One of every advisor’s biggest challenges is keeping your clients invested for the long run and sticking to the plan. Typical investor behavior helps to explain why investors want to buy high and sell low. "Investors are 'normal,' not rational," says Meir Statman, one of the leading thinkers in behavioral finance. Investors tend to change risk tolerance based on the direction of the market. For example, investors’ willingness to tolerate risk may fall when markets are falling. Alternatively, risk tolerance may rise when markets are rising. Buy high and sell low. Sound familiar?
Unfortunately, no matter how many times you’ve been down this road before, once a client begins to feel the future is unsafe, keeping them on track can be an uphill battle that can challenge even the most skilled and experienced financial advisor. One tool that can help you win that crusade is a compelling story that illustrates why investing for growth during a market correction is a valuable opportunity and, even more, how disciplined diversification can help manage risk.
The ROBO Global Robotics & Automation Index is the tool that supports that narrative. It all begins with a research-driven investment strategy that focuses on identifying best-in-class companies in robotics, automation, and AI—a high-growth theme that is experiencing one of the most dramatic skyward trajectories seen in decades. As well, the ROBO story includes two key points that can help put even the most wary investor at ease during volatile markets: a disciplined approach to rebalancing, and deliberate diversification across sectors, companies, regions and market caps. Here’s a brief look at each:
In the world of robotics, automation, and AI—or ‘RAAI’—extremely rapid development means that market leadership can change nearly as quickly as the technology itself. To respond to these inevitable shifts, the ROBO index is rebalanced to the appropriate % index weights on a quarterly basis. Stocks that go up are trimmed, while those that go down are added. The index also goes through a quarterly reconstitution, adding companies that show new potential for growth according to our research and quality filters, and deleting companies that have lost market leadership. Using our rigorous industry classification process and the unique insights of our research team, we identify an optimal mix of current market leaders and innovators who are poised for near-term growth—including companies that may be less than obvious to industry outsiders.
While regular rebalancing helps maintain the most appropriate mix of best-in-class companies in the theme, the index is decidedly passive, with changes made only when they are deemed absolutely necessary. In 2018, there were a total of 7 additions and 7 deletions.
To provide some perspective into the types of companies that are periodically added and why, here’s a quick look at 3 of the year’s 7 additions to the index:
Invested entirely in companies that are leaders or emerging leaders in RAAI, the ROBO Global Robotics & Automation Index uses a rigorous Industry Classification process that is designed to provide multiple levels of diversification. Starting with a universe of more than 1,000 global innovators, we narrow that down to include only those companies that fit into 1 of the 12 subsectors we’ve identified as growth leaders, that meet our requirements for robotics and automation revenue, and that adhere to our ESG policy. We then turn to the research and insights of our Strategic Advisory Board—including a team of 9 PhDs, professors, and researchers who are each recognized experts in their fields—to evaluate the technology and market leadership of each company.
The result is a mix of 80 or more companies that span the entire RAAI supply chain. Of those companies, more than half are mid-caps, with the remaining members split between small-cap and large-cap companies. This is a major contrast to some newer indexes that attempt to target the RAAI opportunity by allocating a high % to only the best-known, largest-cap players in the space. ROBO offers less than 2% overlap with the larger indexes like the S&P 500 and ACWI All World.
Diversification across subsectors can also help diversify risk and lower volatility—and in ways that are highly visible to retail investors. For example, the healthcare subsector includes companies that offer a wide range of technologies and applications that are disrupting the entire industry. Progress in genome sequencing is changing how we diagnose and treat disease. Robot-assisted surgeries are improving patient outcomes and reducing healthcare costs. Exoskeletons are improving patient mobility and helping caregivers lift patients to provide better care. The food and agriculture subsector focuses on companies that design, fuel, and deliver the robots are feeding, watering, and picking our crops to increase output from limited resources. In the logistics subsector, AI and automation are accelerating supply chains and dramatically increasing speed-to-delivery, and in manufacturing, cobots are increasing factory efficiency and decreasing costs. And for every one of these industries, failure to adopt means failure to compete. RAAI has become a must-have for companies that hope to thrive in the future, and for investors seeking to benefit from that growth.
In today’s volatile market environment, perhaps the hardest job of every advisor is keeping your clients from abandoning their plans due to fear. No growth strategy is entirely free of risk and there is no silver bullet here. But for advisors who understand the balance between risk and reward and who are seeking a passive strategy designed to use lower prices and higher market volatility to their advantage, the ROBO Global Robotics & Automation Index may be the ideal solution. And telling the ROBO story may just be the key to helping you succeed in keeping your clients invested and on track toward their long-term financial goals.
By Chris Buck and Andrew Martin, ROBO Global