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Investing in healthcare technology and innovation

At ROBO Global, we believe robotics, automation, and AI to be the next technological revolution—perhaps the most important in our lifetime. It is a global shift that is comparable to the introduction of electricity in the early 20th century and, more recently, to the adoption of the Internet and mobile technologies over the last two decades. To enable investors to gain exposure to best-in-class companies across these key robotics and AI applications, ROBO Global created the ROBO Global Robotics & Automation Index in 2013. Investors familiar with the ROBO index have taken note that companies leading the charge—many of which are included in our research-driven strategy—have significantly outperformed equity markets in recent years.

Earlier this week, we revealed our Healthcare Technology & Innovation Index (HTEC). This healthcare-focused index seeks to capture the growth and returns opportunity presented by the convergence of robotics, machine intelligence, and life sciences. While the list of innovations in this area is vast, it includes many advancements that seemed like science fiction just a few years ago.

The healthcare opportunity

Today, there are more than 5,000 medical robots in hospitals around the world, assisting surgeons in performing prostate and gynecology procedures. AI is being used to help physicians increase the accuracy of patient diagnosis when reading medical imaging and biopsy results. Other new innovations include 3D-printed implants for organ and bone transplants, miniature heart pumps that can be inserted through the femoral artery, and wearable devices that measure and deliver insulin to patients wherever they are. Perhaps the most important development to date is the availability of affordable gene sequencing technology. This science has opened the door to an entirely new medical approach to detecting disease at very early stages and to the development of custom treatments that are tailored to the needs of the individual patient. The first gene therapies have recently been approved by the FDA, and the number of clinical trials to find a cure for cancer using genomic data has more than doubled in the past two years.

There could not be a more exciting time for doctors, patients, and investors in healthcare technology.

From an investment perspective, we anticipate that technology will continue to profoundly transform the healthcare industry at a rapid pace, creating immense disruption in which stale business models will disappear and innovation will offer new profit opportunities. Winners will invent and implement technologies that match the right care at the right time, place, and cost. And because this transition to a technology-enabled healthcare system is still in the early stages, there will be huge rewards resulting from rapid growth and consolidation due to the economies of scale that are integral to technology solutions.

The market, too, is telling us something significant is happening. VC funding of US healthcare companies has tripled, from $10B in 2011 to $30B in 2018. Of that funding, 32% has been in digital health alone. And in 2018, the financing of AI companies in healthcare nearly doubled to $2.3B.

HTEC: Delivering exposure to healthcare technologies

The public companies at the forefront of the healthcare revolution have begun to significantly outperform global equities. A back test of the ROBO Global Healthcare Technology & Innovation Index (HTEC) shows annualized total returns of over 23% and 18% in the three and five years ending in 2018. Today, the combination of exponential gains in performance capabilities and rapidly declining cost curves is creating a key inflection point and finally bringing medicine into the 21st century.

Note: As of 31 May 2019. Back test prior to April 2019.

 

HTEC combines the results of our extensive research efforts with the discipline and quantitative aspects of index investing to provide exposure to best-in-class companies, small and large, that are leading the global healthcare technology revolution in nine major areas: robotics, lab automation, data analytics, genomics, precision medicine, regenerative medicine, diagnostics, instruments, and telehealth. This research-driven index portfolio of over 80 companies is focused on the technology and market leaders that are helping transform healthcare along four main lines:

  • Shifting the model from caring for the sick to preventing, predicting, and eradicating disease, using advancements such as AI-powered diagnostics, remote monitoring through connected devices, and genomic analysis, which have opened the door to the detection of diseases at very early stages.
  • Enhancing physicians’ accuracy and productivity with a wide range of automation and robotics technologies that promise to address the looming shortage of physicians, while also reducing human error and improving patient outcomes.
  • Improving the efficacy of therapies by enabling the shift from a one size-fits-all approach to one of custom therapies tailored to individual patients.
  • Lowering costs in one of the large economic sectors that saw the least productivity gains in the past decade and that also remains one of the least digitized.

To select best-in-class index members, we evaluate and score companies for technology and market leadership, as well as for revenue and investment exposure. Those with the highest “HTEC scores” that also pass ROBO Global’s Environmental, Social, and Governance (ESG) policy requirements are selected as index members. We review suitable companies’ HTEC scores based on ongoing research, engagement with company management teams, and market developments, and we reconstitute and rebalance the index to modified equal weights on a quarterly basis.

The resulting portfolio is significantly different from typical healthcare funds, offering a high active share rather than a broad equity index. In fact, the overlap with world equity indices is less than 2%. The index also has very limited exposure to the traditional pharmaceutical industry, which we expect to be significantly disrupted, and which typically accounts for over 40% of global healthcare funds. Instead, HTEC offers much higher exposure to technology hardware and software providers, life science tools companies, and biotechnology companies involved in genomics and precision medicine. For investors who recognize the coming impact of the healthcare revolution, HTEC may indeed be just what the doctor ordered.

By Jeremie Capron, Director of Research, ROBO Global

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