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