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Q&A: BlackRock’s Jay Jacobs on Robotics Investment Case

Robots have been part of the human collective consciousness since the “Flash Gordon” comics of the 1930s, and they became a physical reality in the 1970s when the first industrial robots were used in Japanese automobile manufacturing. But today’s world may present the most attractive investment opportunities yet. BlackRock recently identified robots as one of its core megatrends, “powerful and transformative forces that could change the global economy, business, and society.”

For a clearer look at the near- and long-term prospects for robotics, we spoke with Jay Jacobs, Managing Director and Head of Thematic ETFs and US Active Equities at BlackRock. He shares what robotics can expect and how advisors can seize this attractive investment opportunity in their portfolios. Here are edited excerpts from that interview:

Robotics has been around since the 1970s. What makes a compelling entry point now?

The underlying technology has continued to improve, resulting in growing demand and proliferating use cases. While the automotive industry was historically the largest consumer of robots, non-automotive manufacturers now account for the majority of sales.

Yet even with robots smarter, more sophisticated and more agile than ever before, we are still in the early stages of robotics adoption. On average, there are 126 robots per 10,000 employees in manufacturing, nearly double the number five years ago, but still far from ubiquitous adoption.

Beyond manufacturing, we see technology advancing to the point where robots can be used for all sorts of specific and delicate tasks, from picking vegetables to producing semiconductors to performing complex surgeries. To put that into perspective, the surgical robot market is expected to surpass $25 billion by 2031, up from $6 billion today. Increased research and development funding from governments, universities and private organizations; the rapid growth of robotic technology; and improved surgical results, particularly in orthopaedics, neurology and urology, are key growth factors. The topic of robotics has the potential to massively disrupt healthcare and other industries.

What is the impact of the current macroeconomic environment on the adoption of robotics?

The macroeconomic environment, combined with advances in technology, is creating a powerful moment for robotics. We are being pushed to produce more goods in the United States profitably alongside historic relocation and wage inflation. Robot sales had their strongest year ever in 2021, up 28% from 2020. That was before inflation and labor shortages accelerated in 2022, challenges that will likely only push the adoption of robotics further.

Hourly earnings in the United States have increased by 11% since the start of the pandemic, and labor shortages prevent many companies from finding qualified workers. This makes the initial investment in automation much more attractive. Automation from production to packaging combats supply chain disruptions and inflation, allowing employees to act faster and focus on higher value tasks.

On top of that, the seismic growth of e-commerce has further strained supply chains. Robotics will also play an important role in logistics innovation. Strained warehouse operations, due to growing consumer demand, necessitate their use.

Where will the next generation of robots have the most impact?

As robotics and artificial intelligence advance together, more complex tasks can be automated. There are two key areas where we see the next generation of robotics driving change: logistics and healthcare.

Competition for warehouse and fulfillment labor has become incredibly fierce, driven by the steady growth of e-commerce. The long-term implications of a heavy reliance on labor are clear: Warehousing automation is imperative to control costs, improve efficiency, and scale to meet growing demand. . In response, companies are investing in logistics robots and constantly looking for new ways to automate tasks.

Robots in the medical field are transforming the way surgeries are performed, streamlining supply delivery and disinfection, and allowing providers to focus on patient engagement and care. While countless businesses have been shut down during the COVID-19 pandemic, robotics companies have found themselves in a unique position: many have seen their orders increase. Robots have been deployed as first responders all over the world to help with response efforts. In US hospitals, Diligent Robotics has been testing its robot, Moxi, performing commercial mobile manipulations, distributing supplies to patient rooms, delivering lab samples and distributing personal protective equipment (PPE), the all completely independently. Robots are redefining healthcare.

What other technologies are needed to make robots successful?

There is a clear convergence between robotics and artificial intelligence, or AI. The integration of the two has the potential to increase productivity and elevate human-like cognitive abilities. Simply put, AI is an accelerator. Think of it this way: the robots act as the body and the AI ​​acts as the mind. Robots assimilate incredible amounts of information, extracting it through sensors and uploading it to the cloud to be processed with AI. Spatial awareness is essential, so they can operate alongside humans in more confined areas while being aware of their surroundings.

On the other hand, battery technology is a limiter. Robots have become increasingly autonomous and mobile, allowing them to roam hotel floors and deliver packages to your doorstep. These robot designs are powered by batteries and have limited potential because batteries often take up at least 20% of the available space inside a robot, or represent a similar proportion of the robot’s weight. New technologies, such as biomorphic batteries, could provide 72 times more energy to these robots.

How can advisors incorporate robotics into their portfolios?

While robotics presents a compelling long-term theme, our analysis shows that the average US wealth portfolio has negligible exposure to pure-play robotics and AI companies, at just 1.3%. And many investors struggle to identify investments that are positioned to benefit from the rise of this transformational technology. Enter thematic ETFs, which provide targeted exposure to a theme’s value chain. A fund like iShares Robotics and Artificial Intelligence Multisector ETF (ticker: IRBO) provides investors with access to leading companies worldwide in areas such as industrial robotics, artificial intelligence software, surgical robots and more.

While there are many ways for investors to add themes to their portfolios, we share two approaches: core-satellite and sector replacement.

With a core-satellite strategy, the current portfolio serves as the core, part of which is subtracted and used to fund a handful of themes (i.e. the satellite). We believe that ETFs are well suited to act as satellite investments for two reasons. First, we expect them to outperform broader stock markets over the medium to long term as they capture long-term structural trends. Second, thematic ETFs invest without constraint across geographies, sectors, and market capitalizations, so there is little overlap with traditional core equity indices.

Alternatively, investors could employ a sector replacement or enhancement strategy, reducing exposure to the information technology or industrials sectors and investing the proceeds in a thematic ETF on robotics and technology. artificial intelligence. This allows the characteristics of the stocks in the portfolio to remain relatively constant, while capturing more targeted exposure to pockets of sustainable growth.

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