Q3 2022 In Evaluate: ROBO World Innovation Indices

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The ROBO World indices declined according to world equities in Q3 within the face of excessive inflation and jumbo fee hikes to finish the quarter 42%-50% under their all-time highs in 2021. The Robotics & Automation Index (ticker: ROBO) misplaced 7%, the Synthetic Intelligence Index (ticker: THNQ) dropped 4%, and the Healthcare Expertise & Innovation Index (ticker: HTEC) declined 6%. Valuations have compressed properly under long-term historic averages. On this report, we talk about main developments and massive movers throughout our portfolios.

 

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Webinar Transcript:

Jeremie Capron:

Whats up everybody and welcome to ROBO World’s October 2022 investor name. My title is Jeremie Capron, I am the director of analysis and I am speaking to you from New York. And with me at the moment my colleagues Invoice Studebaker and Zeno Mercer. We’ll begin with a quick reminder of what we do at ROBO World after which we’ll share some ideas about what’s occurring within the markets. After which we’ll take a more in-depth have a look at every of the three index portfolios, ROBO, THNQ and HTEC. And naturally we’ll be taking your questions, so be happy to sort them into the Q and A field on the backside of your display.

So let me begin with this fast overview of ROBO World. We’re analysis and funding advisory firm that is targeted on robotics, AI and healthcare applied sciences. And we handle three major index portfolios which are tracked by almost $3 billion in belongings. These are primarily in ETFs. And our first index portfolio is ROBO, that was the primary robotics and automation index and it began nearly 9 years in the past in 2013. And the second is THNQ, T-H-N-Q, that’s the synthetic intelligence index. And the third one is HTEC, the healthcare know-how and innovation index. And you may see right here the annualized returns since inception of every index as of the top of September, 2022.

So these portfolios, they mix analysis with the advantages of index investing within the ETF wrapper. They’re composed of greatest at school firms from all all over the world. The small, mid and enormous caps that we analysis and we rating on varied metrics, and the best scoring shares make it into the portfolios. Then we rebalance each quarter and the result’s portfolios which have a really low overlap with broad fairness indices like DSNP 500 or the NASDAQ and different world fairness indices.

Okay, so let’s discuss what we’re seeing within the markets. And the elephant within the room right here is that the world’s greatest firms on the forefront of robotics, of AI, of healthcare know-how as represented by the ROBO world indices, they’re now buying and selling 40 to 50% under their 2021 highs. Sure, a variety of shares are on sale proper now. World equities are down greater than 25% this yr, however these usually are not your common shares right here. Once more, we’re speaking concerning the know-how and market leaders. They’re firms which are sometimes very worthwhile and rising a lot quicker than the financial system. In reality, once we have a look at their steadiness sheets, we discover {that a} majority of the businesses within the ROBO, the AI and the healthcare tech index, they’ve more money than debt. And they also have a constructive web money place.

And extra importantly, many of those firms are relative beneficiaries of the present surroundings. When you concentrate on the issues that we face at the moment within the world financial system, now we have the labor shortages, now we have rising prices throughout the board. The one clear and easy response from enterprise leaders is automation and enterprise leaders and firms are making it a high precedence. In reality, and Invoice will come again to that shortly, demand for automation at the moment is at report highs and rising and there may be extra demand for robots and automation that suppliers can provide.

And on the similar time, this down market in equities, we consider is giving buyers a chance to put money into these firms at a reduction. In reality, the three portfolios at the moment are buying and selling considerably under historic common valuations and we’ll come again to that. So let us take a look at robotics and automation first, and for that I will go it on to Invoice Studebaker.

 

Invoice Studebaker:

Good morning everybody. Thanks for the time and curiosity. Jeremie, thanks for the introduction. Simply to comply with up on Jeremie’s feedback, we definitely know that the third quarter was a tough interval for buyers. And September was a strong illustration of simply how tough it may be to be targeted on the long term horizons, notably when the market is continually being tripped up by a confluence of points and occasions. And we perceive that these are difficult instances. Concurrently Jeremie commented, the down market is giving buyers actually a welcome alternative to reap the benefits of deep reductions and put money into firms that we see they’re delivering on the required automation applied sciences.

And we consider, as Jeremie additionally commented, that this has created an surroundings, it is type of an ideal storm for buyers, to extend publicity to a supercycle for automation and demand for automation applied sciences, as I will remark shortly in additional element, has by no means been larger and the problems which are lowering fairness costs that we’re all considerably accustomed to, the labor shortages, the compressed margins, the provision chain bottlenecks and the necessity to cut back working prices are considerably rising the necessity for adoption. And as we doubtlessly go right into a recessionary surroundings, we expect companies are going to be very eager to wish to spend on effectivity and automation.

As you may see for the quarter, the ROBO index declined about 7%, which is an identical decline for world equities, which has resulted in valuations which have compressed properly under our historic averages. And the broad weak spot was represented in 10 of our 11 sub sectors that we invested that had proven losses. And importantly although, as we glance into the fourth quarter past, we see an important alternative for buyers to sharpen their pencil and add to this, what we consider, is inevitable automation theme. That is on sale like a lot of the market.

And we see an enormous discrepancy as the place inventory costs are, inventory costs are 40, 50% off their all time highs regardless of the strong fundamentals of automation that we’ll contact on shortly. And lots of of our constituents actually are firing on all cylinders and may’t make sufficient to satisfy the demand. As you may see right here on the valuations, the PE is 12% cheaper than our historic common. And I do wish to underscore that our valuation relies on PE, many different tech exposures are primarily based on worth of gross sales, and in lots of instances are arguably over owned and overvalued. I do wish to make the remark that lower than 3% of ROBO is within the S&P 500. So this can be a distinctive publicity that also may be very beneath owned and underappreciated by a lot of the market and we expect that is a chance.

Subsequent slide please. So from an EV to gross sales standpoint, you may see that we’re buying and selling fairly near parity to historic valuations. So ROBO is buying and selling round 2.7 instances EV to gross sales. Once more, the context of the place know-how trades, I imply, Adobe simply made a purchase order of an AI asset for 40 instances trailing EV to gross sales. In order that hopefully provides you some context that I’d not say that we’re hardly overvalued. Particularly, I feel our valuation of our portfolio has developed fairly considerably over time and has turn out to be a lot growthier, in order that’s type of skewed the valuation of the upside. So I’d argue that even at 2.7 instances relative to the previous, our valuation is fairly low-cost.

And simply as a construct on to that, what we have seen right here out there, we have had three consecutive quarter declines within the ROBO index and that is actually type of an unprecedented improvement since we launched the index again in 2013. And it is solely corresponding to the again take a look at going again to ’08, ’09. And importantly although, earnings estimates, I do know that that is perhaps type of the elephant within the room, that folks suppose the earnings estimates are going to come back down dramatically. We definitely haven’t seen that but. For 2022 and 2023, earnings estimates have solely been minimize by about one to three% of the final three months and simply 6% over the past yr. And this I feel is a mirrored image of the energy and demand for automation applied sciences and options.

And actually importantly, the power for ROBO firms to deal with rising prices and provide chain challenges. Many of those firms have been round for a few years and have had the talent set to adapt to and handle completely different financial environments and to have the ability to go on and costs. And I feel importantly, the income estimates have seen really constructive upgrades over the past three and 12 months and level to a couple of 12% gross sales progress for 2022 and about 9% for 2023. Though the market is skeptical that estimates will not come beneath extra stress, that to date has been the report card.

Subsequent slide please. In order Jeremy type of alluded to, ROBO is designed to be diversified, it is designed to be invested in the perfect of breed know-how firms globally throughout the ecosystem of the know-how. So what makes the robotic or automation work? After which the purposes, the place is automation being deployed? Sadly, this drawdown, as everyone knows, has been considerably violent and excessive and has resulted in probably the most important drawdown we have seen. Even supposing 50% of the portfolio has what we see as an actual worth, that being uncovered to industrial automation, logistics automation, healthcare. To not point out, as Jeremie alluded to, that roughly round 60% of portfolio has a web money place and no debt. So these firms are properly positioned to climate the storm, like they did throughout Covid.

And this trade is importantly traditionally grown the highest line two to a few instances that of the market and we anticipate that to proceed. To not point out yr to this point, FX has been about an 800 foundation level headwind and the transfer within the greenback actually has been considerably parabolic and we expect there may be more likely to be a reversion of imply and there could possibly be a positive tailwind as we start to maneuver into 2023 and past.

By way of the large inventory strikes, we have had a pair fortunes to the upside, not sufficient in fact, iRobot was up 57% within the quarter, as lots of you might be conscious, they’re a frontrunner in client robotics and so they agreed to be acquired by Amazon in an all money transaction for 1.7 billion. This does importantly symbolize the twenty eighth takeout since we launched ROBO again in 2013. And whereas we will not forecast what the MA surroundings’s going to appear like, lots of our firms are, once more, leaders of their trade. And as asset costs come down, we expect that they definitely turn out to be extra favorable within the eyes of strategic and monetary patrons.

Luminar Expertise additionally had a good transfer to the upside. They’re a frontrunner in lidar know-how for vehicles and vans. The inventory was, I feel the efficiency was considerably supported by the conviction of insiders. The CEO did buy upwards of $6 million within the quarter. However importantly what’s actually shifting the inventory is their business success with bulletins. They introduced partnerships with Mercedes and Nissan, which intend to combine their know-how in most of their autos by 2023, or I am sorry, 2030. So we do anticipate to see extra progress right here on the business entrance.

Then by way of the sectors that we actually stay extremely convicted on, one space to focus on is industrial automation. And an earlier touch upon that Jeremie additionally did is that industrial automation actually is firing on all cylinders to satisfy demand. And Yaskawa, which is a big industrial robotic producer, simply introduced lately that their orders had been up 34% yr over yr. Fanuc, which is the biggest industrial robotic producer, has been fairly vocal about their backlog, which now’s in extra of 1 yr. Importantly, Teradyne, which additionally performs a key position in industrial automation, has final quarter talked about their industrial automation progress was up 29% yr over yr. We anticipate that to proceed after they announce their outcomes quickly. They’re one of many largest producers of collaborative robots by way of their buy of Common Robots, which is a Dutch firm. That enterprise has additionally actually been firing on all cylinders. That enterprise final quarter noticed robotic gross sales really up 30% on a 55% comp.

So enterprise actually stays fairly sturdy and wholesome. These asset costs are definitely fairly fascinating for buyers to check out. And general, in case you have a look at robotic density, and in order that’s wanting on the variety of robotic installations per 100 individuals, consider it or not, the worldwide common is only one.2 robots per 100 workers. And so now we have a protracted strategy to go by way of the place penetration charges are going. Simply to place that in context, the US has roughly 2.5 robots per 100 workers. China can also be 2.5, however they’ve grown from 0.5 to 2.5 in 5 years. So fairly wonderful progress there. Japan’s about 4, Germany’s 4 and Korea is 9.

So this all is within the context of a worldwide surroundings the place world manufacturing employs about 500 million individuals globally. So if robots are stealing our jobs, they don’t seem to be doing an excellent job of it and we expect there may be important progress within the years forward. That is it for my ready marks. I suppose I will go it on to-

 

Moderator:

Thanks Invoice. Hey Invoice, earlier than we transfer on, now we have a particular query to ROBO from the viewers round why we embrace Nvidia however not Micron or Intel or STM. May you converse to that?

 

Zeno Mercer:

Certain. Hello. Hey everybody. Zeno right here masking THNQ at the moment. And okay, may you repeat that query? It was round possession?

 

Moderator:

Sure. In order that they’re asking within the ROBO Index, we embrace Nvidia however not Micron or Intel or STM. So may you speak concerning the distinction between ROBO and THNQ and the place these firms would fall?

 

Zeno Mercer:

Proper, okay. I feel the way in which we have a look at it’s not solely, sure, these are all concerned in parts of type of fashionable society, robotics, AI, however we’re searching for firms which have maybe probably the most funding or publicity to those areas. And I am really going to cowl in a video later, however I may say some issues now, at their current AI day, they’re closely invested not solely within the chips however the software program facet of issues. And at that time we think about them extra of an AI and robotics play. I imply, they’ve software program particularly for it and we simply have stronger conviction round it going ahead. Clearly firms like Micron are making large investments and are vital to society, however we’re attempting to get publicity to particular areas and never simply make investments on the whole firms within the house. I imply, we are able to cowl extra later once I speak extra about Nvidia for a bit.

Yeah, we are able to go to the following slide. Reflecting on the quarter, the THNQ index was down 4%, really outperforming world indices and the S&P, and we’re down 47% since November 2021 excessive. So the AI house has been underperforming even whereas fundamentals have been enhancing in some ways. And I will get to that. From a valuation standpoint, Ford EV gross sales are persevering with downward and so they’re really on the quarter finish, they’re at 4.6, which is under March 2020 lows. Even whereas adoption progress, digitization and plenty of large developments and tailwinds are coming, not solely now however 2023 and past. And we’ll cowl that. And a number of the large issues that occurred is we had earnings deceleration this yr right down to 11.2%. So general our firms grew, however this was down from 27.9% in 2021. Clearly it was a really large yr for income.

And the present forecast proper now’s a stronger rebound again within the low twenties for 2023, 2024. So proper now, I imply, this has been a tough yr. Folks have been type of reorganizing and determining what strikes they will make, however sure areas of the financial system are seeing and have large backing for continued funding over the following a number of years and quarters. So I feel it is vital to suppose and know that AI is changing into an rising proportion of company authorities spend and it is also an enabler of GDP progress and value financial savings. So there’s each progress elements and deflationary elements which are concerned right here and we’ll cowl that.

Subsequent slide. Yeah, so we really had, regardless of the index being down, we had outperformance, we had 79% beat high line expectations and 85% beat earnings. And I feel round 87% are anticipated to be worthwhile subsequent yr. So in case you’re desirous about these firms, now we have excessive pricing energy, they’re essential gamers to the financial system, whether or not it is funding spend from the Fortune 500 trying to digitize their merchandise or make new merchandise and even simply discover value financial savings throughout provide chain, operations, issues like that. And even simply utilizing AI as a core product and to extend the product improvement, whether or not actual world world merchandise or digital merchandise, options. So there’s developer operations, cybersecurity, numerous angles there.

Many firms even have raised steering within the index corresponding to Samsara, which really raised thrice this yr regardless of their very own provide chain issues. That is high line and backside line. From large knowledge and analytics, we really noticed a standout from firms like Alter X, which is seeing 50% yr over yr progress and 90% gross margins. And regardless of everybody being afraid of, oh, what is going on to occur with spend, and the place cash goes is shifting this yr, I feel we’re all seeing that. And Alter X is seeing their largest pipeline in historical past for digitization automation of bringing in knowledge and determining what to do with it and discovering methods to streamline capabilities with elevated labor value, inflation.

So these firms present very excessive ROI and that is why once we’re setting up and reevaluating the index and rebalances, we’re what firms are enablers proper now. And that is each the infrastructure facet and the precise software facet which are really getting used at the moment. It is the provision and demand. And also you would not construct semi chips, there is not a motive, and I will get to this subsequent, concerning the CHIPS Act, if there weren’t an vital side coming down the road for that. And most of these chips, the chips being produced there aren’t going to be coming on-line till 2025 and past.

So we are able to really go to the following slide now. I suppose I already coated the outperformance right here, nevertheless it was, regardless of points within the financial system, it was a really sturdy quarter and we noticed fairly strong reassuring steering from many areas. I feel probably the most troubled areas is on client, although our client index or the buyer sub sector and e-commerce had been the perfect performing this final quarter, they’d oversold in Q2.

So in case you’re type of searching for 1 / 4, I imply you are going to have shifts there, however that is why we even have publicity and make allocations of those completely different areas. Going to speak about Semi actual fast, I feel one of many largest issues that occurred was two issues. A, we handed the CHIPS Act and we additionally had US commerce restrictions, Semi efficiency regardless of the CHIPS Act being handed, regardless of Europe additionally declaring they wish to double manufacturing of Semi chip capability themselves, getting away from Asia manufacturing area, our Semi index was down 12%.

A part of it’s falling in lockstep with the financial system and every little thing else. A part of it’s type of overblown fears round what’s occurring with the China commerce restrictions and in addition round client, PCs, Cell. Apple introduced that they will not enhance manufacturing of the iPhone 14. And now we have some publicity there, however general that is PC and private. If you happen to’re speaking about cloud, AI, automotive and connectivity, which is the place we really attempt to allocate extra publicity to on that facet of issues, on the infrastructure facet, we’re really seeing sturdy demand and forecast. For instance, Qualcomm, which is concerned in lots of, they’ve I feel $7 billion enterprise items. They’ve seen their automotive pipeline go from 19 billion to 40 billion in a single quarter. So the inflation discount act, all these items individuals are making, we do not have full EVs but, at the very least within the sense that they don’t seem to be in every single place.

I imply, in case you have a look at proportion of autos on the highway, it is 0%, 0.001. Nevertheless, clever sensible autos that require extra processing, you have bought EVs, they require extra semiconductor chips and processing connectivity and also you’re seeing an enormous increase in demand spike there. So whereas we’re seeing a oversaturation in that section, we’re seeing huge progress. After which there might be one other improve cycle for wearables and issues like that, that that’ll come again on-line. But it surely’s type of smoothing out the method right here. And that additionally includes parts, sensors and pc imaginative and prescient.

By way of cloud demand, we’re seeing large pull by way of nonetheless. Arista, which makes networking switches and software program for these large cloud heart deployments from the large tech firms and enterprise and others. They offered very strong steering in 2023 at their final name. So in case you’re wanting by way of the noise and seeing what’s an indicator of issues to come back, it is continued funding on this house. And we have a number of hundred billion greenback plus tailwinds coming by way of 2023 and past. And it could not be extra apparent how vital it’s than once you get to the commerce restrictions.

However the CHIPS Act, simply to offer everybody an instance of how we have a look at the infrastructure house, they need to make the semiconductors themselves, so you may have Nvidia, Intel, Samsung, gamers like that. You even have firms like LAMB Analysis and ASML, which make important parts to that. To make tiny three nanometer parts, you want very costly, very subtle tools. I imply, it is a number of the most spectacular tech now we have on the planet proper now. Every of those gadgets although have a few years pre-order, there is a backlog, and so they run $180 million per pop for ASML for instance, it is a Dutch primarily based firm.

As a proportion of spend, okay, as an example there is a $50 billion Chips Act and tons of of billions coming on-line in manufacturing within the US for instance, not even speaking concerning the EU, one $17 billion plant in Texas, $10 billion of that’s going to semi manufacturing tools. So simply to offer you a scale, and I do not suppose the market’s actually reflecting that, semi’s useless, lengthy reside semi, individuals are like, “Oh, PC, gaming,” there’s a lot approaching board. I feel that is one thing to remember once you’re sitting right here desirous about what’s comfy and what’s really going to get cash within the subsequent couple of years.

China restrictions, Nvidia, Nvidia’s had a tough yr, gaming’s down after which the China commerce restrictions have come on board. They are not set to begin for some time till subsequent yr, 3Q subsequent yr. And it really leaves them with some wiggle room. So it is not essentially they can not promote into China, they simply cannot promote particular chips and issues. Truly rumors are saying that they are really getting a variety of orders and individuals are stockpiling proper now. So take that as you’ll. However I feel finally it simply exhibits how vital these are and that there is going to be elevated emphasis and funding right here.

One other factor I needed to speak about briefly is the Tesla robotic. That was a fairly large deal for a lot of, within the sense that it introduced consideration to the house. Elon has that impact. He targeted on EVs, he mainly made the EV market. Robots although are already an enormous market, clearly that is why you guys are all right here is attempting to know and listen to that and from our angle. So what I feel goes to occur right here is A, client robots have very low penetration. In reality, it is mainly null. You do have extra automation in semi and automative and manufacturing, nevertheless it’s one other market that actually is not being appreciated is the robotic house and AI house having the ability to visualize and mainly, they need to function within the digital world to have the ability to function within the bodily world. That is going to take elevated computation and funding in cloud, AI, connectivity.

So I feel that is the takeaway there. I do not actually wish to make a projection on when will Tesla robotic be in individuals’s properties if it would, et cetera. However I feel it is simply one thing to remember.

Yeah. So talking of latest issues, we have a brand new addition. We added CrowdStrike this quarter. So CrowdStrike for many who do not know, is an American cybersecurity firm that was based in 2011. That they had their first product in 2013. They have been on a roll right here. We have been watching them for a while and so they’ve actually confirmed resilient. And once we’re desirous about making an addition to an index, we have a look at a lot of issues, We have a look at their market and know-how management and we additionally have a look at what are they investing in, have they got a pipeline of merchandise which are going to proceed to make them achieve market share and increase their addressable market.

Proper now they have been rising, their 5 yr progress fee is 94% anticipated to hit 1.5 billion this yr and a pair of.2 billion subsequent yr. So their AI enabled cybersecurity options are trusted worldwide, with a TAM addressed estimated to be $75 billion and that is rising to 125 billion with new merchandise. They’ve a 97% retention fee and so they grew to become worthwhile in 2021. So this is not just a few progress story. Their EPS is projected to develop 50% over the following a number of years. Going again to funding, they’ve 25% of their income investing within the R&D and in merges and acquisitions. They’re making sensible acquisitions, they’re investing, we’re very assured that they will proceed to be a frontrunner in AI enabled cybersecurity.

At this level, I will go it on to Jeremie to debate our healthcare index.

 

Jeremie Capron:

Okay, thanks Zeno. So HTEC is the healthcare know-how innovation index that we launched in 2019. And in the previous couple of years we have seen the convergence of robotics, AI and life sciences that has enabled some breakthrough advances. And we consider that healthcare is the one large financial sector that is going to be profoundly reworked by know-how over the approaching decade. And so we construct the HTEC index utilizing an identical recipe to the ROBO index. Meaning the index portfolio consists of the perfect at school firms from all over the world which are reworking the healthcare trade throughout 90 areas you could see on this pie chart. So there’s robotics, which is about robots within the working room, within the pharmacy, in hospitals and so forth.

And you’ve got knowledge analytics, which is about firms utilizing software program to derive insights from the info that we now acquire round sufferers. The info from scientific trials, the info from medical imagery and AI is more and more utilized in diagnostics and drug analysis and automating, or it is extra about augmenting the work of clinicians, augmenting the pace and accuracy of a diagnostic. After which you may have telehealth, which is about decentralized medication, like distant physician affected person visits that we’re now all accustomed to, nevertheless it’s additionally about wearable gadgets for the monitoring of glucose ranges or cardiac exercise and so forth.

You could have genomics in fact with firms offering the instruments to decode the genome and firms creating early most cancers detection options. You could have firms with gene enhancing know-how and even artificial biology the place we create artificial genes. After which lastly you may have a bunch of medical and surgical devices like 3D printed implants, you may have coronary heart pumps, miniature coronary heart pumps, neurovascular instruments and so forth. So it is a fairly numerous basket of presently 78 firms, large and small.

In reality, almost half of the businesses within the portfolio are small and mid caps, however they’ve one factor in frequent, which is know-how and market management of their respective sectors. And on the following slide you may see that the portfolio carried out very properly in 2019, 2020 and 2021 earlier than that type of indiscriminate promoting primarily minimize in half. And so the HTEC index has now declined 50% from its excessive of February 2021. And within the meantime, the income has grown by greater than 30%. So income grew by 22% final yr. And this yr we’re going to see an extra 12% and subsequent yr we’re 10% gross sales progress, 2023. So HTEC is now buying and selling on 3.9 instances ahead enterprise worth to gross sales. That is on the median for the basket. And that compares to the excessive yr of seven.2 instances and the low within the Covid lockdown panic, that was 4 instances. So we at the moment are under the Covid lows by way of valuations and I feel that is a very vital level to remember.

So I wish to contact on a number of the firms right here so that you get a greater sense of what is within the portfolio. And I’ll begin with a number of the high performers through the quarter. You may see Butterfly Community’s right here, that was up over 50% prior to now three months. So Butterfly’s in our diagnostic sector and it has developed the IQ ultrasound resolution, that is an ultrasound system that’s 80% cheaper than conventional gadgets. It is small, it really works with smartphones and tablets and has a software program platform that’s subscription primarily based. In order that they’re increasing entry to ultrasound primarily based prognosis dramatically. And it is rising very quick, about 30% per yr, with margins above 50% on the gross stage. So Butterfly has $300 million within the financial institution, so loads of room to proceed to scale and finally we expect it is a very possible acquisition goal.

After which Penumbra right here, Penumbra is an organization in our medical machine sector. They’ve developed very modern surgical devices for neuro and vascular situations. So it is about stroke therapy and eradicating clots and thrombectomy and coiling techniques. And Penumbra’s tech is superior to the standard stent method, so that they’re additionally rising quick, like 15, 20% a yr. And so they have higher than anticipated margins after they reported and so they’re speaking about accelerating progress and procedures into the rest of the yr. They’re making aggressive good points. Additionally they have quite a few merchandise developing over the following 18 months.

And AxoGen, you may see right here, which was up greater than 40%, that is in a regenerative medication sector. AxoGen has developed an answer to restore the bodily injury to nerves, peripheral nerves. And they also’re capable of restore feeling and performance of nerves. Principally it is a nerve graft and it is the one off the shelf human nerve allograph in the marketplace. And AxoGen additionally had higher than anticipated income final quarter. And the administration commented that they anticipate the gross sales progress to return to mid teenagers by the top of the yr.

And at last, I needed to the touch somewhat bit on genomics and precision medication, which collectively account for a couple of quarter of the portfolio. And you may see on this slide some examples of firms in HTEC, a number of the know-how and market leaders which are actually powering the genomics trade. And we expect genomics is completely a revolution and it is occurring now. It is a revolution as a result of genomics allows a very new method to medication and the early detection of illness. It is not solely hereditary illness but additionally persistent illness like most cancers. And since it additionally allows customized remedy, customized remedy which means individualized remedy versus the present mannequin of huge pharma the place you may have a one dimension suits all type of molecule that value billions of {dollars} to deliver to market. Right here we’re speaking about therapies which are tailor-made to the person.

And the explanation why this revolution is occurring now’s as a result of we now have inexpensive gene sequencing know-how and the price of sequencing the human genome is declined dramatically from billions of {dollars} with the primary human genome undertaking a long time in the past to now beneath $1000. And if there’s one firm that is been main the cost by way of driving down the price of gene sequencing, that’s Illumina, which is the market chief. They’ve greater than 20,000 machines put in worldwide. They’ve greater than 75% market share globally. And final yr they grew income by 40%. And about two weeks in the past they launched the brand new NovaSeq X, which is the brand new sequencing platform that would take sequencing prices down by greater than half to only a few hundred {dollars}. And the final time we noticed such a big value decline, that drove fivefold enhance out there dimension for genomic sequencing.

And that is what allows genomics testing. And I discussed the early detection of the ailments like most cancers. So Natera for instance, is the market chief in prenatal DNA testing. They’ve a non-invasive take a look at for abnormalities and Natera is now pushing into most cancers screening and implant rejection testing as properly. Veracyte, that is one other firm that is reworking the diagnostic of most cancers utilizing DNA know-how. They’re working in thyroid and lungs and breast most cancers testing. They’re rising the accuracy of diagnostic and avoiding pointless surgical procedures for sufferers.

And I additionally spotlight Twist Bioscience right here. Twist is the chief in DNA writing. So it is the synthesis of genes which they do with a silicon chip to fabricate big selection of artificial DNA at a low value. They now have 1000’s of shoppers together with pharma firms, together with analysis facilities, but additionally industrial firms, chemical firms, agricultural firms.

And at last I wish to contact on Alnylam. Alnylam is an efficient instance of precision medication and individualized remedy. They pioneered the RNA interference therapeutics, we name that RNAI. And so they simply obtained their fifth approval in lower than 4 years for the therapy of polyneuropathy illness referred to as ATTR. And this therapy that they are developing with may attain billions of {dollars} in gross sales. So once you evaluate that to the market cap of Alnylam at the moment, there’s I feel fascinating discrepancy.

So in complete there are 18 firms in our genomics and precision medication section and so they account for round 25% of the HTEC portfolio. And I hope you perceive that there our portfolio development course of right here is absolutely about diversification, offering publicity not solely to small areas like genomics, precision medication, however to all areas of the healthcare trade the place know-how is making a distinction.

All proper, so I’ll pause right here. I feel we have coated a variety of floor, I actually wish to take a few of your questions and I see now we have a query about earnings trajectory for our portfolios. What’s the anticipated earnings progress for this yr and subsequent? And I feel we are able to begin with ROBO. I will touch upon ROBO after which Invoice and Zeno can touch upon the opposite portfolios. However primarily we expect we will shut 2022 with about 15% EPS progress for ROBO. So final yr we had greater than 40% EPS progress. This yr we’re nonetheless 15, which is considerably forward of what you’d anticipate for the S&P 500, notably in case you exclude the power sector from the S&P 500. We’re mainly a compression in EPS for this yr for the broad market. For ROBO, it is 15%. And for subsequent yr, we’re about the identical, so 15 to 17% is the anticipated EPS for ROBO in combination for subsequent yr. Zeno, do you wish to touch upon AI?

 

Zeno Mercer:

Sure, Hello. Yeah, so by way of EPS progress for the THNQ index and its members, I will type of cut up it into software and companies and the infrastructure element. Infrastructure has been a bit smoother this yr and we noticed 29% EPS progress in 2021, this yr we have seen and projecting for the total yr, 22%. So a slight pull down. On the flip facet on software and companies, we noticed 29% final yr and seven.9% this yr, with eCommerce and client being the most important laggards. However that is anticipated to rebound within the following yr respectively, client and e-commerce to 25% and 64%.

And I feel wanting 2023 and past, the projections are 11.6 this yr. General THNQ index is trying to get again into the twenties progress for EPS, so 20.4 after which even larger clip in 2024 and past. I feel a number of the standouts inside that may be community and safety, which is rising at 49% this yr and anticipated to nonetheless preserve higher twenties, low thirties subsequent yr. So that you’re seeing some rebound in some areas and others are simply going to see continued energy for EPS.

 

Invoice Studebaker:

Jeremie, simply to fall on to your feedback, perhaps nearly revenues for ROBO, I feel importantly, that is kind of the elephant within the room, everybody thinks there’s going to be a reasonably dramatic discount in estimates. Clearly we have not seen that occur. That may be a danger. Income progress ROBO is actually anticipated to be about 13% this yr and subsequent yr somewhat over 8%, which is according to its historic averages. So even when there may be stress from the broader markets, we do anticipate our indices to usually develop two to a few instances to that of the market, which traditionally they’ve. So we really feel fairly good about the place these companies are positioned as we go into 2023 and past.


Jeremie Capron:

Okay, thanks Invoice and Zeno. And I see now we have a query about potential ESG points with the genome oriented firms, particularly governance considerations. So right here at ROBO World, we take ESG very significantly. We launched our ESG coverage in 2017, so occurring 5 years now. And we have improved the coverage persistently over time, primarily given the pool that we had from a few of our European buyers. And so the coverage at the moment is extraordinarily full and you’ll find all the small print on the web site and it is actually targeted on excluding firms that fail sure requirements that we have established according to the Febelfin requirements over in Europe. It is one of many strictest requirements. So we have a look at environmental efficiency, governance and social points in fact. We use our personal inside analysis to guage every firm that is in our funding universe, however we additionally use exterior help from maintain analytics that helps us flag any potential points or controversies as they come up.

Now by way of query across the genome, I feel it is an space the place we’re seeing a variety of debate, whereas is not any debate is round utilizing genomics for early detection of illness as a result of the idea right here is that you’ll be able to decide up a illness earlier than it turns into an unlimited downside by way of your means to treatment, in fact, and your likelihood of survival, but additionally by way of the fee to the healthcare system. And so there appear to be unanimous view throughout the trade and coverage makers round the truth that genomics in diagnostics is a no brainer. And so we do not anticipate any points there. The place some points may doubtlessly come up I feel is round gene enhancing as a result of right here we’re making adjustments into the human DNA. In lots of instances we’re making adjustments into cells in order that it will possibly produce particular proteins and proteins that may assist struggle towards a illness.

And it’s nonetheless very early days. At the moment there is no FDA accepted gene enhancing primarily based remedy. However in 2020 we noticed the primary dosing of a human affected person with such an method and we had some pretty promising outcomes with that and that is why you have seen the gene enhancing shares carry out very well in 2020 and first half of ’21. Now they’ve come down a good distance, however I feel that is the place we have to pay somewhat extra consideration.

And the final remark I’d make round that’s that clearly we have seen a change within the trajectory on the FDA by way of how briskly they have been approving gene therapies and cell therapies. So for a very long time till I might say round 2019 or so, there was reluctance by the FDA to quick monitor this analysis. However at the moment it has been a transparent acceleration and whereas there’s solely a handful of gene and cell therapies accepted out there at the moment, there is a backlog of a number of tons of of these presently in scientific trials. And so we anticipate the raft of approvals over the following a number of years.

So I’ll cease right here once more, if you wish to deliver up any questions, please sort them into the Q and A field. There is a query concerning the autonomous system, sub sector, I feel Invoice, you may wish to take that. It is presently at 0%, was considerably greater than that, Invoice, you wish to give some colour.

 

Invoice Studebaker:

Yeah, that is proper, it’s 0% proper now. And we did have one constituent in there, which was iRobot, clearly taken out. And simply because an organization is faraway from an index, we do not routinely simply put one thing in, as Jeremie talked about within the earlier a part of the presentation, we’re trying to determine firms that we expect are leaders of their trade, firms which have a technological mode round their enterprise, have dominant market shares. In order that’s a very vital standards for what we’re searching for.

And we do anticipate the buyer sector to start to evolve. Clearly we’re fairly enthusiastic about Tesla’s ambitions right here and I feel as the value factors come down, because the use instances broaden, I feel we will see a pure evolution within the client sector, however we have not had a variety of progress there but. With regard to your query, I suppose you had been commenting about Group Gorge and one other entity in Spain. Once more, I feel the vital attribute about what we’re attempting to do at ROBO is put in leaders within the trade. Whereas these firms could have some ambitions in robotics, they’re clearly not getting there but. Group Gorge in France particularly, not solely would we query their market share in technological management, there’s a liquidity problem for firms to go in our index, they need to have a minimal market cap and minimal liquidity per day. And each of these firms would fail these screens. So I do not, Jeremie, every other ideas, however that is.

 

Jeremie Capron:

Invoice, there’s one other query about FX attribution for ROBO yr to this point. I do know you touched on that earlier. Do you wish to repeat that?

 

Invoice Studebaker:

Yeah, clearly it has been an enormous headwind. It has been round 800 foundation factors since we launched yr to this point, it is in all probability about 12, 1300 foundation factors since we launched in 2013. So we have really absorbed that slightly properly, we definitely would hope that that may turn out to be a tailwind. There have been years the place FX has been a tailwind and whereas we will not anticipate that, we definitely do not hedge for it. And we expect over time there’s a reversion in imply that sometimes occurs in foreign money markets. And on condition that the way in which the index is constructed, we’re attempting to determine firms that we’re detached to the place they’re positioned. It simply so occurs about 45% of our index is in North America and about 55% internationally. And once more, an important attribute for us is defining who the market leaders are, trade leaders, know-how leaders, and we’re detached to what we area they’re in.

 

Jeremie Capron:

Okay. Now we have one final query concerning the turnover that we see within the index. I’ll take that. So primarily the turnover comes primarily from the quarterly rebalancing. The index itself is fairly secure by way of the constituents. Now in fact the weightings can change on the margin because the scoring evolves, so we rating every firm in our analysis universe and the rating drives a legibility into the portfolio and to some extent the place dimension.

Scores evolve every time the analysis group interacts with the corporate or there is a company motion, there’s new details about market management or know-how management. Additionally the income publicity to the issues that we’re going after, the scores will transfer, however the major driver of turnover is absolutely the rebalance when each quarter we return to that rating pushed weighting. And in order that drives about 25 to 35% turnover in a typical yr, so 4 rebalances per yr. However the adjustments by way of constituents actually usually are not that significant. In reality, each quarter you may sometimes see one or two new inclusions or exclusions on the basket of about 80 firms. That is the place the turnover comes from.

 

Zeno Mercer:

I will add one thing to the THNQ index actual fast. Considering by way of THNQ, now we have 71 index members and this previous quarter we had 4 takeouts, one addition. Final yr we had 5 or 6 takeouts from M&A alone. And one of many takeouts was iRobot, which was additionally within the THNQ index. There’s not that a lot overlap, however that was one, it was in AI and ROBO play. So I simply needed so as to add that we’re making strikes there. And I feel what we have considered lots recently is simply because the entire market is down, we’re wanting to ensure we seize the businesses which are strong and never simply following in tandem, however we’ll be sure that they will develop market share, have invested correctly, have resilient management going ahead and to the following quarter and past. So. Yeah.

 

Jeremie Capron:

All proper. Nicely, I feel we’re occurring the hour, so I wish to thank all people for becoming a member of us at the moment and remind you you could join a biweekly e-newsletter on the web site roboglobal.com, the place we share a few of our analysis and insights into firms and sectors, robotics, AI, and healthcare know-how. And we very a lot stay up for chatting with you once more sooner. Thanks.



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