orders were up 34% year over year. Fanuc, which is the largest industrial robot manufacturer, has been pretty vocal about their backlog, which now is in excess of one year. Importantly, Teradyne, which also plays a key role in industrial automation, has last quarter talked about their industrial automation growth was up 29% year over year. We expect that to continue when they announce their results soon. They are one of the largest manufacturers of collaborative robots through their purchase of Universal Robots, which is a Dutch company. That business has also really been firing on all cylinders. That business last quarter saw robot sales actually up 30% on a 55% comp.

    So business really remains pretty strong and healthy. These asset prices are certainly pretty interesting for investors to take a look at. And overall, if you look at robot density, and so that's looking at the number of robotic installations per 100 people, believe it or not, the global average is only 1.2 robots per 100 employees. And so we have a long way to go in terms of where penetration rates are going. Just to put that in context, the US has roughly 2.5 robots per 100 employees. China is also 2.5, but they have grown from 0.5 to 2.5 in five years. So pretty amazing growth there. Japan's about four, Germany's four and Korea is nine.

    So this all is in the context of a global environment where global manufacturing employs about 500 million people globally. So if robots are stealing our jobs, they're not doing a very good job of it and we think there is significant progress in the years ahead. That's it for my prepared marks. I guess I'll pass it on to-

     

    Moderator:

    Thank you Bill. Hey Bill, before we move on, we have a specific question to ROBO from the audience around why we include Nvidia but not Micron or Intel or STM. Could you speak to that?

     

    Zeno Mercer:

    Sure. Hi. Hey everyone. Zeno here covering THNQ today. And okay, could you repeat that question? It was around ownership?

     

    Moderator:

    Yes. So they're asking in the ROBO Index, we include Nvidia but not Micron or Intel or STM. So could you talk about the difference between ROBO and THNQ and where those companies would fall?

     

    Zeno Mercer:

    Right, okay. I think the way we look at it is not only, yes, these are all involved in components of kind of modern society, robotics, AI, but we're looking for companies that have perhaps the most investment or exposure to these areas. And I'm actually going to cover in a video later, but I could say some things now, at their recent AI day, they're heavily invested not only in the chips but the software side of things. And at that point we consider them more of an AI and robotics play. I mean, they have software specifically for it and we just have stronger conviction around it going forward. Obviously companies like Micron are making big investments and are important to society, but we're trying to get exposure to specific areas and not just invest in general companies in the space. I mean, we can cover more later when I talk more about Nvidia for a bit.

    Yeah, we can go to the next slide. Reflecting on the quarter, the THNQ index was down 4%, actually outperforming global indices and the S&P, and we're down 47% since November 2021 high. So the AI space has been underperforming even while fundamentals have been improving in many ways. And I'll get to that. From a valuation standpoint, Ford EV sales are continuing downward and they're actually at the quarter end, they're at 4.6, which is below March 2020 lows. Even while adoption growth, digitization and many big trends and tailwinds are coming, not only now but 2023 and beyond. And we'll cover that. And some of the big things that happened is we had earnings deceleration this year down to 11.2%. So overall our companies grew, but this was down from 27.9% in 2021. Obviously it was a very big year for revenue.

    And the current forecast right now is a stronger rebound back in the low twenties for 2023, 2024. So right now, I mean, this has been a difficult year. People have been kind of reorganizing and figuring out what moves they're going to make, but certain areas of the economy are seeing and have big backing for continued investment over the next several years and quarters. So I think it's important to think and know that AI is becoming an increasing percentage of corporate government spend and it's also an enabler of GDP growth and cost savings. So there's both growth aspects and deflationary aspects that are involved here and we'll cover that.

    Next slide. Yeah, so we actually had, despite the index being down, we had outperformance, we had 79% beat top line expectations and 85% beat earnings. And I think around 87% are expected to be profitable next year. So if you're thinking about these companies, we have high pricing power, they are very important players to the economy, whether it's investment spend from the Fortune 500 looking to digitize their products or make new products or even just find cost savings across supply chain, operations, things like that. Or even just using AI as a core product and to increase the product development, whether real world world products or digital products, solutions. So there's developer operations, cybersecurity, lots of angles there.

    Many companies actually have raised guidance in the index such as Samsara, which actually raised three times this year despite their own supply chain problems. That's top line and bottom line. From big data and analytics, we actually saw a standout from companies like Alter X, which is seeing 50% year over year growth and 90% gross margins. And despite everyone being afraid of, oh, what's going to happen with spend, and where money is going is shifting this year, I think we're all seeing that. And Alter X is seeing their biggest pipeline in history for digitization automation of bringing in data and figuring out what to do with it and finding ways to streamline functions with increased labor cost, inflation.

    So these companies provide very high ROI and that's why when we're constructing and reevaluating the index and rebalances, we're looking at what companies are enablers right now. And that's both the infrastructure side and the actual application side that are actually being used today. It's the supply and demand. And you wouldn't build semi chips, there isn't a reason, and I'll get to this next, about the CHIPS Act, if there weren't an important facet coming down the line for that. And most of those chips, the chips being produced there aren't going to be coming online until 2025 and beyond.

    So we can actually go to the next slide now. I guess I already covered the outperformance here, but it was, despite issues in the economy, it was a very strong quarter and we saw pretty solid reassuring guidance from many areas. I think one of the most troubled areas is on consumer, even though our consumer index or the consumer sub sector and e-commerce were the best performing this last quarter, they had oversold in Q2.

    So if you're kind of looking for a quarter, I mean you're going to have shifts there, but that's why we actually have exposure and make allocations of these different areas. Going to talk about Semi real quick, I think one of the biggest things that happened was two things. A, we passed the CHIPS Act and we also had US trade restrictions, Semi performance despite the CHIPS Act being passed, despite Europe also declaring they want to double manufacturing of Semi chip capacity themselves, getting away from Asia manufacturing region, our Semi index was down 12%.

    Part of it is falling in lockstep with the economy and everything else. Part of it is kind of overblown fears around what's happening with the China trade restrictions and also around consumer, PCs, Mobile. Apple announced that they're going to not boost production of the iPhone 14. And we have some exposure there, but overall that's PC and personal. If you're talking about cloud, AI, automotive and connectivity, which is where we actually try to allocate more exposure to on that side of things, on the infrastructure side, we're actually seeing strong demand and forecast. As an example, Qualcomm, which is involved in many, they have I think $7 billion business units. They've seen their automotive pipeline go from 19 billion to 40 billion in one quarter. So the inflation reduction act, all these things people are making, we don't have full EVs yet, at least in the sense that they're not everywhere.

    I mean, if you look at percentage of vehicles on the road, it's 0%, 0.001. However, intelligent smart vehicles that require more processing, you've got EVs, they require more semiconductor chips and processing connectivity and you're seeing a big boom in demand spike there. So while we're seeing a oversaturation in that segment, we're seeing massive growth. And then there will be another upgrade cycle for wearables and things like that, that that'll come back online. But it's kind of smoothing out the process here. And that also involves components, sensors and computer vision.

    In terms of cloud demand, we're seeing big pull through still. Arista, which makes networking switches and software for these big cloud center deployments from the big tech companies and enterprise and others. They provided very solid guidance in 2023 at their last call. So if you're looking through the noise and seeing what's an indicator of things to come, it's continued investment in this space. And we've got multiple hundred billion dollar plus tailwinds coming through 2023 and beyond. And it couldn't be more obvious how important it is than when you get to the trade restrictions.

    But the CHIPS Act, just to give everyone an example of how we look at the infrastructure space, they have to make the semiconductors themselves, so you have Nvidia, Intel, Samsung, players like that. You also have companies like LAMB Research and ASML, which make critical components to that. To make tiny three nanometer components, you need very expensive, very sophisticated equipment. I mean, it's some of the most impressive tech we have on the planet right now. Each of these devices though have many years pre-order, there's a backlog, and they run $180 million per pop for ASML for example, it's a Dutch based company.

    As a percentage of spend, okay, let's say there's a $50 billion Chips Act and hundreds of billions coming online in manufacturing in the US for example, not even talking about the EU, one $17 billion plant in Texas, $10 billion of that is going to semi manufacturing equipment. So just to give you a scale, and I don't think the market's really reflecting that, semi's dead, long live semi, people are like, "Oh, PC, gaming," there's so much coming on board. I think that's something to keep in mind when you're sitting here thinking about what is comfortable and what is actually going to get money in the next couple of years.

    China restrictions, Nvidia, Nvidia's had a rough year, gaming's down and then the China trade restrictions have come on board. They're not set to start for a while until next year, 3Q next year. And it actually leaves them with some wiggle room. So it's not necessarily they can't sell into China, they just can't sell specific chips and things. Actually rumors are saying that they're actually getting a lot of orders and people are stockpiling right now. So take that as you will. But I think ultimately it just shows how important these are and that there's going to be increased emphasis and investment here.

    Another thing I wanted to talk about briefly is the Tesla robot. That was a pretty big deal for many, in the sense that it brought attention to the space. Elon has that effect. He focused on EVs, he basically made the EV market. Robots though are already a big market, obviously that's why you guys are all here is trying to understand and hear that and from our angle. So what I think is going to happen here is A, consumer robots have very low penetration. In fact, it's basically null. You do have more automation in semi and automative and manufacturing, but it's another market that really isn't being appreciated is the robotic space and AI space being able to visualize and basically, they have to operate in the digital world to be able to operate in the physical world. That's going to take increased computation and investment in cloud, AI, connectivity.

    So I think that's the takeaway there. I don't really want to make a projection on when will Tesla robot be in people's homes if it will, et cetera. But I think it's just something to keep in mind.

    Yeah. So speaking of new things, we've got a new addition. We added CrowdStrike this quarter. So CrowdStrike for those who don't know, is an American cybersecurity company that was founded in 2011. They had their first product in 2013. They've been on a roll here. We've been watching them for some time and they've really proven resilient. And when we're thinking about making an addition to an index, we look at a number of things, We look at their market and technology leadership and we also look at what are they investing in, do they have a pipeline of products that are going to continue to make them gain market share and expand their addressable market.

    Right now they've been growing, their five year growth rate is 94% expected to hit 1.5 billion this year and 2.2 billion next year. So their AI enabled cybersecurity solutions are trusted worldwide, with a TAM addressed estimated to be $75 billion and that's growing to 125 billion with new products. They have a 97% retention rate and they became profitable in 2021. So this isn't just some growth story. Their EPS is projected to grow 50% over the next several years. Going back to investment, they have 25% of their revenue investing in the R&D and in merges and acquisitions. They're making smart acquisitions, they're investing, we're very confident that they're going to continue to be a leader in AI enabled cybersecurity.

    At this point, I'll pass it on to Jeremie to discuss our healthcare index.

     

    Jeremie Capron:

    Okay, thank you Zeno. So HTEC is the healthcare technology innovation index that we launched in 2019. And in the last few years we've seen the convergence of robotics, AI and life sciences that has enabled some breakthrough advances. And we believe that healthcare is the one big economic sector that's going to be profoundly transformed by technology over the coming decade. And so we build the HTEC index using a similar recipe to the ROBO index. That means the index portfolio is composed of the best in class companies from around the world that are transforming the healthcare industry across 90 areas that you can see on this pie chart. So there's robotics, which is about robots in the operating room, in the pharmacy, in hospitals and so on.

    And you have data analytics, which is about companies using software to derive insights from the data that we now collect around patients. The data from clinical trials, the data from medical imagery and AI is increasingly used in diagnostics and drug research and automating, or it's more about augmenting the work of clinicians, augmenting the speed and accuracy of a diagnostic. And then you have telehealth, which is about decentralized medicine, like remote doctor patient visits that we're now all familiar with, but it's also about wearable devices for the monitoring of glucose levels or cardiac activity and so on.

    You have genomics of course with companies providing the tools to decode the genome and companies developing early cancer detection solutions. You have companies with gene editing technology and even synthetic biology where we create synthetic genes. And then finally you have a host of medical and surgical instruments like 3D printed implants, you have heart pumps, miniature heart pumps, neurovascular tools and so on. So it's a pretty diverse basket of currently 78 companies, big and small.

    In fact, nearly half of the companies in the portfolio are small and mid caps, but they have one thing in common, which is technology and market leadership in their respective sectors. And on the next slide you can see that the portfolio performed very well in 2019, 2020 and 2021 before that kind of indiscriminate selling essentially cut in half. And so the HTEC index has now declined 50% from its high of February 2021. And in the meantime, the revenue has grown by more than 30%. So revenue grew by 22% last year. And this year we are going to see an additional 12% and next year we're looking at 10% sales growth, 2023. So HTEC is now trading on 3.9 times forward enterprise value to sales. That's at the median for the basket. And that compares to the high year of 7.2 times and the low in the Covid lockdown panic, that was four times. So we are now below the Covid lows in terms of valuations and I think that's a really important point to keep in mind.

    So I want to touch on some of the companies here so you get a better sense of what's in the portfolio. And I will start with some of the top performers during the quarter. You can see Butterfly Network's here, that was up over 50% in the past three months. So Butterfly's in our diagnostic sector and it has developed the IQ ultrasound solution, that's an ultrasound system that is 80% cheaper than traditional devices. It's small, it works with smartphones and tablets and has a software platform that is subscription based. So they're expanding access to ultrasound based diagnosis dramatically. And it's growing very fast, about 30% per year, with margins above 50% at the gross level. So Butterfly has $300 million in the bank, so plenty of room to continue to scale and ultimately we think it's a very likely acquisition target.

    And then Penumbra here, Penumbra is a company in our medical device sector. They have developed very innovative surgical instruments for neuro and vascular conditions. So it's about stroke treatment and removing clots and thrombectomy and coiling systems. And Penumbra's tech is superior to the traditional stent approach, so they're also growing fast, like 15, 20% a year. And they have better than expected margins when they reported and they're talking about accelerating growth and procedures into the remainder of the year. They're making competitive gains. They also have numerous products coming up over the next 18 months.

    And AxoGen, you can see here, which was up more than 40%, that's in a regenerative medicine sector. AxoGen has developed a solution to repair the physical damage to nerves, peripheral nerves. And so they're able to restore feeling and functionality of nerves. Basically it's a nerve graft and it's the only off the shelf human nerve allograph on the market. And AxoGen also had better than expected revenue last quarter. And the management commented that they expect the sales growth to return to mid teens by the end of the year.

    And finally, I wanted to touch a little bit on genomics and precision medicine, which together account for about a quarter of the portfolio. And you can see on this slide some examples of companies in HTEC, some of the technology and market leaders that are really powering the genomics industry. And we think genomics is absolutely a revolution and it's happening now. It's a revolution because genomics enables a totally new approach to medicine and the early detection of disease. It's not only hereditary disease but also chronic disease like cancer. And because it also enables custom therapy, custom therapy meaning individualized therapy as opposed to the current model of big pharma where you have a one size fits all kind of molecule that cost billions of dollars to bring to market. Here we're talking about therapies that are tailored to the individual.

    And the reason why this revolution is happening now is because we now have affordable gene sequencing technology and the cost of sequencing the human genome is declined dramatically from billions of dollars with the first human genome project decades ago to now under $1000. And if there's one company that's been leading the charge in terms of driving down the cost of gene sequencing, that is Illumina, which is the market leader. They have more than 20,000 machines installed worldwide. They have more than 75% market share globally. And last year they grew revenue by 40%. And about two weeks ago they launched the new NovaSeq X, which is the new sequencing platform that could take sequencing costs down by more than half to just a few hundred dollars. And the last time we saw such a large cost decline, that drove fivefold increase in the market size for genomic sequencing.

    And that's what enables genomics testing. And I mentioned the early detection of the diseases like cancer. So Natera for example, is the market leader in prenatal DNA testing. They have a non-invasive test for abnormalities and Natera is now pushing into cancer screening and implant rejection testing as well. Veracyte, that's another company that's transforming the diagnostic of cancer using DNA technology. They're working in thyroid and lungs and breast cancer testing. They're increasing the accuracy of diagnostic and avoiding unnecessary surgeries for patients.

    And I also highlight Twist Bioscience here. Twist is the leader in DNA writing. So it's the synthesis of genes which they do with a silicon chip to manufacture wide range of synthetic DNA at a low cost. They now have thousands of customers including pharma companies, including research centers, but also industrial companies, chemical companies, agricultural companies.

    And finally I want to touch on Alnylam. Alnylam is a good example of precision medicine and individualized therapy. They pioneered the RNA interference therapeutics, we call that RNAI. And they just obtained their fifth approval in less than four years for the treatment of polyneuropathy disease called ATTR. And this treatment that they're coming up with could reach billions of dollars in sales. So when you compare that to the market cap of Alnylam today, there's I think interesting discrepancy.

    So in total there are 18 companies in our genomics and precision medicine segment and they account for around 25% of the HTEC portfolio. And I hope you understand that there our portfolio construction process here is really about diversification, providing exposure not only to small areas like genomics, precision medicine, but to all areas of the healthcare industry where technology is making a difference.

    All right, so I'm going to pause here. I think we've covered a lot of ground, I really want to take some of your questions and I see we have a question about earnings trajectory for our portfolios. What is the expected earnings growth for this year and next? And I think we can start with ROBO. I'll comment on ROBO and then Bill and Zeno can comment on the other portfolios. But essentially we think we're going to close 2022 with about 15% EPS growth for ROBO. So last year we had more than 40% EPS growth. This year we're still looking at 15, which is significantly ahead of what you'd expect for the S&P 500, particularly if you exclude the energy sector from the S&P 500. We're basically looking at a compression in EPS for this year for the broad market. For ROBO, it's 15%. And for next year, we're looking at about the same, so 15 to 17% is the expected EPS for ROBO in aggregate for next year. Zeno, do you want to comment on AI?

     

    Zeno Mercer:

    Yes, Hi. Yeah, so in terms of EPS growth for the THNQ index and its members, I'll kind of split it into application and services and the infrastructure component. Infrastructure has been a bit smoother this year and we saw 29% EPS growth in 2021, this year we've seen and projecting for the full year, 22%. So a slight pull down. On the flip side on application and services, we saw 29% last year and 7.9% this year, with eCommerce and consumer being the biggest laggards. But that's expected to rebound in the following year respectively, consumer and e-commerce to 25% and 64%.

    And I think looking 2023 and beyond, the projections are looking at 11.6 this year. Overall THNQ index is looking to get back into the twenties growth for EPS, so 20.4 and then even higher clip in 2024 and beyond. I think some of the standouts within that would be network and security, which is growing at 49% this year and expected to still maintain upper twenties, low thirties next year. So you're seeing some rebound in some areas and others are just going to see continued strength for EPS.

     

    Bill Studebaker:

    Jeremie, just to fall on to your comments, maybe just about revenues for ROBO, I think importantly, that's sort of the elephant in the room, everyone thinks there's going to be a pretty dramatic reduction in estimates. Obviously we've not seen that happen. That is a risk. Revenue growth ROBO is essentially expected to be about 13% this year and next year a little over 8%, which is in line with its historical averages. So even if there is pressure from the broader markets, we do expect our indices to generally grow two to three times to that of the market, which historically they have. So we feel pretty good about where these businesses are positioned as we go into 2023 and beyond.


    Jeremie Capron:

    Okay, thanks Bill and Zeno. And I see we have a question about potential ESG issues with the genome oriented companies, specifically governance concerns. So here at ROBO Global, we take ESG very seriously. We introduced our ESG policy in 2017, so going on five years now. And we've improved the policy consistently over the years, primarily given the pool that we had from some of our European investors. And so the policy today is extremely complete and you can find all the details on the website and it's really focused on excluding companies that fail certain standards that we've established in line with the Febelfin standards over in Europe. It's one of the strictest standards. So we look at environmental performance, governance and social issues of course. We use our own internal research to evaluate each and every company that's in our investment universe, but we also use external support from sustain analytics that helps us flag any potential issues or controversies as they arise.

    Now in terms of question around the genome, I think it's an area where we're seeing a lot of debate, whereas is no debate is around using genomics for early detection of disease because the concept here is that you are able to pick up a disease before it becomes an enormous problem in terms of your ability to cure, of course, and your probability of survival, but also in terms of the cost to the healthcare system. And so there seem to be unanimous view across the industry and policy makers around the fact that genomics in diagnostics is a no brainer. And so we don't expect any issues there. Where some issues could potentially arise I think is around gene editing because here we are making changes into the human DNA. In many cases we're making changes into cells so that it can produce specific proteins and proteins that will help fight against a disease.

    And it is still very early days. Today there's no FDA approved gene editing based therapy. But in 2020 we saw the first dosing of a human patient with such an approach and we had some fairly promising results with that and that's why you've seen the gene editing stocks perform really well in 2020 and first half of '21. Now they've come down a long way, but I think that's where we need to pay a little more attention.

    And the last comment I would make around that is that clearly we've seen a change in the trajectory at the FDA in terms of how fast they've been approving gene therapies and cell therapies. So for a long time until I'd say around 2019 or so, there was reluctance by the FDA to fast track this research. But today it has been a clear acceleration and while there's only a handful of gene and cell therapies approved in the market today, there's a backlog of several hundreds of those currently in clinical trials. And so we expect the raft of approvals over the next several years.

    So I'm going to stop here again, if you want to bring up any questions, please type them into the Q and A box. There's a question about the autonomous system, sub sector, I think Bill, you might want to take that. It's currently at 0%, used to be somewhat bigger than that, Bill, you want to give some color.

     

    Bill Studebaker:

    Yeah, that's right, it is 0% right now. And we did have one constituent in there, which was iRobot, obviously taken out. And just because a company is removed from an index, we don't automatically just put something in, as Jeremie talked about in the earlier part of the presentation, we're looking to identify companies that we think are leaders in their industry, companies that have a technological mode around their business, have dominant market shares. So that's a really important criteria for what we're looking for.

    And we do expect the consumer sector to begin to evolve. Obviously we're pretty excited about Tesla's ambitions here and I think as the price points come down, as the use cases broaden, I think we're going to see a natural evolution in the consumer sector, but we haven't had a lot of progress there yet. With regard to your question, I guess you were commenting about Group Gorge and another entity in Spain. Again, I think the important characteristic about what we're trying to do at ROBO is put in leaders in the industry. While these companies may have some ambitions in robotics, they're clearly not getting there yet. Group Gorge in France in particular, not only would we question their market share in technological leadership, there is a liquidity issue for companies to go in our index, they have to have a minimum market cap and minimum liquidity per day. And both of those companies would fail those screens. So I don't, Jeremie, any other thoughts, but that's.

     

    Jeremie Capron:

    Bill, there's another question about FX attribution for ROBO year to date. I know you touched on that earlier. Do you want to repeat that?

     

    Bill Studebaker:

    Yeah, obviously it's been a big headwind. It's been around 800 basis points since we launched year to date, it's probably about 12, 1300 basis points since we launched in 2013. So we've actually absorbed that rather well, we certainly would hope that that would become a tailwind. There have been years where FX has been a tailwind and while we can't anticipate that, we certainly don't hedge for it. And we think over time there is a reversion in mean that typically happens in currency markets. And given that the way the index is built, we're trying to identify companies that we're indifferent to where they're located. It just so happens about 45% of our index is in North America and about 55% internationally. And again, the most important characteristic for us is defining who the market leaders are, industry leaders, technology leaders, and we're indifferent to what we region they're in.

     

    Jeremie Capron:

    Okay. We have one last question about the turnover that we see in the index. I'm going to take that. So essentially the turnover comes primarily from the quarterly rebalancing. The index itself is pretty stable in terms of the constituents. Now of course the weightings can change at the margin as the scoring evolves, so we score each and every company in our research universe and the score drives a legibility into the portfolio and to some extent the position size.

    Scores evolve whenever the research team interacts with the company or there's a corporate action, there's new information about market leadership or technology leadership. Also the revenue exposure to the things that we're going after, the scores will move, but the primary driver of turnover is really the rebalance when every quarter we go back to that score driven weighting. And so that drives about 25 to 35% turnover in a typical year, so four rebalances per year. But the changes in terms of constituents really are not that meaningful. In fact, every quarter you'll typically see one or two new inclusions or exclusions on the basket of about 80 companies. That's where the turnover comes from.

     

    Zeno Mercer:

    I'll add something to the THNQ index real quick. Thinking through THNQ, we have 71 index members and this past quarter we had four takeouts, one addition. Last year we had five or six takeouts from M&A alone. And one of the takeouts was iRobot, which was also in the THNQ index. There's not that much overlap, but that was one, it was in AI and ROBO play. So I just wanted to add that we are making moves there. And I think what we've thought about a lot lately is just because the whole market is down, we're looking to make sure we capture the companies that are solid and not just following in tandem, but we'll make sure that they're going to grow market share, have invested properly, have resilient leadership going forward and to the next quarter and beyond. So. Yeah.

     

    Jeremie Capron:

    All right. Well, I think we're going on the hour, so I want to thank everybody for joining us today and remind you that you can sign up for a biweekly newsletter on the website roboglobal.com, where we share some of our research and insights into companies and sectors, robotics, AI, and healthcare technology. And we very much look forward to speaking to you again sooner. Thank you.

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