Jay Jacobs (02:58):

So we look across the world at technology trends, at trends that are impacting people on demographics, that are impacting climate, things like urbanization or rising global wealth. We actually call all of those our five mega trends and look for opportunities within them to capture these long-term structural themes as they’re emerging.

Jay Jacobs (03:17):

So it’s a little bit of mixing a bit of futurism and anticipating the future with investment theory and understanding how this hasn’t been priced into the market yet and where the opportunity is.

Clay Finck (03:28):

Yeah. When it comes to thematics, I think of these very volatile funds that might have these hype cycles and have these up and down just roller coaster ride, as many of them are higher beta and these companies that are investing for the really long term. So I think it’s really important when it comes to thematics that investors really understand the risk associated with such a trend and be really familiar with the trend overall, and then again, just having that really long-term time horizon. So I’m excited to dive into these a little bit deeper.

Jay Jacobs (03:59):

Absolutely. And look, I’ll agree with you that thematic investing when done well, often results in concentrated portfolios. And that’s actually the idea is if we’re looking at a long-term structural theme, like the investment and reinvestment in American infrastructure, you don’t want a 300 stock portfolio because the 300th stock that’s added to that portfolio is probably not going to have a lot of exposure to that theme. We want to get really laser targeted on which companies benefit from the materialization of that theme, but naturally that results in a more concentrated portfolio than something like a core broad-based index and that will create more volatility.

Jay Jacobs (04:34):

So a lot of this is not only capturing the growth opportunity, but also thinking about how does this fit in a portfolio. How do I diversify across themes, because these can be more volatile. So making sure that we have diversification to spread out that risk. And thinking about things like entry and exit points, when is the right time to get in, and when has the theme fully played out and maybe we should be looking to what’s next over the next 10 years?

Clay Finck (04:56):

Oftentimes the goal with investing is to achieve high risk-adjusted returns. That’s the end goal in what investors are really trying to do. Most people are comfortable just buying and holding a simple S&P 500. It’s a go-to strategy, tried and true. That’ll get you say a 6 to 10% return over the long run. But when looking at thematics specifically, if the trend ends up being huge, then you could outperform that potentially given that you’re right on your thesis and like you mentioned, have a good entry point essentially.

Clay Finck (05:28):

And in investing in a thematic ETF, you’re ensuring that you’re likely grabbing a lot of the winners in that trend, but you’re also holding onto the losers. So how do you think about taking this basket approach of buying the whole sector and buying some of those leaders and potentially buying losers as well in that ETF versus just buying maybe one, two or three of the current leaders today?

Jay Jacobs (05:53):

First of all, if we think about the S&P 500 and investing in a fund like that, you have the same dynamic playing out. You’re not betting that all 500 stocks are going to go up, you’re expecting that over time, on average, those stocks will be rising and carrying the performance of that fund, but recognizing that some company … I’ll make a grand statement, some companies in the S&P 500 today will not be here 10 years from now, but it’s okay to hold them in a fund like that because you’re diversified.

Jay Jacobs (06:17):

And I think the same principle applies to thematic investing, that predicting the individual winners today for a theme that is still very early, that may take 10 years to fully play out is a difficult job. And we want to play really many stocks in that ecosystem, because first of all, there’s many parts of the ecosystem that might benefit.

Jay Jacobs (06:35):

So if we’re talking about infrastructure, we’re not just saying that only electric utilities might do well. There’s construction engineering companies that might do well. There’s materials and commodities companies that might do well. There’s transportation companies that might do well.

Jay Jacobs (06:46):

So really thinking through the entire ecosystem of a theme of who benefits from this long-term structural theme, and then having diversification within those segments, because maybe we pick an area and there is a winner and there is a loser, but making sure we have exposure to more winners than losers over time.

Jay Jacobs (07:04):

If we go back and think about a theme that’s more mature, let’s think about E-commerce. E-commerce has now been around for 20 plus years. If you invested in it 20 years ago, there was risk, there’s volatility. There is a first wave of E-commerce companies that did not do particularly well and there was a shakeout. And we saw some of those companies disappear and we saw some of those companies be the biggest, most powerful companies in the world today.

Jay Jacobs (07:27):

To answer your question, first we need to have exposure to the ecosystem that will benefit, and we have to design our funds so that when there are winners, that we continue to capture those winners and cut our losers. So one of the things that we do, Clay in some of our funds where we see a lot of economies of scale playing out, where meaning that one or two or maybe three winners are going to be the major winners in that specific theme is we market cap weight that fund.

Jay Jacobs (07:51):

So we get more exposure to the winners, and if a company is not surviving and is going bankrupt, we’re letting that exposure fall. And that’s part of the product design and part of the thematic ethos of how do we capture the winners and ride those winners while cutting bait, if something isn’t making it.

Clay Finck (08:08):

That’s interesting. And when I was digging into your team’s work, you mentioned that millennials are going to be a big driver of some of these mega trends going forward. And your team mentioned that millennials today account for 50% of global spending, which is kind of mind blowing for just one generation.

Clay Finck (08:25):

And then I think about how millennials have higher debt levels, rising cost of education and housing, they’re paying off their debts on those. And then you have the baby boomer generation retiring, which puts enormous pressures on just the labor market overall. Talk about how these demographic trends might affect the global economy.

Jay Jacobs (08:46):

The broader discussion is yes, we have US millennials and US millennials are a very specific category of millennials, but we also have the global millennial. We have the rising consumer class, which is happening. In emerging markets around the world, in LATAM and Africa and Southeast Asia that are getting increasing consumer power, actually over 50% of retail spending now is happening with emerging market consumers.

Jay Jacobs (09:08):

So if we think about what worked in the past, what did people buy 20 and 30 years ago, those are not the major consumers of the world today. It’s the millennials in the United States who now are entering prime earnings years, who maybe even are inheriting money, if they’re lucky, and doing family formation, which tends to be more of a consumerism part of one’s life cycle, combined with that emerging market consumer, which is increasingly entering the middle class as emerging markets continue to see rising incomes. And you have to think what are the companies that are selling to that consumer, not yesterday’s consumer, but today’s and tomorrow’s consumer.

Jay Jacobs (09:41):

And what’s interesting about that is that these consumers behave differently. So if you look at previous generations, frankly, there was more focus on materialism. People cared more about buying jewelry and buying cars and buying homes. When you look at the millennial generation, there’s more of an emphasis on experiences, there’s more of an emphasis on sustainability.

Jay Jacobs (10:00):

If you look at how people make purchasing decisions at a grocery store, millennials are much more likely to consider where that food comes from. Companies that are able to offer that product or offer that service to appeal to the new consumer, we think is really set up for long-term growth rather than companies that are really resting on what worked in the past.

Jay Jacobs (10:18):

So when we think about it, there’s the thematic opportunity, which is what are those targeted companies that really understand the new consumer, but to your question, there’s macro questions as well. What does this mean for housing, when you have more family formation in millennials, in the United States? What does this mean for food production?

Jay Jacobs (10:34):

If we have a population that’s going to reach 10 billion people by 2060, and we’re going to have hundreds of millions of people in the emerging markets entering the middle class, and yet at the same time, we’re land constrained with how much food we can produce and general productive agricultural land is actually shrinking in the world, then how do we meet that supply and demand equation?

Jay Jacobs (10:54):

I think the generational shifts that we’re seeing both in the United States and abroad are creating really fascinating questions that have many macro implications, but many thematic implications as well.

Clay Finck (11:05):

Another piece related to what you’re saying with millennials is that they’re almost a different employee type as well. Some of these traditional companies that have been around forever that might not innovate as quickly as some of these emerging startups, the incumbents might not be able to attract some of this millennial workforce because of the type of work environment they have, or maybe the flexibility in working from home and such. And I think that could disrupt a lot of the incumbents as well.

Jay Jacobs (11:37):

There’s a lot of levels to determining this new consumer or this new cohort within the economy. One is how they spend their money. One is how they invest their money. And actually we see a lot of millennials like looking at thematic investing because millennials have long-term time horizons. So they’re investing for 20 years from now, not for five years from now.

Jay Jacobs (11:52):

If you’re a baby boomer, you’re thinking about retirement. What’s happening in the fixed income market today is a much more relevant conversation than a millennial, who’s thinking about how do I retire when I turn 65, how millennials invest their money and how millennials spend their time, which is both leisure and work.

Jay Jacobs (12:07):

But I think you’re absolutely right, there’s a lot of effort to appeal to the psyche of millennials, again, not just in the United States, but globally as well. And I think companies that can really tap into that, the uniqueness of this generation are going to see success both on the revenue side of their business, as well as on the execution side of their business with hiring.

Clay Finck (12:26):

What trends are you guys seeing that will benefit the most from the rise of the millennial being a large spender in the economy, and then eventually the emergence of gen Z in the workplace as well?

Jay Jacobs (12:38):

There’s a few different themes. We mentioned one of them already, which is looking at emergent and sustainable food. So if millennials are buying food differently, if they care more about organic food or where food is coming from, if it’s grown locally or produced locally, or how it’s packaged, then we believe that a lot of companies that can appeal to that millennial generation with the types of food they’re producing are likely to be set up for the future.

Jay Jacobs (12:59):

But also just being able to feed the millennial generation and that rising middle class that’s abroad, thinking through AgTech companies that are able to scale agriculture, do agriculture indoors, do it in abandoned warehouses, do it on rooftops, using less inputs, like less water or less chemicals. We believe those companies are going to be very well set up for feeding the next generation going forward. So we certainly have our eye on emergent food.

Jay Jacobs (13:23):

Also, when we think within financial services, we’ve seen that millennials are much more likely than baby boomers to be thinking about blockchain and thinking about decentralized finance and alternative finance. Companies that can appeal to millennials through those products and services, I think are going to be well positioned as well.

Jay Jacobs (13:40):

Especially when we think about emerging markets, there’s over 2 billion people that are unbanked. So who is able to use technology to reach that millennial investor overseas, who maybe is only investing tens of dollars or hundreds of dollars? In scaling that technology to them, I think they’re well positioned as well.

Clay Finck (13:56):

There’s this term mega trends that’s being thrown around and in my mind, I think, okay, it’s just a huge growth opportunity and with that comes a huge investment opportunity. Maybe could you define what qualifies as a mega trend in the research you guys are doing?

Jay Jacobs (14:14):

When we look at a mega trend, we’re really trying to understand what are the most powerful forces in the world today that are reshaping the global economy or society. That sounds like a really big statement, but the reality is we can look at a lot of these different aspects and tease out the importance to our economy.

Jay Jacobs (14:29):

So if we think about one of our mega trends is breakthrough technologies, often when a breakthrough technology is being produced, we can look at the total addressable market, where we are basically trying to anticipate how big is the market for this technology, if and when it reaches entire scale. So an example that says, if we look at electric vehicles, the total addressable market for electric vehicles is actually pretty simple because about 90 million cars are produced a year. All of those cars could be electric. That’s the total addressable market today.

Jay Jacobs (14:57):

Now yes, the total cars being sold is probably going to increase over the next 10 years. Again, back to the emerging market consumer, more emerging market consumers are going to buy cars going forward, but let’s ballpark that total addressable market as 90 million to 100 million cars being sold a year. You can put an average purchase price on those cars, probably around $25,000. Boom, you have your total addressable market.

Jay Jacobs (15:17):

And then the question we ask ourselves today is how much of that addressable market has already been penetrated? So if we’re selling 9 million electric cars a year, we have about 10% penetration of that total addressable market. That means 90% of the market today, actually more than 90% of the electric vehicle market today still has not been addressed with this technology.

Jay Jacobs (15:36):

And then the question after that is what is the investment opportunity and has it been priced in? So when we think about these themes, what often happens is the markets are shortsighted, that they’re not thinking 10 or 20 years from now, and they haven’t fully priced in the power and the impact and the duration of these themes, which creates an opportunity, a long-term opportunity in even in a disruptive tech sector, like electric vehicles.

Jay Jacobs (15:58):

And also the markets tend to be a little bit narrowly focused. So I’m sure all of us can probably name two or three electric vehicle stocks that are on the news, in the news every single day, but do we know about the lithium mining companies that are mining the lithium that goes into electric batteries? Do we know the battery producers that are predominantly based out of Asia that are producing those batteries? Do we know those parts suppliers that are creating electric engines specifically for electric vehicles or the infrastructure companies building electric charging?

Jay Jacobs (16:24):

There’s a huge ecosystem of companies that are playing a major role in electric vehicles that frankly are under covered and underappreciated by the average investor because they don’t have the brand name, they don’t have, let’s call it the charisma of a CEO and maybe they’re overseas and they’re not publishing SEC reports because they’re based out of another country and have their own regulatory regime.

Jay Jacobs (16:47):

Even in these instances of a theme that we all know very well and we see in our everyday lives, there’s still opportunity in these themes. So a lot of that work in developing mega trends is quantitative work in understanding what is the size of the opportunity, how much of that opportunity has already been addressed, and what does that mean for investors going forward.

Clay Finck (17:06):

One of the mega trends you’re bullish on, or you’ve done research on is infrastructure specifically. Talk to us about what you’re seeing in this field, infrastructure, what it means going forward and how investors should think about this trend.

Jay Jacobs (17:23):

This is a theme that I’ve been excited about for several years now and it’s because again, if we look at some of the quantitative aspects of infrastructure, there’s a little bit of a golden rule. It’s a little bit of a simplification, but generally you want to see a developed market economy like the United States spending about 2% of its GDP on infrastructure a year. That’s to maintain your infrastructure at a quality level and make sure it’s growing to address your growing population and changing dynamics within that population.

Jay Jacobs (17:50):

There’s really been only about two distinct periods in the last century where the United States has invested that much in infrastructure. It was in the 1930s during the Great Depression, and it was in the 1950s and 1960s following World War II. Since then, we’ve basically left infrastructure to deteriorate and we see that because the American Society of Civil Engineers puts out a report every four years and they gave infrastructure a D plus grade for the quality across the United States.

Jay Jacobs (18:18):

There’s no way to avoid this. The infrastructure in the US is not in good state. And we knew several years ago, thinking back looking at this theme that it’s too critical of an area not to receive more investment, that at some point, regardless of what’s happening in Washington, we would see enough willpower and enough political will to ultimately bring forth a major bill. And of course we saw that last year.

Jay Jacobs (18:41):

We saw the passage of the Infrastructure Investments and Jobs Act, which is a $1.2 trillion bill. And frankly, if you ask me, that’s a good amount of money. That’s not everything that was needed to repair US infrastructure, but it’ll really restart the rebuilding and revitalization of things like airports, sea ports, where we’ve seen huge constraints during supply chain disruptions during COVID-19. Surface transportation, do we have enough lanes on highways? Are we fixing potholes? Are we making sure bridges are safe enough?

Jay Jacobs (19:07):

Even thinking about things like water infrastructure, which maybe we take for granted, but a lot of water infrastructure is leaking, which is wasting water, or it’s still lead pipes, which can lead to really harmful impacts on humans. And really, as well as thinking about electric infrastructure, as we move towards more decentralized electrification, where people are putting solar panels on their roofs and windmills in farms and things like that, but really adapting that infrastructure for the new century.

Jay Jacobs (19:33):

We think that there’s a really exciting growth opportunity within infrastructure, which is rare over the last century, but also there’s more of a near-term dynamic with infrastructure as well, which is that when we think about different asset classes that tend to do well in an inflationary environment, infrastructure is one of them.

Jay Jacobs (19:50):

If you think about the rates you might pay on your electricity or the rates you pay on water, oftentimes those rates are written into law that that is going to be tied to inflation. So when inflation rises, the water company gets to raise your rates and the electric company gets to raise your rates, and maybe even the bridge you cross to get to work raises its toll. That gives those companies inflation protection, that even if inflation rises, they’re going to continue to maintain that revenue.

Jay Jacobs (20:13):

So it tends to be a bit of an inflation fighting theme. And then on top of that, it tends to be a defensive theme that even in a environment like today, where people are more concerned about recession and maybe we have slowing economic growth, people are probably not going to turn off the lights, they’re probably not going to stop drinking water, they probably still have to go to work and pay those tolls, which gives it a very defensive characteristic compared to other segments of the economy, which are more cyclical. So we like infrastructure for that long-term growth thesis, but also given the context of the macro environment today.

Clay Finck (20:45):

When I was doing research on this trend, I think it does make sense. And I was actually reading our TIP daily newsletter this morning that we send out to the audience and it mentioned that Howard Marks and Oaktree is actually bullish on infrastructure because of the many things you just mentioned. And then there’s other pieces such as supply chain issues that need fixed and then the build out of infrastructure for green energy. And it’s interesting to think about how wide this trend goes, you have bridges, roads, airports, housing, schools. Are there any specific sectors you think will play the biggest part of this, or is it just a diversified kind of mega trend?

Jay Jacobs (21:27):

I would say this is a very diversified mega trend, and we’ve seen that in the passage of the IIJA, which addressed many of these different segments. The definition of infrastructure is sweeping and it’s because really what are the things that we depend on as the backbone of our economy every single day to get to our jobs, to get goods and services to where we want to consume them, to travel around the country. And so there are a lot of different segments within infrastructure and there’s different drivers within each of those segments.

Jay Jacobs (21:53):

We were mentioning one of them, electric distribution. On one hand, we absolutely need electricity, there’s no question about that. We need an electrical grid that works, but at the same time, we’re upgrading that electrical grid because it used to be just, you had one local power plant and it spread its electricity across the grid and you turned on the lights and you turned on the AC and that was that.

Jay Jacobs (22:13):

And now we have that decentralized electrical grid where someone might have a solar panel on their roof, a farm might have the windmill in the middle of the farm. We’re going to be charging cars not just at our houses or at our offices, but anywhere along that grid, and that actually creates a lot of stress on existing electrical grids. So how do we not only invest in infrastructure to make sure it works today, but also future proof that infrastructure.

Jay Jacobs (22:35):

So I think when we think about infrastructure, there’s that core infrastructure that it just has to turn on today. Well, there’s also that new infrastructure that has to adapt to new technologies of the future. And I think that new infrastructure is where there’s that additional layer of growth opportunity, because in a lot of ways, it just has to be completely built from scratch.

Clay Finck (22:53):

On top of that, there’s also the infrastructure enablers as well as the owners. Could you talk about what the difference between these two is and why an investor would want to own one versus the other?

Jay Jacobs (23:06):

Digging into thematic investing, again, it’s not just looking at one sector or one asset class and trying to determine who wins, it’s really thinking through the entire ecosystem. So the easy thing to think about with infrastructure is if we have better infrastructure, that’s good for the electric company, that’s good for the water company. Those are infrastructure owners though, they already have infrastructure.

Jay Jacobs (23:26):

When I was talking about the new infrastructure it’s who are the companies that are going to be building that infrastructure going forward? That can be construction engineering companies that specialize in handling large scale construction. It can be machinery companies. If we’re building new airports, new terminals or new hospitals and schools, who are the companies that build the machines that do that?

Jay Jacobs (23:48):

Also, thinking through totally from the upstream perspective, if we’re rebuilding infrastructure across the country, that’s going to put a lot of demand on steel, on cement, on asphalt, on other materials like copper. So we’re really rethinking the entire ecosystem of infrastructure with those enablers being the inputs that go into new infrastructure.

Jay Jacobs (24:10):

Let’s think about existing infrastructure assets, those owners as being more like utilities companies, the enablers are more like industrials and materials companies that are going to be building the next generation. And when we think about this from a thematic perspective, we really like to combine those two groups because we want those builders and we want those operators to own the entire ecosystem, and it gives us more diversification within that theme.

Jay Jacobs (24:32):

Actually right now, when we see a more volatile market, those infrastructure owners are acting as stabilizers because they tend to be more defensive like we’re talking about. You don’t shut off the water, you don’t shut off the lights in a recession. The enablers are going to be a little bit more economically sensitive because maybe people do pull back on construction. But also they could benefit to the upside, as we’re seeing more spending from the IIJA.

Jay Jacobs (24:55):

So it’s really combining these different pieces into the thematic fund that gets us very excited and is that thematic approach that is different from sector-based investing.

Clay Finck (25:04):

You mentioned the infrastructure bill passed by the federal government and it almost seems like this mega trend is very dependent on what sort of funding comes from the governments, whether it be the US or other nations. How do you expect this to play out over the next decade? You mentioned how this investment is practically inevitable, but what do you think about the role that government plays in how this all pans out?

Jay Jacobs (25:29):

It’s a big role, and specifically in the United States, the government plays a disproportionately large role in infrastructure. We don’t have a ton of privatized infrastructure actually. And you go overseas to places like Europe or in Asia, sometimes the airports are publicly traded companies and sometimes sea ports and railroads are more often actually publicly traded companies rather than government entities. But in the United States, a lot of our roads and highways and these infrastructure assets are run by the governments themselves.

Jay Jacobs (25:55):

Yes, the federal government plays an enormous role in this. I would say state and local governments also play a major role. We see very large ambitious infrastructure bills and infrastructure efforts still done at the state and local level, but there is room for private as well.

Jay Jacobs (26:11):

Think about internet broadband companies that’s a form of infrastructure that’s bringing internet and digital connectivity around the country. Those are private companies and maybe you see more private investment in that space, as we see efforts to expand broadband to rural areas.

Jay Jacobs (26:27):

There are many layers to this theme beyond just the federal government, but certainly in the United States, the federal government does play an out-sized role in this theme.

Clay Finck (26:36):

Let’s transition to talk about maybe a little bit more exciting mega trend. I think of infrastructure as more of a foundational piece of a portfolio in terms of it’s going to at least produce some cash flows during a recession or a downturn and-

Jay Jacobs (26:52):

Well, I think that’s exciting, Clay, but I’ll let you …

Clay Finck (26:55):

Yeah. I guess I’m just giving my perspective. Let’s transition to talk just about a different mega trend, robotics and artificial intelligence. Obviously this is something we’ve seen over the past say 20, 30 years. Why do you think this is a good opportunity now specifically?

Jay Jacobs (27:13):

Robots have been around for a surprisingly long time. You can see references to robots dating back to the early 1900s. You can think about Jetsons cartoons or A Space Odyssey 2001. Maybe the millennial audience hasn’t seen that one. But robots have been around in popular culture for a very long time, and even they’ve been around in the economy for a long time.

Jay Jacobs (27:34):

The first robots were really introduced in an industrial capacity in the 1970s, in Japan, in the auto manufacturing segment where these were really big, clunky robots that picked up pieces of sheet metal and put them down somewhere else. They weren’t smart. They weren’t nimble. They weren’t thoughtful. They weren’t considering their environment. They were programmed to do one thing and basically be a tool that humans could use to do the stuff that humans were incapable or unwilling to do.

Jay Jacobs (28:02):

Now, if we fast forward today, robots are of course much smarter and much more capable than ever before. Robots can be super fast. They can be extremely precise. We’re seeing robots being used to do surgery on people’s hips and people’s knees and people’s backs. We’re seeing robots that have the dexterity and the agility to pick up gentle fruit like strawberries and not crush them. And of course we’re seeing continued use in technology spaces where they’re being used to manufacture just completely microscopic chips in the semiconductor space. So the amount of use cases that are emerging in the robotic space are really growing with that capability as that capability and technology gets better and better.

Jay Jacobs (28:41):

Uniquely in this environment though, we’re seeing many drivers that are making robotics adopted even faster. One thing is just the economics of robotics. Technology tends to get cheaper over time, labor costs tend to rise. So when that pattern continues to compound year after year, you see that robots tend to get cheaper and hiring a manufacturing worker to do the same job is getting more expensive.

Jay Jacobs (29:03):

And oftentimes those paths are now crossing where the payback period for certain robots is now two or three years, meaning you turn on that robot, it works 24 hours a day, 7 hours a week, 365 a year, doesn’t take breaks, doesn’t take a vacation or anything like that. And then in about two or three years, that robot will have paid for itself versus an equivalent worker.

Jay Jacobs (29:22):

So the economics are driving robotics adoption, but also what we’re seeing is labor is now increasing. We’re seeing inflation in wages, which is making it even more expensive relative to robots. And we’re also seeing supply chain disruptions where previously the answer to rising labor costs for certain companies was let’s move that manufacturing overseas, let’s go to somewhere where labor is really cheap.

Jay Jacobs (29:43):

But now given that we have disrupted supply chains and COVID really showed how much regional dependence some of these companies might have, a lot of these companies are rethinking manufacturing and their supply chains and saying we want to build stuff in the United States or we want to build stuff in Europe, we don’t trust the globally integrated supply chain anymore.

Jay Jacobs (30:01):

But the way to do that in an economic way is to use robotics as much as possible. Because moving that manufacturing to the US is going to be more expensive from a labor perspective is to try to automate as much of those functions as possible. So in 2021, we saw record sales for robotics because of that, a lot of companies preparing to move manufacturing to the United States and automate as much as possible and we’re continuing to see that trajectory going forward.

Jay Jacobs (30:27):

In fact, I think what’s interesting about robots is if we think about what is slowing robotic adoption, why is robotic adoption not even faster in a place like the United States, it’s not that we can’t get our hands on enough robots, it’s that we don’t have enough engineers who are trained in robots to say, okay, we have a robot on a desk, how do we train it to now build a semiconductor? So there’s actually an education process in the United States where we have to develop the next generation of engineers to use these new tools.

Clay Finck (30:54):

I was looking at ticker IRBO, iShares Robotics and Artificial Intelligence ETF, and I see 115 holdings in this fund. When I’m looking at the holdings, I see many of the big tech companies, I see some companies out of China. So for the US, Microsoft, Google, Twitter, then China, you have JD, Baidu, Alibaba. I’m curious how companies qualify to enter your fund and how maybe investors should think about it and how it might be different than say something like the NASDAQ.

Jay Jacobs (31:27):

This is a very broad theme because we see so many companies involved in robotics and or artificial intelligence. So I think of robots as the body and artificial intelligence as the mind. A lot of these companies are thinking about artificial intelligence. They have an eye on how do we automate? How do we leverage our data? How do we leverage our processing power to generate insights? And maybe that’s as simple as suggesting the next website you should go to, or as simple as suggesting the next song or the next movie that you listen to or watch. But artificial intelligence is becoming ingrained in their product, and in many ways is the key to their success. If they were recommending bad songs, you maybe stop listening to that service.

Jay Jacobs (32:06):

Artificial intelligence in many ways has just become the next age of technology. As we aggregate more data and get more processing power, a lot of companies that maybe were simple web companies or simple product companies are now becoming AI companies. And that’s being equally felt in the United States as well as overseas in places like China.

Jay Jacobs (32:24):

To answer your question, how does this differ from other indexes? Well, part of it is that global reach that when we think about the rise of robotics and artificial intelligence, some of the leading robotics companies in the world are Japanese. And frankly, a lot of these companies the average investor probably has never heard of, but they are really good at making robotic arms that can move quickly and pick up things that are very small. A lot of artificial intelligence companies are overseas in China now. A lot of robotics and AI companies are in Europe.

Jay Jacobs (32:50):

If you’re just simply buying a broad market index, one, you might not be getting that global exposure depending on which index you’re buying, but the S&P 500, you’re not getting global exposure. And even if you are getting global exposure in a broad index, we have a tool called our X-Ray tool, where we look at what is the thematic exposure within those broad indexes, and what we often find is there’s very little exposure to these themes within those broad indexes. Maybe you’re getting some of the mega cap companies, but looking at some of those small and mid-cap companies that are leading in robotics and artificial intelligence, you’re getting very minimal exposure through broad market indexes.

Clay Finck (33:24):

Are there any specific industries you’re seeing a large impact in the robotics space?

Jay Jacobs (33:31):

Absolutely. The previous industries that really benefited from robotics were in manufacturing, auto manufacturing. It makes a ton of sense, these are heavy things. It’s mostly pre-programmed. You can program a robot to weld a beam to a frame of a car, or to do these kind of repeated tasks. But as robots get smarter and more capable, the question is, how do robots now get into other industries?

Jay Jacobs (33:55):

We’re seeing robots being used in healthcare. Robots are doing surgeries right now. Robots are going to be doing cleaning and delivery service. Robots are going to be preparing food and delivering food to tables soon because the capabilities are getting better than ever before.

Jay Jacobs (34:08):

So I think hospitality and services, I think hospitals and medicine are going to see more robotic penetration because it’s cheaper, because it’s safer, because it’s more repeatable, or because we’re just going to continue to have labor shortages.

Jay Jacobs (34:22):

In a lot of ways people worry about robots taking jobs. If a robot is cleaning a hospital, is that a job that a human would’ve been doing? But actually, if we fast forward, and this is always what we’re doing in thematic investing, we’re fasting forward to 10 years, 20 years ahead, there’s real challenges in the labor market, in the healthcare space, because there’s going to be so many baby boomers that are reaching senior years and are going to need senior care. Frankly, that can’t just be addressed with humans in the United States today.

Jay Jacobs (34:51):

And this isn’t just looking at a crystal ball, what we do is we look at parallels around the world. We’re already seeing that in Japan today. And Japan is ahead of the United States in that demographic curve, where they have a very top heavy aging population, they already have issues with, how do you care for that senior generation? And guess what? They’re using robots. There’s no mistake that the leading robotics companies in the world are often Japanese because they need to use them at a societal and economic level to treat those issues.

Jay Jacobs (35:18):

That’s coming our way in the United States. Part of it is still technological advancement, but interestingly, I think part of it is also society adapting to that, the concept that it’s okay to have a soda delivered to you by a robot rather than the human, because ultimately, maybe that makes food less expensive or stretches our economy less thin.

Clay Finck (35:38):

I mentioned that this one robotics fund has just over 100 holdings. So that means each company is about a 1% allocation or less. I’m curious how you guys landed on that 1% or 115 companies number, and how you determine how many companies should be held in a fund like this.

Jay Jacobs (35:58):

This all comes into the design of the theme, where we do a lot of work before we launch a product to understand what is the theme? What are the segments that benefit? How do we identify those segments? Where do those segments come from? Is it specific sectors or certain geographies? And then also, how do we weight those different companies? Is this a winner-take-all segment, or is this going to be more spread out and diversified?

Jay Jacobs (36:19):

And actually what we’ve thought about within robotics is this is probably going to be more diversified winners. We don’t see one robotics company taking over the entire world of robots. Oftentimes we see more specialization that one robotics company focuses on the medical space, one AI company focuses on media, one robotics company focuses on automation within the automobile manufacturing space.

Jay Jacobs (36:40):

In this instance, as we think about this theme, we want to plant a lot of seeds across the world and across different sectors, because this is a really broad theme that has a lot of potential winners in it, unlike the example I used earlier, which was E-commerce, which there’s a lot of economies of scale. And if you’re looking at that from a thematic perspective, you might want to be pretty top heavy in just a few names that dominate E-commerce.

Clay Finck (37:02):

One item we’ve talked about so much on this network is just the macro environment. So I’m curious to maybe hear your thoughts on what you’re seeing as far as the macro environment and how that might affect some of these trends you’re looking at.

Jay Jacobs (37:17):

Probably the most important part of the macro environment that’s on people’s minds today is inflation because we see it. Every time we go to the grocery store, we see how much more expensive things are getting. I still get floored sometimes when I see how expensive my shopping cart is, or when I dine out and get the bill from the restaurant. And so we see it every day, but the question then is really, what are the themes that benefit from that?

Jay Jacobs (37:37):

And I think we’ve talked about a few of those themes. We’ve talked about infrastructure being resilient to inflation because it automatically adjusts its prices. We’ve talked a bit about food because food can naturally benefit as the companies that are producing food or producing solutions to produce more food in the future benefit from rising inflation in the food space. Even in some cases it’s clean energy.

Jay Jacobs (37:57):

One of the metrics that people look at in clean energy is levelized cost of energy. When oil prices are higher, the relatively fixed costs of something like a windmill or a solar photovoltaic cell become lower relatively speaking, because you build a windmill once that’s most of the cost, but if you build a gas fired plant, you’re constantly buying gas, even as gas prices are rising and falling. So when gas prices are higher, that windmill or that solar plant looks more attractive.

Jay Jacobs (38:25):

We’re looking at inflation, but specifically we’re thinking about what are some of the themes in the near term that have more of that inflation resilience. We still have the long-term excitement around the theme, but we understand that investors care about the near-term environment and are recognizing how that impacts these themes.

Clay Finck (38:41):

Jay, what a informational conversation. I really enjoyed it. Thank you so much for joining me. I want to give you a chance to hand off to what you guys are working on at BlackRock, the research you’re doing and anything else you’d like to share before we close it out.

Jay Jacobs (38:57):

I mean, all I’d share is that we are constantly thinking about these themes. We’re researching these themes and we’re developing nuance. And as much as I want to tease the future, I’ll have to wait a little bit on that, but I’ll make a plug for at www.ishares.com/megatrends you can see our latest research, you can see our latest products because we are constantly … By definition this space is evolving, we have to too, with our research and with our product offering. So advise people to check out ishares.com/megatrends to keep up with the latest.

Clay Finck (39:26):

Awesome. Thanks so much, Jay.

Jay Jacobs (39:28):

Thank you, Clay.

Clay Finck (39:29):

All right. I hope you enjoyed today’s episode. Please go ahead and follow us on your favorite podcast app so you can get these episodes delivered automatically. If you’ve been enjoying the podcast, we would really appreciate it, if you left us a rating or review on the podcast app you’re on. This will really help us in the search algorithm so others can discover the show as well.

Clay Finck (39:48):

And if you haven’t already done so, be sure to check out our website, theinvestorspodcast.com. There you’ll find all of our episodes, some educational resources, as well as our TIP Finance tool that Robert and I use to manage our own stock portfolios. And with that, we’ll see you again next time.

Outro (40:06):

Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday we teach you about Bitcoin, and every Saturday we study billionaires and the financial markets. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network, written permission must be granted before syndication or rebroadcasting.