The trend of the world as we know it

08-11-2016 | Interview

For the past 10 years, RobecoSAM has provided investors with exposure to human ingenuity. 

Pieter Busscher, Lead Portfolio Manager for the RobecoSAM Smart Materials Strategy, reflects on how the fund has backed cutting-edge resource efficiency trends and human ingenuity for the past 10 years.

How did you first become interested in materials?

Pieter Busscher: I played a lot with electronics as a kid… taking things apart and putting them back together again. My parents wouldn’t buy me a cassette deck, so I had to get one from a scrap shop and figure out how to make it work. Then I started computer programming when I was about 12 or 13, and I programmed my own computer games. So for me, this became the basis of my interest in resource efficiency. My grandpa was an engineer and my dad is a physicist, so through him I had exposure to a lot of machines and how they work from an early age. The idea that we have a finite set of resources and the challenges around this issue has always been fascinating to me. 

When was the strategy launched and why?

Pieter Busscher: We launched the Smart Materials strategy in October 2006 in order to address long-term megatrends in the commodities sector-specifically, how to deal with intensifying resource challenge.
The pressure on our finite resources has been driven by population growth and the intensification of usage. Within the past century, the world’s population has grown at a considerable rate and it’s expected to reach over 9 billion people by 2050, up 30% from current levels.
Historically, people have dealt with the resource scarcity issue by increasing the supply of resources or making productivity gains and discovering substitutes. However, in the future it will become harder to expand the supply of resources for two reasons. First, most resources are finite and the most easily accessible resources have already been extracted. As a result, it is becoming more difficult to maintain production levels, let alone increase them. Second, our ability to increase the supply of natural resources is constrained by the intensifying environmental impacts related to the extraction and consumption of resources. This means that achieving productivity gains and discovering substitutes will play an increasingly important role in how we cope with resource scarcity.

“Carbon fibers are four times lighter and up to ten times stronger than steel. Their usage in airplanes has increased from 0% to 50% or more over the past 30 years.”

How important are productivity gains and substitutes to solve the problem of resource scarcity?

Pieter Busscher: A study by McKinsey Global Institute estimates that productivity gains could meet up to 30% of global demand for natural resources, and that 70% of these can be achieved using existing technologies. Not only are huge productivity gains within reach, they are also economically viable.
One example of this is carbon fiber composites. Carbon fibers, which are four times lighter and up to 10x stronger than steel, have enabled the commercial aerospace sector to respond to rising fuel prices – by far the largest expense for airlines. In 1970, a Boeing 747 contained 80% aluminum and no carbon fiber, while today a Boeing 787 contains only 20% aluminum, but more than 50% carbon fiber. Companies in this value chain stand to benefit from this transition and provide solutions to resource scarcity.
Next to using better materials process innovations also play an important role in improving productivity and coping with resource scarcity. Used in combination with computer aided design (CAD) and related software tools, 3D printers are transforming how companies think about product development and prototyping. Such technologies have pioneered faster, more advanced and less costly design processes, fostering product innovation, reducing time-to-market and enhancing profitability. In addition, manufacturers are now better able to simulate and test products’ properties early on in the development phase, reducing design errors, improving overall product quality and limiting the risk of product recalls. Finally, 3D printing can save money by enabling the more efficient use of raw materials because it manufactures products in an additive manner, rather than cutting away from a raw material through drilling or milling in a subtractive process. 

How are companies rising to the challenge?

Pieter Busscher: The aviation sector is one good example of an early adopter, driven by economics. Operating expenses outweigh capital cost due to fuel cost favoring the production of new carbon fiber models, while older planes are no longer as competitive. Major aerospace players such as Boeing and Airbus see this reflected in their order books as a result of strong demand for more efficient airplanes.
On the other hand, the automotive sector is a bit behind in the substitution process. With more than 74 million vehicles sold per year, it consumes about 1000x times the amount of materials as aviation. However, increasingly stringent regulation on fuel economy in Europe, the US, China and Japan is forcing automakers to take action. The sector is expected to see adoption rates of lightweight materials increase from one third to two thirds until 2030, and reach sales of EUR 300 billion. Two materials are expected to see particularly strong growth in the foreseeable future: high-strength steel (13% CAGR until 2030) and aluminum (3% CAGR until 2030). Already we see demand for the former comes from OEMs like Volkswagen and Hyundai, while the latter is used by Ford or Range Rover. Efficiency gains range from up to 100kg (VW Golf 7), to around 10% for Hyundai and around 420kg for Range Rover, and as much as 15-20% for the 2015 Ford F-150 pickup.
Another way companies are rising to the challenge is doing more in less space at the micro, nano-, and pico meter scales. One of the better-known materials is graphene, which is thin as an atom. It is included in Head tennis racquets used by Novak Djokovic and other tennis stars to increase rigidity and decrease weight. Revenues for nano coatings (take i.e. scratch resistant car coatings) and products that have been optimized at that level have already reached USD 100 billion. Exposure to companies that sell tools necessary for innovation in this space is one way that investors can benefit from this structural trend.

How does the fund distinguish itself from the competition?

Pieter Busscher: The key difference is the forward-looking concept. We focus on companies that are exposed to and benefit from structural changes that we see happening in the future, whereas other materials strategies only focus on what is in demand right now. The Smart Materials Strategy invests in companies that offer solutions to the world’s resource challenges by producing advanced materials that substitute traditional ones, or developing process technologies that deliver productivity gains in resource extraction, processing, and usage.
The investment universe includes companies that are active in the fields of substitute materials which fill in for supply constrained ones and efficiency gains, helping to do more with less. Approximately 380 companies benefit from structural growth trends in the smart materials universe. These companies are structured into four investment clusters defined by RobecoSAM: Advanced Materials, Transformational Materials which are materials related, as well as the efficiency gains related Process Technologies, Automation and Robotics. 

In which sectors do you see the biggest potential for growth?

Pieter Busscher: Automation, already worth more than USD 195 billion as an industry, is a big potential area for growth. This is due to rising labor costs, especially in the West but also in manufacturing hubs like China, where automation is traditionally used as a means to decrease the cost of manufacturing. As labor costs rise, automation is becoming more and more important. But while the cost of labor continues to rise, the cost of automation has decreased by 40-50% since 1990, according to a McKinsey study and is expected to decline further.

“While the cost of labor continues to rise, the cost of automation has decreased by 40-50% since 1990, and should continue to do so.”

Robotics is a particularly promising area. Robots have already become ubiquitous in many industries such as autos, rubber and plastics. Japan still has the largest installed base, but China quickly caught up to become the biggest buyer of industrial robots since 2013. The International Federation of Robotics listed the adoption of new materials (e.g. carbon fibers in car production), and increased requirements for efficiency and quality as key drivers, next to traditional cost advantages. This means that the number of robots is expected to rise sharply. According to Boston Consulting Group, the number of manufacturing tasks done by robots is expected to rise from a global average of about 11% in 2015 to about 25% in 2025, including in some industries with more than 40% of manufacturing tasks done by robots. This would require annual growth rates of industrial robots of about 10% over the next decade. 

What makes the strategy attractive as an investment now?

Pieter Busscher: Materials have always been vital to mankind and its progress over time. Entire eras – the Stone Age, Bronze Age and Iron Age – have been named after different materials, reflecting how they have shaped the course of history. Indeed, the discovery and development of new materials are still among the most significant factors in determining how society develops and prospers.
The traditional approach to investing in materials is to invest directly in commodities or commodity stocks. This is based on the assumption that with limited supply and increasing demand, the price of commodities should rise. Yet real commodity prices have declined steadily, suggesting that natural resources have not become more scarce in the economic sense of the term. This is because free market forces and human ingenuity have generally led to technological breakthroughs and the development of substitutes that have enabled us to grow despite resource scarcity.
The Smart Materials Strategy goes beyond simply investing in natural resources. We invest in human ingenuity. When you asked people in the beginning of the 20th century what their biggest concern was, it was horses – the problems associated with feeding, managing and cleaning up after the primary mode of transport at the time. Of course, the solution of back then (the invention of the automobile) has become a problem of today. We have secular, long-term trends in place that are powered by human’s unique ability to continually innovate. As we deplete our stock of finite resources and environmental issues intensify, banking on human ingenuity is undoubtedly the investment approach of the future for the materials sector and beyond.