Fund managers series

Making money in the age of disruptions

Alexandre Mouthon, senior client portfolio manager at Pictet Asset Management, discusses the outlook for disruptive technologies and artificial intelligence in the latest in our series featuring fund managers and market experts.

With 20 years of investment industry experience under his belt, Mr Alexandre Mouthon says Pictet Asset Management’s three equity strategies surrounding the themes of technology and artificial intelligence, or AI – security, digital and robotics – allow investors to get access to fast-growing disruptive technologies in a distinct way.

All three strategies have outperformed the MSCI World Index since their respective launches. The three funds - Pictet-Security, Pictet-Digital and Pictet-Robotics - are available only for private bank and institutional clients in Singapore.

Q There is so much discussion going on around disruptive technologies. What exactly are they and where does AI come into the picture?

A Disruptive technologies refer to innovations that permeate into the mainstream and disrupt existing business models. In the 1900s, horse carriages in New York were replaced by cars in 13 years. In the past five years, the emergence of smartphones completely changed the way we live.

We identified seven major disruptive technologies: Internet of Things (IoT) and advanced sensors; mobile Internet; advanced automation; big data and cloud computing; autonomous vehicles; next-generation healthcare; and fintech. AI is the overarching technology that fuels the growth of these disruptive technologies through powerful computer algorithms.

Q How do Pictet Asset Management's three strategies - security, digital and robotics - gain exposure in disruptive technologies? And why should investors look at investing in those areas?

A When disruption hits, investment opportunities abound.

Mr Alexandre Mouthon, 46, feels big data is an area that offers investment opportunities, as it fuels the development of artificial intelligence. If structured, big data can generate significant financial value across sectors. ST PHOTO: LIM YAOHUI

Robotics, security and digital strategies are set to grow faster than the global economy. Each has outperformed the MSCI World Index since their respective launches.

Security is now seen as a "must have" versus "nice to have" for individuals, corporates and governments. The strategy invests in physical security products, such as adaptive cruise control of transportation safety products; IT security products, including cyber security software; and security services, such as food testing and e-payment process.

Pictet's digital strategy targets firms that will profit from the transition to digital, driven by rising penetration in e-commerce, online advertising and cloud computing.

It gives investors access to, among others, social media's expanding ecosystems, the sharing economy, fintech, e-health and the rapid deployment of AI algorithms in software solutions.

Robots are no longer confined to the factory floor but are becoming ubiquitous. Applications have increased in breadth and are now tapping markets so far unserved. Smart personal assistants help us at home; surgical robots heal us; automated robotic drones deliver our parcels; and automated cars drive us.

Q AI is the overarching theme of all disruptive technologies. How has the AI landscape changed and who are the tech giants at play here?

A AI will be the next big wave to ratchet up tech innovation and disrupt our routines. The AI market, including hardware, software and services, may see a five-year compounded annual growth rate of over 70 per cent.

Applications, such as deep learning, machine learning, speech and voice content recognition, gesture control or computer vision, will drive revenue. Among all, deep learning is key, replicating the human neural network to teach machines how to act and "think".

Take Facebook's Deepface facial identification and Amazon Alexa's voice recognition, for instance.

These require a lot of processing power, prompting demand for powerful graphics processors that can support parallel processing, enable computers to analyse and make use of vast quantities of data. That creates demand for memory chips and cloud storage solutions.

We also continue to see a favourable trend for major Internet companies, given the amount and quality of data they possess.

Last year was a record year for investments in AI companies, drawing interest from tech giants, including Google, Facebook, Amazon, Tencent, Alibaba and Baidu.

Q What are the potentials and trends in the robotics space?

A The robotics industry is expected to grow at a 36 per cent compounded annual growth rate over the next five years. We see potentials across enabling technology, driven by AI and machine vision that allow robots to "sense" the surrounding and make sense of the data available before planning further actions.

The implementation of Industry 4.0 - automation and data exchange in manufacturing technologies - will also be another growth driver as technologies such as 3D printing and logistics could reduce maintenance and inventory costs while boosting productivity.

Lastly, consumer applications, such as rehabilitation robots, driverless vehicles and smart homes, could see a 60 per cent compounded annual growth rate in automation and entertainment.

Q We're now in the third wave of IoT. By making things smarter, how does that affect our daily lives and why should investors care?

A IoT is a platform of physical objects that contain software, sensors and IP technology to enable interaction with, and gather data from, their environment.

Market data shows that the US$1.6 trillion (S$2.2 trillion) market today should more than double to US$3.7 trillion by 2020, where transportation and smart home devices should register solid growth: smart fridges that ping us when we are low on milk and connected cars that share traffic information with other vehicles.

IoT is also moving to factories. Manufacturing robots are connected to learn from one another and improve performance. Most of the value added in that space will be captured by the software side rather than the hardware side.

Q A lot is happening in disruptive technologies and digital economies. Can you tell us a bit about the cyber security infrastructure and how the landscape has changed?

A The recent WannaCry ransomware attack highlights the importance of companies and governments safeguarding themselves by investing in cyber security for the long term.

Over the next few years, the convergence of physical and cyber security threats is set to accelerate as more people and things are connected. The rise of IoT means hackers need only get into one vulnerable device, such as a baby monitor or a Wi-Fi-enabled Barbie, to infiltrate a critical infrastructure network, be it an electricity grid or nuclear power plant.

It is impossible to stop malware from infecting the network, just as it is impossible to prevent viruses from infecting humans. Instead of building walls, the industry should start fighting from within: developing an effective immune system that prevents, slows or disrupts malicious activity. For instance, a British cyber security firm has developed digital antibodies, arming self-learning machines with large-scale data mining to fight off cyber threats without requiring human intervention.

Q The valuations of US tech stocks have surged substantially. How does that affect your investment strategy in robotics? Should investors still consider investing in disruptive technologies at this point?

A The development of disruptive technologies is still in its infancy. US tech stocks, in general, are expensive. But it is important to evaluate stocks on an individual basis rather than by segments or geographical regions.

We still see stocks that offer good value and growth to justify their slight premium over others. We are actively looking for good small- and mid-cap ideas to hold for the longer term. We believe that merger and acquisition activity will continue around the robotics theme and that consolidation of the semiconductor industry will also continue.

Q Among the various major disruptive technologies, such as mobile Internet, IoT and big data, what are the key opportunities for investing in disruptive technologies in 2017?

A Big data will be a major area, as it fuels the development of AI. The available data gathered from channels, such as social media, digital pictures/videos and online transactions, increases the value of organisations that turn data into information and into insight.

Only 0.5 per cent of available data is actually used and 80 per cent of world data is unstructured. If structured, big data can generate significant financial value across sectors. Data is the munition of the digital group, while powerful algorithms and AI are the weapons.

Q Should investors worry about the tech bubble? Are we getting close to the 2000 peak?

A Many tech companies are increasingly in a position to generate stronger revenues and, in general, have superior profitability characteristics. We are nowhere near a tech bubble. MSCI World Technology, as of the end of March, was about 17.1 times, well below the 2000 bubble, when price-earnings ratio peaked at 44.2 times. It is even below levels observed in 2005/6 of 19.1 times.

Correction note: This story has been edited to provide the correct name of Alexandre Mouthon.

A version of this article appeared in the print edition of The Sunday Times on June 18, 2017, with the headline 'Making money in the age of disruptions'. Print Edition | Subscribe