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Q1 2022 In Review: ROBO Global Innovation Indices



The Robotics & Automation Index (ROBO) declined 16% in Q1, marking the third-worst quarterly performance since inception and leaving best-in-class robotics and automation stocks 19% below their all-time high of November 2021. The Healthcare Technology & Innovation Index (HTEC) also dropped 16%, and the Artificial Intelligence Index (THNQ) was down 15%. While fundamentals remain strong across the board, valuation multiples have compressed under the weight of the fastest rates of inflation in decades, leaving the valuations of the ROBO Global innovation indices in line with long-term historical averages. In this report, we discuss key developments and big movers across our innovation portfolios.

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Jeremie Capron:

Good morning everybody. And welcome to the ROBO Global April, 2022 investor call. My name is Jeremie Capron. I’m the director of research, and I’m talking to you from New York where we have a beautiful spring day. With me on the call, my colleagues and analysts from the research team, Nina Deka and Zeno Mercer. So let’s take a look at the agenda for today’s call, which is broadcast live and will be available as a replay on our website We’ll start with a brief reminder of what we do here at ROBO, and then some thoughts around the recent market development. And then we will look at each of the three index portfolios, ROBO, HTEC, and THNQ. And then finally we’ll be taking your questions. So feel free to type them into the Q&A box at the bottom of your screen. So let me kick off here with this overview of ROBO Global.

We are a research and investment advisory company that’s focused on robotics, AI and healthcare technologies. And eight years ago, we put together a team of investment professionals and industry experts to create research based investment strategies around what we believe to be the next technology revolution. And today there’s around $4 billion US in funds tracking our strategies, primarily in ETFs here on the New York stock exchange as well as in Europe and Asia. And the most notable index is ROBO, which was the first robotics automation strategy, and that started about eight years ago in 2013. And you can see here on the screen that we also run THNQ, T-H-N-Q, that is the artificial intelligence index and HTEC, H-T-E-C, that’s the healthcare technology and innovation index. And you can see that you can find the annualized returns since the inception of each strategy as of the end of last month, March, 2022.

So these index portfolios combine research with the benefits of index investing and the ETF wrapper. They are composed of best in class companies from around the world. They’re small, mid, large cap that we research and we score on various metrics to determine if they are included and at what weighting. And then we rebalance every quarter. So the result is portfolios that have a very low overlap with broad equity indices, like the S&P 500 or the NASDAQ or other global equity industries. And on the next slide, I want to show you how we started with ROBO that covers the entire robotics and automation value chain and the bubbles you see around it represent the sub sectors of focus. So we have key areas of application like factory automation, logistics and warehouses, healthcare, food and agriculture, and so on. And also the enabling technologies that make automation possible like sensing and computing.

And in 2018, we started two additional index portfolios around areas that really stand out in terms of their potential disruptive impact. And so THNQ an HTEC or designed using a similar recipe to ROBO in terms of the sub-sector approach and the research work. So let’s talk a little bit about the market and the first quarter returns. In the first quarter, equities had one of the worst starts to a new year on record, and we saw some recovery in March. We had inflation ramping up the highest levels in 40 years, we had a considerably more hawkish fed. We have a geopolitical disaster in Ukraine, we have rising commodity prices. It was a pretty tough order to say the least, and there was no place to hide as bonds also dropped hard. So in this context, our index portfolios underperformed during the first quarter. We saw declines ranging from 15 to 16%, as you can see here on the screen.

The important thing that I want to tell you about this decline is that it was entirely driven by compression in valuation multiples, especially in the areas that are most sensitive to the economic cycle. And we’ll get back to that. So the 15 to 16% decline corresponds to a 15 to 16% compression in the valuation as opposed to a reduction in the sales and profit outlook for the companies in the portfolios. In fact, the earnings estimates for index members in aggregate have not come down, they have remained stable and even marginally increased over the past three months. Now, of course, we are entering the earnings season and we will see how resilient margins and profitability can be in the face of fast rising costs. And it looks like consumer demand, especially here in the US, is slowing after some extraordinary strength in the past 18 months.

But the reality is that after this 25 to 30% decline from the highs, our three portfolios are now trading on valuations that are essentially back to pre pandemic levels and they’re also in line with the long term historical average valuations that we’ve seen over the years. And in the meantime, I think the outlook for robotics, for AI, for healthcare technologies is significantly improved relative to before the pandemic. And this is because this pandemic has been a very strong catalyst for the digitization of the economy. It has been an accelerator for automation and in the current environment of rising inflation and shortages, we have shortages in semiconductors, we have shortages in transportation, we have a shortage of workers of course. In this context, business leaders are deploying automation at a record pace. And the good news is that our portfolios are not overly exposed to long duration stocks.

What I mean by long duration is companies that are loss making currently but expected to generate significant profits far into the future. They are not that many of those companies in the indices. One of the key pillars of our investment strategy is diversification. We’ll come back to that. And we take the long term view. We build our index portfolios out of companies that are positioned to benefit from this technology revolution over the long term. And the methodology that we employ is based on a very discipline scoring, a scoring system to select the technology in market leaders. It’s a discipline weighting systems as well, that avoids concentration, which can be very painful as we have seen in recent month for technology-centric funds. Okay, now let’s talk about robotics and some of the trends that we are watching. And so first I like to show this long term performance chart of the ROBO index, which is composed of robotics and automation companies from around the world.

Those are the highest scoring companies based on our systems. We can move on to the performance chart here. Thank you. And you can see here the out performance over time, which is really a reflection of this ongoing technology revolution and the exponential growth of automation and autonomous systems in pretty much every sector of the economy. And you can also see that historically, the drawdowns have been in that range of 20 to 30%, and they have presented interesting opportunities for investors. And on the next slide, you can see what we capture with the index on the left hand side the pie chart you can see in green, the core enabling technologies that make autonomous systems possible like sensing, like computing and actuation. And in blue, those are the most promising applications from factory automation to eCommerce, logistics, healthcare, food and agriculture, and so on. And you can see the performance by sector on the right hand side.

And as I said earlier, the worst performing sectors in the border have been the most economically sensitive, essentially the industrial and factory automation stocks. Now, this is interesting because what we are seeing, what our research is telling us today is that demand for factory robotics and logistics automation is booming and the world’s leading manufacturers just cannot keep up with demand. In fact, that’s one interesting data point here, at the beginning of the year FANUC, which is a global leader in factory robotics company based in Japan selling all over the world. FANUC was sitting on a record high order backlog, nearly 300 billion Japanese Yen. That is more than double the level of orders that they had before the start of the COVID pandemic. And that’s also more than a full year worth of sales. So as we head into the earning season, we expect that the quarterly orders at ROBO members such as FANUC but also the other factory robotics companies like Yaskawa or ABB or Teradyne, these orders will continue to trend up because very powerful drivers are still firmly in place.

First is the eCommerce boom. eCommerce boom is driving demand for logistics automation solutions. We’ve seen those gaining traction in new areas of warehousing in distribution operations. It’s not just the eCommerce companies, but essentially the whole transportation and logistics industry that’s upgrading its tools to cope with that booming demand. The second driver that we’re seeing is the rapid shift to electric vehicles in the car market. And that is pushing car makers towards a different production approach that is more modular, that is more flexible, and importantly that is very intensive in terms of their use of automation technology. And the third driver is of course, the labor shortage that is increasingly pressing. That is putting automation at the top of business leaders’ minds. In the US, the latest job market data suggests that there are more than 1 million manufacturing jobs that are left open at the moment.

So moving on, I want to quickly touch on a couple of the top performers in the quarter. It was not all down quarter. Two companies that you may not be familiar with. So on the next slide here, I want to tell you about the first one that is AppHarvest. AppHarvest was up 38% in the first three months of the year. AppHarvest is an agriculture technology company that is developing high tech indoor farms. Those are highly efficient, they’re pesticide free, they’re hyper local, and they have a very strong focus on technology. This is a model that has already proven very successful in places like Holland and Spain. And this stock is in our food and agriculture automation sub sector. It’s been quite volatile. Since they went public last year, they have faced some challenging quality issues with their first harvest. But since then, we’ve seen management revising its buildup plan that was very aggressive to a more conservative four farms by the end of the year.

And they’ve also made some significant progress in terms of operations and a successful harvest. And that’s what propped up the stock in the last three month. The next one is iRhythm. iRhythm was up 34% in the quarter. iRhythm is the digital healthcare company that’s behind the Zio mobile electrocardiogram device that is used for remote monitoring. This is a very interesting solution for patients at risk of arrhythmias. It can be worn for weeks, and it gets smarter over time as machine learning is applied to a very rapidly growing set of cardiac data. And so iRhythm stock is in our healthcare sub sector. It’s also a member of the HTEC portfolio that Nina will be talking about in a minute, and has continued to rise this order on the back of a very large improvement in the reimbursement rate for the Zio device compared to expectations just a few months ago.

And finally, I want to present you with two important facts about the ROBO portfolio. The first one is that aggregate valuations for ROBO are back to pre COVID levels. You can see here, this chart shows the forward price to earnings ratio over the eight plus years of life data for ROBO. And you can see that we are back around 25 times, which is just one point above the long term average, that is 24 times. And this is also the level that we were trading at in 2019 and the low twenties for much of the index history. And I think that suggests that a lot of the valuation risk that was embedded in the index a few months ago is essentially gone. Now, the second fact that I want to leave you with is that ROBO is not concentrated on high flying expensive stocks. No. It’s quite the opposite.

ROBO is diversified. It’s diversified across fast growing companies and in slower growing lower multiple stocks as well. You can see here, this is the distribution of valuations for the 81 holdings. And there really are only 14 out of 81 that I think could be characterized as a very high growth and high multiple with a sales multiple above 10 times. And these are companies like AutoStore that’s based out of Norway that makes some turnkey solutions to automate warehouses. It’s growing very fast, more than 70% sales growth year over year. You’ll find stocks like Nvidia, AppHarvest that I just mentioned, or Intuitive Surgical that has extremely high margins and a very high recurring revenue components. And then at the other end of the spectrum on the left hand side, you can see that there are nearly as many stocks with a sales multiple below one.

And so in fact, if you look at ROBO through the prism of investment factors, the traditional investment factors, you’ll see that ROBO scores high on quality. And the vast majority of companies in the ROBO index are very profitable. In fact, there’s only a few exceptions to that and only a handful of stocks to that are not yet profitable, but have a very clear trajectory towards profitability over the next year or so. And so with that, I will pass it on to Nina to discuss healthcare technologies. And I want to remind everyone that you can ask your questions. We’ll get back to Q&A at the end of the call. Please use the Q&A box. All right, thank you. Nina.

Nina Deka:

Thanks Jeremie. So I’m here today to talk to you about HTEC’s quarterly performance. HTEC is ROBO Global’s healthcare technology and innovation index, and it is comprised of world class best in class healthcare technology companies across a wide range of sub sectors. Let me start with performance. The HTEC index posted a loss this quarter of 16%. This underperformed the NSCI world index, which was a return of negative 5.4% and it also underperformed the S&P global healthcare index, which returned negative 3%. So similar factors that have been pressuring growth stocks such as interest rates rising, supply chain constraints are also impacting healthcare technology equities. In fact, also the Omicron wave at the end of last year and into Q1 of this year also had a negative impact on a healthcare industry in general because it did cause delays in procedural volumes.

It also further exacerbated the already critically low levels of staff in the hospitals. A lot of nurses and doctors were out sick in Q1, and so that also led to a delay in procedural volumes and patient care. So underperforming the broader market for the quarter, but we do keep in mind that this is a strong longer term play. And if you were to look at a three year return, you would see that HTEC is actually outperforming both the world equities, as well as the S&P global healthcare index. Meanwhile, the underlying fundamentals remain strong of the index. HTEC has a median forward 12 month growth of revenue of 13% and over half of the portfolio is cash positive. So as investors seek exposure to more stable value oriented investment opportunities during these times, HTEC the portfolio offers a very attractive composition of investment opportunities in terms of risk exposure.

In fact, over half of the portfolio is comprised of large cap stocks and include some of the most longtime best in class technology leaders of healthcare companies like Boston Scientific, Edwards Life Sciences, Illumina, Intuitive Surgical, Jeremie mentioned earlier. These companies have strong balance sheets and earnings growth potential, and they can weather the storm of logistical and supply chain complexities as well as cost variability. So we just want to make sure that it’s clear to everyone that although this is a healthcare tech portfolio, it does include a lot of companies that are quite stable and long term market leaders. And regardless of what’s going on in the world, all the macro factors that we’ve discussed, the demand for new and better treatments and better diagnostics is not slowing down, which bodes very well for the entire healthcare technology and innovation portfolio.

It’s currently trading at 5.4 times forward 12 month EV sales. And this is significantly at a discount from a ties of seven times EV sales in 2020, 2021 in fact, and it’s also down from Q4 where it was trading at 6.4 times next 12 month EV sales. So we’ve got a pretty compelling entry point right now into the portfolio. And I just wanted to also make note that despite a period of a lot of macro uncertainty, the HTEC members continue to make notable advances during the quarter. For example, a company called Glaukos. This is an ophthalmic medical technology company that’s focused on the treatment of eye diseases. I think there’s a slide on that. And I wanted to point out that Glaukos returned 30% during the quarter. If you look at the photo, what we’re looking at is one of the smallest known implants into the human body in the world available in medical technology.

This is the iStent and Glaukos is a market leader of this device. iStent is used to treat glaucoma. So glaucoma is basically an eye disease that puts pressure and damages the optic nerve, and can ultimately lead to blindness. And ophthalmologists will approach the treatment of glaucoma with many different types of treatments. They might put a stent in to help relief pressure, they might prescribe eyedrops. And so Glaukos is really breaking round here on expanding beyond their market leading stent technology into some of these other ways of treating glaucoma. For example, the eye drop which can be very tedious. It requires a patient to put eyedrops in their eyes multiple times a day, and many times patients aren’t compliant, they forget or it’s just annoying and they don’t want to do it. So Glaukos is developing something called iDose that will enable one time implant of drops that will slowly release eyedrops over potentially a full year period.

So this could help slow down the progression of the disease and help people keep their eyesight for longer. And so they expect to potentially have this FDA cleared in the next couple of years. And that’s just one of the many things in their very rich pipeline. Vertex, another company, returned 18% in a quarter. So Vertex is known for the treatment of cystic fibrosis, and they are expanding beyond rare diseases into diseases that cover a much more substantial size of population. During the quarter, they progressed one of their drugs into phase two three to treat a kidney disease, which has a much larger market than cystic fibrosis. They’re also working on progressing technology in diabetes. They just hired a renowned diabetes specialist to come work at their organization. So we expect some great things to be coming out of Vertex in the next three to five years and it’s a really exciting time to be involved with this company.

And then if we just zoom back out and look at our sub-sectors as a whole HTEC is comprised of nine different sub-sectors. You’ll see them on the right here, on the left excuse me. Medical instruments is our most heavily weighed sub-sector. And it was the best performing sub-sector in the quarter. So it’s roughly more than a quarter of the entire portfolio. And it is comprised of some of those companies I mentioned earlier like Edwards Life Sciences, Boston Scientific. So you can see that it was the best performing sub-sector, because this is a time where, like I said, a lot of investors are migrating to those really stable value oriented stocks. And our medical instrument sub-sector is pretty heavily weighed there. And companies, even during a tough quarter, continue to make progress.

For example, Dexcom, the innovator of the continuous glucose monitoring device, it is the smallest device and most accurate one, and they just launched their seventh generation of this device in Europe during the quarter. So this has been a long awaited technological advancement. This device is the size of a nickel. And the thought is that because it’s so small and so accurate and it’s expected to be very widely available, patients can get it very easily through a pharmacy, that this’ll compete directly with Abbot’s Libre and potentially bring even more share to Dexcom. So a lot of exciting things happening in the medical instrument space. The worst performing sub-sector in HTEC was the genomics sub-sector. This is a sub-sector that returned negative 33% in the quarter. And I believe we have a slide on them. It’s just really pointing out that genomics is a very volatile set of companies.

And yet the companies in the genomic sub-sector, they are fueling the most proliferating themes in healthcare tech. So when people talk about precision medicine, when people talk about early disease detection, disease prevention, all of this in innovation that’s happening with the pharma companies with biotech, can’t be done without diagnostic tests in the genomic world. And these are the companies that are enabling that. So themes like liquid biopsy, where you can draw blood from a patient and see whether or not they have cancer cells floating around in their blood. This is a much easier way to detect cancer than actually performing a surgical procedure and doing a tumor biopsy. This is a new way that can be used to screen people for cancer that maybe potentially a patient is at high risk because a genomics test was done on them and they saw that they were a carrier of a certain gene.

So this is the way of the future, where people are going to have much more information, the cost of sequencing the genome is continuing to come down. And with all this information, we can develop more precise tests to treat very specific types of disease. And we’re already seeing a lot of progress in that in the cancer space. So companies like Natera for example, had a large pullback in the quarter. They had to be a settlement to a competitor for a transplant product of theirs for the advertising. But this continues to be a market leader in prenatal testing, and one of the most innovative companies in genomics. And so other companies that have had pullbacks are just largely moving as a group in response to the market.

This is like if investors are migrating toward more value oriented companies where we see a heavier presence in our medical instrument space, they’re also shying away from some of these other companies that had a huge run over the last couple of years. And genomics is one of them. Genomics had a huge run. Some companies were doubled in stock value over the last couple of years. And in fact, this sub-sector has pulled back 54% from its highs in February, 2021. But that being said, the underlying fundamentals are intact. These companies continue you to see strong demand, and we expect to see a compelling level of demand over the next decade for things like liquid biopsy and spatial biology technology. So much more to come in this space in a very attractive entry point.

Genomics comprises 13% of the total HTEC portfolio. So it’s by no means the entire portfolio. And back to what Jeremie was saying earlier about the diversity that we see in ROBO, we also see diversity in the HTEC portfolio. So you’re going to have a combination of high growth names that some of which are not yet profitable and then you’re going to have a lot of stable companies as well that are we slower growing but growing earnings. And over time, we expect them to continue to maintain their market leadership. So all that, I’m going to stop there and pass this along to Zeno to talk about THNQ.

Zeno Mercer:

Thanks, Nina. So yeah, today I’m going to cover what happened in THNQ this past quarter. So as an introduction for those who are new and a reintroduction, THNQ provides a comprehensive balance and global exposure to both infrastructure, the picks and shovels if you will, and as well to game changing applications of AI in our everyday lives. 2021 was a record breaking year for many reasons for AI, total investment highest than ever book public and private adoption is higher. The number of AI patents were 30 times higher than in 2015. During this past quarter, we’re seeing lots of new product announcements from companies like Nvidia and the likes, which are going to see training costs go down, training time go down and this just puts things into an accelerating reiterative cycle of improved products and hardware and software that will go into our lives.

During the quarter, the THNQ index was down 15.33%. Most of this was evaluation contraction from an earlier 2021 high of 11 Ford EV sales. We’re now looking at, and as of today, a 6.6 EV sales rate. So this comes during a quarter when we had 80% of the THNQ index members beat earnings and revenue expectations, and a year where over three quarters of companies in the index are expected to post a positive EPS. And adding to that further overall earnings and sale estimates have overall been revised upwards for the next 12 months. So what we’re seeing here is truly valuation contraction in a market and thematic area that is accelerating. So if you look at the three year performance we had, or we can say that real quick we’re still in the early innings here. I mean, congrats if you’re here. Not only is AI transforming traditional industries, but as an additional driver, we’re going to see multiple potential trillion dollar markets up here that THNQ index companies provide exposure to such as autonomous vehicles, the metaverse and more.

Moving to the next slide. So I mentioned earlier, we have a balanced weighting to both of these, and I really mean it. We’ve got 50-50 split more or less to applications and services as well as core enabling infrastructure. So there have been a lot of questions coming through around the impact of inflation on an AI portfolio. And the reality is outside of semi and cloud, which is actually in some ways benefited from supply chain disruptions. I mean, not being able to deliver it, but just more so the demand is bigger than ever from these multiple industries. A lot of AI companies don’t necessarily have supply chains. They’re inherently digital first. And so they’re actually able to provide deflationary pressure providing faster solutions, better products and things that across their respective industries are improving profitability and better products and services to customers, 24/7 automation and availability, more personalized experiences.

And this is very important in the face of high labor costs and increasingly competitive markets. I wanted point out also that 64% of members of THNQ are net cash positive. Barring whatever happens they’re all relative in good position. Semiconductor could be facing some near term challenges and a lot of this has been priced in already. There are a couple reports coming out of a potential short term demand or dip and slow down. Some of this is supply chain issues causing people to reconsider orders, but what’s important here is, I’m going to highlight a recent White House report, the lack of supply chain disruption to semiconductor took a full point off the GDP in 2021. So this is so critical that there’s going to be increased investment.

Not only that, governments around the world are pressing for heavy, heavy investment into localized chip manufacturing and production. That’s in the US, that’s in Europe and the rest of the world with hundreds of billions of dollars worth of CapEx expected to come through over the next decade. So this is not slowing down. I mean, if you’re thinking about getting out now, that’s a very short-sided term for a semiconductor, which is essentially the core body providing all of these other experiences. On the negative side, we had eCommerce suffering its worst quarter since inception. Digital retail is one of the fast growing trends. Mobile and internet market penetration is very high. eCommerce is still relatively very low. The pandemic obviously picked that up for many reasons, but we now have a number of our companies in eCommerce and AI enabled that are actually trading below or around their pre COVID valuation levels from a forward EV sales perspective, even as their market share capabilities and operations have improved significantly. As a quick example, our worst perform of the quarter Shopify, which is a leading enabler of global commerce with a full service out of the box online platform, they provide inventory management, payments, supply chain solutions.

There actually have made some acquisitions and they’re looking to also provide two day delivery to up to 90% of the US population to help companies compete with Amazon. Their top line is expected to grow even today 30 to 36% over the next several years to being a $10 billion revenue company. So there’s been a big pullback, which I think is a good value opportunity for some of these companies.

Onto the next slide. So one of our best performing sub sectors here is network and security. For some people this could be obvious, but cybersecurity is really I think a misunderstood category and an area. Some people see it as just a sunk cost or things like that. But if you think it, any operation that is worth value in the history of humanity has had to have a security infrastructure around it. I mean, that’s core to it being able to be functioning. As more and more of our technology is directly interfacing automatically with AI, our digital banking, digital assets, things like that, cybersecurity across both the enterprise level, consumer and government assets is continued to spend. I mean, we basically take for granted our ability to access internet services and applications, and that our data isn’t necessarily being hijacked or things are going wrong. When you order an Uber, you’re expecting that that Uber is actually the Uber coming and that there’s not risk associated with that.

A lot of that is because these platforms use companies like this that help make sure that there are no vulnerabilities in the service they’re providing. And cybersecurity is expected to grow 15 to 25% KEGA over the next decade. So this is a very fast growing industry. And a recent IBM report reported that AI enabled cyber security reduced the cost of cyber security breaches by up to 80%. That includes both lost business due to decreased customer confidence and direct costs such as actual damages and lawsuits, things like that. Onto the next slide. One of the highlight are two quarterly index leaders for THNQ. They’re actually pretty similar companies. They’re both enabling application development and monitoring so much like a car has a systems board where you know what’s happening, digital technology is a living, breathing, and always chain platform with vulnerabilities and connections to the rest of the world.

So Splunk was up 28% for the quarter. So Splunk provides cloud based operational insights from companies data, basically users and developers and leaders to get insight and see what’s happening across the company and basically proactively implement and prevent issues. Revenue is up 20% year over year to just over $900 million, which actually beat expectations by 125 million, this is for the fourth quarter reporting this past February. They also have a new CEO Gary Steele, and he was the founding CEO of Proofpoint, which was a former THNQ member that was acquired for over $12 billion this past year. So we were very confident and happy that he is running the company now. And interestingly, a private equity firm, Hellman Freeman disclosed a 7.5% stake earlier in the year. So there are a lot of interesting movements happening with Splunk that are all positive.

The other company I’m highlighting is Alteryx, which provides end to end data science and analytics for enterprise companies helping automate and understand processes. They provided re-up guidance of 30% for the year of annually recurring revenue while maintaining a very impressive 90% gross margin alters has been investing heavily in their technology. In January they announced the acquisition of Trifecta for 400 million, which is an intelligent data visualization tool that helps developers collaborate. So the core backbone of improving is making investments. So they’re in a really good position to continue expanding here. Next slide I want to focus on all our new addition for the quarter. So Ambarella’s actually been in our ROBO index. So we don’t have that much overlap too often, but this is one where it was a no brainer to add at this point in time to the THNQ index.

So Ambarella develops semiconductors for camera definition video compression in image processing. So it’s used by nine out of 10 of the top security camera companies in the world. And increasingly, and this is where things are getting interesting, they’ve gone from developing for human view and analysis to more AI enabled. So not only is their hardware and software that they provide AI enabled and AI driven, but they are now being used by autonomous vehicles, security cameras that are doing autonomous scanning of potential issues in traffic and things like that. So there are a lot of really interesting plays for Ambarella and they’re primed to be a very important part for the edge use cases of AI over the coming decade and we’re excited to have them in. At this point, we’re off to Q&A so I’ll leave it at that.

Jeremie Capron:

Thank you, Zeno. Thank you, Nina. So we have lot of questions coming in, and I think we’ll start with the question around European exposure in the three portfolios. It’s definitely relevant given the crisis in Europe right now. I’d start off by saying that when it comes to robotics and automation, there is some exposure to Europe. It’s around 20% of the portfolio so it’s quite underweight relative to a global equities index in general. And the companies that you’ll find in Europe are typically from Germany or Switzerland, where you’ll find some firms that have the high engineering skills to manufacture some of the key components that go into robots. We also find some logistics automation companies there. So in terms of ROBO, the exposure’s around 20%, and I’ll let Zeno and Nina comment for HTEC and THNQ.

Nina Deka:

I think there’s about 11% of HTEC companies that are based in Europe but the global diversity is quite large in terms of revenue. So there’s a lot of healthcare technology and innovation companies startups that are based in the US so it is a US heavy portfolio with 80% of the stocks corporate headquarter in the United States. We’ve got 4% in Switzerland, 3% in the UK, and then 1% here and there. And so we’ve got some diagnostics plays DiaSorin in Italy, as well as Roche in Switzerland. So very diverse revenue exposure, but not as diverse geographic breakdown in terms of corporate headquarter.

Zeno Mercer:

Yeah, I’ll go for THNQ now. So from a geographical perspective, we still believe the US has most of the good AI companies deployment and market size. And as such, we have around 70% of the index is US based and most of the revenue is us focused, but this is expected to increase or, I mean, decreased increase depending on how you look at it. These companies are expanding internationally and they’re being used internationally. So we do have exposure to China. We have exposure to Israel, Taiwan, Taiwan semiconductor. So there are important companies that are in the rest of the world, and that’s why we don’t keep a geographic exclusion for the THNQ index.

Jeremie Capron:

Okay, thank you. Next, we have a couple questions around sensitivity to inflation and higher interest rates. And I think that’s a really important question. We think a lot about that. Look, the higher rates really affect the cashflow discounting mechanism, the higher the interest rate, the lower the value of future cash flows. And so what we’ve seen in the market over the past six to eight month is really a significant reaction to the rise in interest rate expectations, in what I call some of the most speculative areas in the market. So those are the companies that have essentially new earnings or even losing a lot of money right now, but that are expected to generate significant cash flows in the future far into the future. Now, the good news is that we don’t have a lot of exposure to those types of companies and that’s by design.

That’s really embedded in the index construction methodology, where we look for companies that are technology and market leaders. And in many cases, those translate into strong financial performance THNQ fact margins, high return on capital. So you’ll find the vast majority of companies in the ROBO index, in the THNQ index are already very profitable. And companies that are currently loss making are the exception rather than the norm. Now we did see multiple compression. Obviously we’ve talked a lot about it on this call. In Q1 in particular, we have 15 to 20% compression in evaluation multiple, but if you look at where we stand and currently we are back at historical averages. So is there further downside on valuations? Possibly. But is there a lot, I’d say I doubt it. Now I want to let Nina and Zeno comment around the profitability of the holdings in HTEC and in THNQ is a percentage of the total portfolio so you get a sense of where we stand right now.

Nina Deka:

About 31, 32% of the HTEC companies have negative earnings on a forward 12 month basis. So about two thirds of the portfolio is profitable in terms of net income and then the remaining names are not yet profitable but do show a pathway toward profitability and all of them have revenue. Chances are if they are not profitable yet, they probably have high growth rates and they’re investing pretty heavily into the growth of the fast growing market opportunities that lie ahead.

Zeno Mercer:

And I did touch on this during the call earlier, but THNQ index members, we have 75% that are saying expected to post positive EPS this year.

Jeremie Capron:

Thank you. Okay. I see some questions around our process on investment process, the index construction process. There’s a question around the quarterly rebalancing. I think that’s a very important characteristics of the ROBO Global indices. Unlike the vast majority of indices out there, our portfolios are not market cap weighted. The weighting system is based on an internal scoring that we do for each and every company that touches on our thematic areas of interest. And so we look for companies that have the best in class technology that have a proven track record of innovating and staying on top of their category in terms of bringing new products and services to market and companies that have a high market share or rapidly expanding market share. And this scoring will determine the weight of the position in the index. And so at the end of the day, you end up with position sizes of anywhere between 0.8% at the bottom and up to 1.8 or 2% at the high end.

And what happens is that every quarter we rebalance the index and the portfolio. That means we go back to that score driven weight. And that means that automatically the index will be selling the best performing stocks over the past three months and it will be buying the worst performing ones as we have this embedded mechanism whereby you are buying low and you are selling high. Now that creates some churn in the portfolio. And I see a question around the efficiency from a tax perspective. And we’re not here to provide tax advice, but certainly index investing and that type of quarterly rebalance has proven very efficient from the investor perspective. And that’s also the case with the ROBO Global indices. I also see a question around how different the ROBO Global indices are from what you find elsewhere in the market. And I want to let Zeno and Nina comment around that. I think when it comes to healthcare technologies, we’ve seen a lot of interest around genomics in particular. So Nina, maybe you can comment around the differentiation here.

Nina Deka:

Sure. Well, I think one key attribute is that we use a modified equal weighting methodology. And so if you were to look at all of the securities in the HTEC portfolio, there’s about let’s say 85, give or take, on any given quarter. No one security comprises more than a couple percent of the entire portfolio. We do have a very proprietary scoring system that we use on every single company, not just in the portfolio, but in the industries in which we research. And based on that score, a company will either qualify and get into the index or if it winds up suffering a downgrade, say they’ve lost market share or they’re not keeping up with technology and they’re being outpaced by competitors, they might get downgraded on the score. And if the score doesn’t maintain our minimum threshold, it’ll get kicked out.

I bring that up because depending on the score, a company might have slightly more heavily weight than others. Some are maybe less than a percent and some are maybe closer to 2%. So that is one unique attribute of the HTEC portfolio. No one company, if it has a bad quarter or a bad year is going to bring down the whole portfolio. And so we’ve got that diversification going, and then we do rebalance that on a quarterly basis. So you might find a lot of other indexes that might rebalance on a semi-annual basis and we do ours quarterly. And that is interesting to note, particularly in a HTEC, because of the volatility in some of the companies as I discussed. Genomics for example, a very volatile set of stocks, and there’s a lot of ups and downs. But the thing is that if you look at it over time, we do expect that over a longer period of time that in the end it will perform and actually as of diversified portfolio outperform is our goal that’s everybody’s goal, right?

But so we are using the diversification to help smooth the ride if you will, because of the volatility. And so if there is for example, a group of companies that are out of favor right now, I mentioned genomics, but another one is regenerative medicine. There’s just not a lot of procedures happening right now. There’s not as many burns as there were prior to the pandemic. There’s not as much trauma injury because people hadn’t been doing as much sports for a couple years. They weren’t skiing as much, they weren’t traveling as much, there weren’t as many car accidents. And so some of the sub-sectors in healthcare have taken a backseat, but those are the ones that are going to bounce right back when things go back to normal. Things like there was a slowdown largely in the genomic space of cancer testing, because people weren’t going to the doctor, they weren’t going to the hospital, they weren’t getting diagnosed with cancer.

But the disease has not slowed down. And the number of people who get the disease, there is no reason why there would be fewer of them impacted. So we do expect in some cases that there’s even going to be a backlog. So by having diversified exposure, not just to one area like genomics or telehealth or just biotech, we offer the diversification because at any given point in time, there could a sub-sector outperforming or underperforming. And also a lot of these companies enable each other to progress. Our process automation sub-sector is one that is unique to our portfolio. You might not find that in a lot of other healthcare tech portfolios, and this is comprised of a lot of the companies that helped companies like Moderna and Pfizer for example, get their vaccine into the arms of hundreds of millions of people. Third party research and development organizations manufacturing drugs, surgical robotics. So our diversified exposure is probably one of the key parts of what makes HTEC unique.

Jeremie Capron:

Zeno, do you want to comment on the AI portfolio and how it differs from what else is in the market?

Zeno Mercer:

Yes. So I do want to jump in and start by saying that any company we add to our index or any of our indices, we have long term conviction in both from company fundamentals itself but also from the man trends that we’re seeing and what we truly believe will be fundamentally game changing technology that will be implemented and heavily invested and heavily used. So you might see some other funds that look at AI for example, that are actively manage for example. And they say they have long term conviction, but they’re trading in and out. And it’s not necessarily a long term belief, but they’re trying to play a game. I think that we’ve seen a sell off in our index this year so far, but as I mentioned earlier, these are highly powerful trends that are coming through.

I mean, autonomous vehicles are happening. Right now the only barrier is time and regulation and both of those are probably inevitably going to be surpassed. And that requires investment, not just from the cars, but training data centers. There’s so much going on inside of this thing that a lot of people don’t think about. And we truly try to capture all the, as I mentioned, picks and shovels that go into that. And so it’s not now necessarily like which specific company is going to win on the front end, and we do have some of those companies like Tesla, but more so we have enabling technologies that will continue to iterate and improve and provide other companies the chance to be successful and be very pivotal and capture the upside while being more diversified themselves. So I think that’s one of the ways we differ is just that long term conviction and getting the right picks and shovels that will have the exposure, massive upside potential, but they’re also being utilized getting cash flow, getting revenue and increasingly important.

Across our applications I mean, we have a healthcare portfolio, but a lot of these healthcare companies are using AI now in various ways to improve. I mean, biotech just improving the trial process. A lot of these things require investments in cybersecurity, investments in different areas to even enable us to be part possible. You have eCommerce, just the way that humans consume and purchase goods and services is more and more being driven by predictive analytics and AI from both large companies, as well as people like you and me that might be making unique product or service for someone online and being able to match that automatically improve the addressable market, automated checkout. There’s so many different areas that require investment to provide a more frictionless society, which is where we’re headed.

I mean, one of our thesis is that AI is providing a more frictionless experience for everyone, more personalized, and this isn’t going to reverse. It isn’t like we’ve seen the light and we’re going to turn around. I mean, the market might have accelerated ahead of itself in 2021, which actually similarly is how crypto had a peak in 2017, which that peak now is very, very small compared to where the market’s at now, which is 2 trillion. So on a similar boat, you have massive markets that aren’t even realized yet. And that’s just you have to keep that in consideration when you’re looking at that. But I think the important factor is to make sure that you aren’t just picking, throwing a dart and hoping that a specific, random small cap autonomous vehicle is going to make it, but getting the companies that are going to win no matter what happens. And I think that’s an important thing to consider if you’re thinking about investing over a medium, long term period.

Jeremie Capron:

Okay, well, we’re at the top of the hour, so I want to thank everybody for joining us today. I see we have a few more questions. We’ll get back to you directly. I want to remind everyone that we do share some of our research on a biweekly basis in an email newsletter that you can sign up to on the website at And with that, I want to wish everybody a great day and we look forward to talking to you again very soon. Goodbye.

Nina Deka:

Thanks everybody.


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