Category: Technology

Cybersecurity as an investment theme

Digital crime is no longer just the domain of individual hackers operating from murky basements. These days many countries have entire cyber armies that stand ready to go to war, and every target whether corporate, governmental, military or civilian seems fair game. As does every piece of crucial infrastructure they can get their hands on via digital means or otherwise.

Countries are fighting wars with drones and robots, and the devices we use in our daily lives are becoming increasingly connected to the internet(Internet of Things) which makes it possible to weaponise them. Cyber crime, data theft and online manipulation is on the rise and can do physical, political and economic damage.

Long story short, the need to protect all of this crucial digital infrastructure is ever growing and governments, companies and individuals will be willing to pay for products and services that offer security. As we hook up more and more of our lives to the internet, that need will only grow, and many companies are stepping into the gap. Investing in firms that provide data protection, firewalls, anti-virus and other cybersecurity should provide solid long-term returns as their products and services become a necessity.

Portfolio construction: two ETFs

CategoryNameIDTERAlloc %
ETFFirst Trust Nasdaq Cybersecurity ETFCIBR0.60%50.0%
ETFETFMG Prime Cyber Security ETFHACK0.60%50.0%

Risk level: high / diversification: low

  • Dividend yield: 0.1%
  • Ex-ante predicted volatility: 13.9%
  • 1 year 95% Value-at-Risk: –23.3%
  • Scenario 2008 Lehman Brothers default period: -24.7%
  • Scenario Interest rates +100bps: +9.8%
  • Scenario 2008-2009: -8.0%
  • Scenario 2010 onwards: +201%

How to invest in the battery revolution

Batteries are currently the bottleneck of many technologies. You have a phone, but after using it for half a year its battery percentage says 36% at 5PM, when you still have a long evening ahead of you. Your laptop battery used to last for five hours when you first got it but now can only go for two. Your smartwatch can barely last you a full day, and on that twelve hour flight your wireless headphones die eight hours in.

Consumer devices have become more compact over the years. Whereas a Nokia 3310 (yes, that Nokia) used to measure 22mm in thickness, the latest iPhones measure only 7-8mm thick. Battery technology has had to shrink down in size accordingly, and on top of that it has had to go from supplying power to small monochrome displays to now powering full-fledged computing devices with huge state of the art screens. Never mind powering lightweight sports cars.

Thus far the battery technology that is available in your average consumer electronics (typically Lithium-ion) has struggled to keep up with these developments. Should at some point the barriers to quick charging and longer battery life be broken however, battery technology would represent a great investment for the longer term.

What are the latest developments in battery technology?

Most devices you will have come across in an average household (and in its next door garage) over the last decades run off Lithium-ion batteries. There are many different types of Lithium-ion batteries, and without going into the technical stuff (you know, how electrons are moved from one end of the battery to the other between the anode and the cathode or positive and negative electrodes, ahem) suffice it to say that these have generally been found to be the most efficient type of battery. Though not without their issues, mainly in the area of safety.

Developments in battery technology all focus on increasing the density of the battery (more energy in less space), improving the battery life and safety. Because no one likes exploding batteries.

Currently there is no clear indication of which technologies are going to win out. There is ongoing research by the big technology companies into improving Lithium batteries, with Lithium-air or Lithium-sulfur as possible contenders to take Li-ion’s place in your phone. Other technologies like solid state batteries, Sodium-Ion or Aluminum-Air batteries look at replacing Lithium entirely, but that seems further off and is receiving less R&D spending. So far no successor has successfully been brought to the market yet.

Demand from all sides should make this a great longer term investment

Batteries go in practically anything, and crossing the hurdle to having longer lasting and faster charging batteries could literally change our lives. Whatever the new technology ends up being, once it ends up on the market there is sure to be enormous demand.

As we have outlined above, which technology is going to end up in your phone is harder to predict, but most currently see no real competition for advances in Lithium batteries. Moreover, if the last 25 years are any guide for the future, it appears that any changes will happen gradually than suddenly. If new advances come to the fore, existing battery manufacturers are likely to be quick to jump on it.

Portfolio construction: lithium and battery technology

  • This single ETF theme portfolio consists of the Global X Lithium and Battery ETF which tracks the Solactive Global Lithium Index. It invests into the full cycle of a battery: from miners (creating exposure to Lithium prices) to actual battery producers
  • The ETF contains allocation to predominantly the United States, Australia, South Korea and Japan (77%) in total
CategoryNameIDTERAlloc %
BatteriesGlobal X Lithium & Battery Tech ETFLIT0.76%100.0%

Risk, Diversification And Allocation

  • Risk level: high
  • Diversification: low
  • For risk and total return since initiation see Portfolios
  • Probability of this theme playing out in the next 3-10 years: 50%-50%

Portfolio Characteristics (Full Look-Through, From USD Perspective)

  • Dividend yield: 3.74%
  • Ex-ante predicted volatility: 15.8%
  • 1 year 95% Value-at-Risk: –22.2%
  • Scenario 2008 Lehman Brothers default period: -31.0%
  • Scenario Interest rates +100bps: +6.1%
  • Scenario 2008-2009: -21.7%
  • Scenario 2010 onwards: +156%

 

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Five reasons to invest in agriculture

People cannot live without food. The global population is ever growing and expected to hit 9.7 billion by 2050. Per the United Nations, food intake is projected to grow by 70% both off the back of that trend as well as a general increase (some 12% per person on average by 2050) in caloric intake in both wealthy and developing nations.

Meanwhile, global arable farmland is scarce. If the above population projections become reality, there will be a need for one additional billion tonnes of cereal and 200 million tonnes of meat. That will naturally put a strain on arable land already, but deforestation and degraded forest land as well as soil erosion also reduce the availability of topsoil and make matters worse. On top of land, scarcity is also going to apply to water (of which agriculture is one of the biggest global consumers).

All of this is going to put an increasing stress on the the $5 trillion agriculture sector and upwards pressure on food prices. New advances will be needed to keep up. So what are some of the main advances in agriculture (or as some like to call it, agtech) taking place today?

#1 Robots

Whether it is to plant, control weeds, monitor the crops or reap the harvest, or even pack the final products, robots as a replacement of fieldworkers are an obvious candidate for enhancing the quality and productivity of global agriculture. Even entire tractors could become driverless vehicles.

#2 Drones

Can be used for soil and field analysis from up high, meticulously geotagging every location and providing data that can be useful in planting, watering, pruning etc. Could potentially even be used for spraying and irrigation in much more efficient ways than old technology could do.

#3 Animal trackers / livestock wearables

What if farmers could keep track of their cattle 24/7 using wearable devices? You could limit certain parasite treatments to only animals who frequently go outside. Or you could couple it with technology that can automatically sound the alarm when livestock puts itself in danger.

#4 Sustainable food and meat substitutes

Not only is caloric intake set to rise, but the consumption of meat is expected to similarly go up across the globe. We are destined to see an increasing amount of sustainable food options and meat substitutes in our supermarkets.

#5 AI: Automated irrigation, crop monitoring and predictive analytics

What if there were techniques that were able to constantly monitor the fields, ensuring that soil conditions remained just right and only irrigating precisely when needed and as much as needed? The savings in water consumption could be significant. And what if the farmer had a system that could give him a live status monitor of his crops, making use of crop data and weather forecasts to highlight the optimal days to harvest? Artificial Intelligence could provide the technologies upon which such features are built.

Why agriculture makes sense for investors

One of the last things people are going to save on in any economic downturn is food. Coupled with very strong fundamental prospects and rising prices over the long run, agriculture should make a good addition to any longer term portfolio.

Portfolio construction: Agribusiness and agriculture

  • I construct a portfolio consisting of three ETFs, with TER ranging from 39bps to 70bps, overweighing the former.
  • The largest exposure is to the VEGI ETF, which offers exposure to “companies that produce fertilizers and agricultural chemicals, farm machinery, and packaged foods, and meats”. It has 120+ holdings of which the largest is Monsanto (14%). It’s holdings are roughly 50% in the US and 50% elsewhere
  • The MOO ETF has a similar profile with a smaller number of firms, while the FTAG ETF contains a larger portion of non-US holdings and focuses on firms improving agricultural yields
CategoryNameIDTERAlloc %
All AgricultureFirst Trust Index Global Agriculture ETFFTAG0.70%20.0%
ProducersiShares MSCI Global Agriculture Producers ETFVEGI0.39%50.0%
AgribusinessVaneck Vectors Agribusiness ETFMOO0.54%30.0%

Risk, Diversification And Allocation

  • Risk level: high 
  • Diversification: low
  • For risk and total return since initiation see Portfolios
  • Probability of this theme playing out in the next 3-10 years: 25%-50%

Portfolio Characteristics (Full Look-Through, From USD Perspective)

  • Dividend yield: 1.62%
  • Ex-ante predicted volatility: 10.1%
  • 1 year 95% Value-at-Risk: -15.8%
  • Scenario: 2008 Lehman Brothers default period: -26.0%
  • Scenario: Interest rates +100bps: +4.9%
  • Scenario: 2008-2009: -13.4%
  • Scenario: 2010 onwards: +169%

 

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Why You Need to Invest in Healthcare Stocks Today

Wouldn’t you like to invest in something that

  • Would have given you a nearly 3% higher yearly return than other stocks over the last two decades
  • Is extremely likely to keep outperforming going forward because the fundamental trends driving it are only getting stronger every year
  • Is pretty much recession-proof given that demand for it is inelastic

In that case you should consider allocating some of your portfolio to healthcare stocks, as these meet all of the above criteria.

Ageing populations that are increasingly middle class = more demand for healthcare

Let me start with some statistics for you to ponder over:

  • Globally, the world population has been ageing. The number of people over 80 years old is expected to triple by 2050. By that time there will be 2.1 billion people over 60 years of age, partly due to the fact that the average life expectancy increased by 5 years between 2000 and 2015 alone
  • Making matters worse, more doctors and caretakers will retire, leaving fewer people to care for more of us
  • The global middle class is increasing rapidly as people lift themselves out of poverty. By 2021 for the first time more than half of the world’s population may be living on a middle class income, and by 2030 that will be as much as 65%. One of their first priorities is going to be to pay for better healthcare
  • Medical breakthroughs are now coming through at an increasingly rapid pace in areas such as cancer, HIV, gene therapy etc. A lot of these advances are helping people with chronic diseases live longer

These are all reasons for the demand for healthcare to keep growing every year over the next decades.

Outperformance because it fares better in the bad times

Since 2000, the MSCI World Health Care Index has had an annualised performance of +7.5%, whereas the regular MSCI World generated +4.7%. That’s an outperformance of +2.8% a year!

Part of the reason for that longer term outperformance is the fact that healthcare is a necessity with no substitutes. Even in recessions people will not cut back on it in any significant way. In 2008 the health care index did have a negative return of -21%, but the broader MSCI World returned -41% over the same period.

Moreover, in the period that followed, healthcare stocks outpaced the broader indices. So the bad times weren’t as bad, and the good times were better.

So to summarise, why should I invest in healthcare?

The three main reasons you should consider to allocate some of your investments into healthcare related stocks are:

  1. Higher risk-adjusted returns. Healthcare features a historical Sharpe ratio of around 0.47 versus around 0.3 on all global stocks. Simply put, that means you got more units of return per unit of risk
  2. Smaller losses during drawdowns. MSCI World lost -41% in 2008, whereas MSCI World Global Health Care lost only -21%. In the years after that, healthcare beat the index again.
  3. Fundamentally there is much, much more to come. The world population is rapidly ageing and becoming increasingly middle class while medical breakthroughs are coming faster than ever

What have been some of the key medical advances of recent years?

As this article and this one outline, some of the biggest advances in the past decade alone have been in the areas of:

  • 3D printed body parts
  • gene therapy and stem cell research
  • cancer therapies
  • bionic eyes
  • synthetic cells
  • a cure for hepatitis C
  • minimally invasive surgery

Since 1950, the number of drugs approved for use by the FDA doubled every year and given all of the above should not be slowing down any time soon. All these advances help humanity live longer and better lives, but they also create opportunities for new technologies to carve out niches in the market and drive growth.

Healthcare is a highly diversified industry

The healthcare sector is comprised of everything from hospitals and medical care to pharmaceuticals and biotech, medical devices manufacturers and health insurance companies. Each of those subsectors will have different dynamics and different risks attached to it.

Whereas pharma, biotech and medical devices are the ones to deliver and profit from spending on research and development, the health insurance firms and private hospitals are well positioned to profit from overall demographic trends like ageing populations. On the other hand, these are also the ones most at risk from changing regulations and public anger about increasingly expensive healthcare.

Some of the subsectors within healthcare include:

  1. Hospitals, nursing and residential care or other care services. Including everything from full-blown hospitals to nursing homes, doctors, chiropractors, homeopaths and psychologists.
  2. Medical devices. Provide machinery and tools to doctors and hospitals that can be used to diagnose or treat certain conditions
  3. Pharmaceuticals. spend money on research and development to create drugs on a chemical basis that prevent, alleviate and cure diseases
  4. Biotechnology. similar to pharmaceuticals except they produce their drugs on a biological rather than chemical basis

Naturally, within R&D of the last three mentioned above, the success rate is highly hit and miss, and finding individual companies that succeed can be an extremely difficult task.

Big pharma firms like Johnson & Johnson diversify that risk by having a balanced product portfolio that besides consumer goods and medical devices features pharmaceutical products across for instance immunology, cardiovascular disease, vaccines, neuroscience, oncology, etc.

Yet in order to find even better diversification, you need to look at ETFs.

Portfolio construction: pharma, devices, innovation and cancer

  • I have designed a portfolio that includes a 20% weight to an overall healthcare sector ETF, and splits up the remainder to a cancer immunotherapy specific ETF, a medical devices ETF, a healthcare innovation ETF and a pharmaceuticals ETF
  • This gives broad-based exposure to the sector, though with an overweighting to innovation and devices, which though having more of a growth orientation and fairly high average P/E ratios, should help to generate outsized profits as they come up with new products
  • This is a high risk portfolio, with a 99% Value at Risk over 1 year (max. expected loss with 99% certainty) of over -21%. Nevertheless, stress scenarios also show that losses in periods like 2008 are in fact not quite as bad as the VaR seems to imply. If you prefer a healthcare portfolio with lower risk, you could opt to lower exposure to HEAL and IHI in favour of IXJ.
  • Moreover, a return of +211% since 2010 makes it obvious that over the long run this portfolio should be a sound investment under practically any scenario you can imagine
CategoryNameIDTERAlloc %
InnovationiShares Healthcare Innovation ETFHEAL0.40%25.0%
DevicesiShares US Medical Devices ETFIHI0.43%25.0%
CancerLoncar Cancer ImmunotherapyCNCR0.79%10.0%
Healthcare overalliShares Global Healthcare ETFIXJ0.47%20.0%
PharmaSPDR S&P Pharmaceuticals ETFXPH0.35%20.0%

Risk, diversification and allocation

  • Risk level: high 
  • Diversification: low
  • For risk and total return since initiation see Portfolios
  • Probability of this theme playing out in the next 3-10 years: 50%-100%

Portfolio characteristics (full look-through, from USD perspective)

  • Dividend yield: 0.7%
  • Ex-ante predicted volatility: 12.8%
  • 1 year 95% Value-at-Risk: -21.2%
  • Scenario: 2008 Lehman Brothers default period: -19.1%
  • Scenario: Interest rates +100bps: +6.3%
  • Scenario: 2008-2009: -10.5%
  • Scenario: 2010 onwards: +211%

 

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Investing in Robotics and Automation, the Trend that will Wipe Out 47% of Jobs

Will you and I still have a job 10-20 years down the line? Artificial intelligence, robots, big data and automation have at times been predicted to take as much as 47% of existing jobs out of the equation in just a decade or two. Presumably upcoming technologies like these will fundamentally change the remaining 53% of jobs. Slow and expensive processes (and people) will be replaced by computers, surgeons and security guards replaced by robots, computers will know what we need before we think of it ourselves, and so on. This is like an industrial revolution all over again.

The trends here are broad and unpredictable, affecting every part of our daily lives. From driverless cars, chatbots as help desk, to the internet of things or digital warfare. While this trend will affect practically any company you invest in (many will keep up while others won’t), there are some companies actually driving the change that you may want to allocate a bit extra to in order to stay ahead of the curve. Simply put, some companies are applying the trends, while others are developing them.

Below I suggest a simple portfolio consisting of 4 ETFs that should help you future-proof your portfolio and benefit from the trend of automation.

Firms that don’t innovate will miss out

As competitors improve technology and find new ways to make use of data and computers, firms that stubbornly refuse to go along in that trend will miss out. However, identifying the actual companies that will fall victim or will survive this trend is hard. Therefore I suggest to focus on technology companies and companies specifically searching for innovations in the robotics and automation space, diversifying your portfolio across US, Europe and China. So what types of companies and products might you want to gain exposure to? For instance the below:

  1. Driverless cars
  2. 3D printing
  3. Virtual/mixed reality
  4. Healthcare innovation
  5. Security and surveillance
  6. Actuation and sensors
  7. Artificial intelligence and deep learning
  8. Internet of things

Portfolio construction: robotics and automation, US/Europe/China technology

CategoryNameIDTERAlloc %
Robotics ETFROBO Global | Robotics & Automation Index ETFROBO0.95%60.0%
China techGuggenheim China TechnologyCQQQ0.71%10.0%
US techVanguard Info Tech ETFVGT0.10%20.0%
Europe techSPDR MSCI Europe Tech ETFITEC LN0.30%10.0%

Risk, diversification and allocation

  • Risk level: high
  • Diversification: low
  • For risk and total return since initiation see Portfolios
  • Probability of this theme playing out in the next 3-10 years: 25%-75%

Portfolio characteristics (full look-through, from USD perspective)

  • Dividend yield: 0.1%
  • Ex-ante predicted volatility: 11.6%
  • 1 year 95% Value-at-Risk: –16.9%
  • Scenario 2008 Lehman Brothers default period: -21.3%
  • Scenario Interest rates +100bps: +5.8%
  • Scenario 2008-2009: -25.9%
  • Scenario 2010 onwards: +167%
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