Yan Taw Boon, Neuberger Berman
Three autonomous vehicle-themed funds have emerged in 2018 (chart below) and the Neuberger Berman Next Generation Mobility Fund is the latest entry.
Yet commercialization of fully autonomous cars hasn’t happened yet, risks have appeared on several fronts and, like any trend investment, timelines could change and today’s “disruptors” could themselves be disrupted.
A key risk is separating commercially viable technology from hype.
Hong Kong-based co-manager Boon, who is also director of Asia research, said the team of three (the other two are in New York) look for companies already generating revenue from the theme.
The company must generate at least 5% of revenue related to one of the three fund sub-themes, which are autonomous and electric vehicles and connectivity.
“The companies cannot just be burning [R&D] money with no returns,” Boon said.
Exceptions are companies like Alphabet (Google), which has zero revenue from the theme but puts 10-15% of total revenues into autonomous vehicle R&D, Boon said.
He expects mass commercialization of a fully self-driving car (semi-autonomous are already on the road) to happen in 2030.
But regulation is also a risk. A self-driving Uber car last year killed a cyclist in Arizona. While US regulation in general has been relaxed under the current administration, a change in political leadership could reverse that stance.
“We are watching regulatory action very carefully,” Boon said, adding that regulatory backlash is “a concern but not a showstopper”.
But after the Uber fatality, safety developments actually accelerated, he said.
“Uber did not do enough R&D. They were rushing it. So carmakers are now putting more into R&D efforts, for example through software simulation.”
There is also the thorny issue of 5G equipment suppliers. The connectivity sub-theme of the fund focuses on the next generation 5G standard, which promises to fortify device connectivity – essential for autonomous vehicles.
But 5G is under political scrutiny due to risks about foreign governments using their telecom providers for espionage. China’s Huawei is at the centre of the political storm.
Boon does not see a delayed timeline for 5G as a result, nor does he see a serious risk. He believes the issue is misunderstood and in the worst case, countries will simply develop different 5G standards.
The biggest risk to his investment thesis, he believes, is if the global economic slowdown, or US-China trade negotiations worsen, they could force a cutback in R&D budgets and setback the self-driving car timeline.
“I don’t think any major events would completely derail the thesis, but slowing down the timeline would be concerning.”
Portfolio and sell signals
Boon believes differentiation for his fund comes from diversification of the sub-themes. Additionally, his engineering background helps him evaluate new technology.
In 2004, he was a design consultant to Mobileye (now an Intel subsidiary), which was designing prototype chips for autonomous vehicles, he explained.
The concentrated fund holds 40-60 positions. There are some unlikely names, such as Alibaba and Amazon. He said the two ecommerce giants have cutting edge research into automated logistics or “unmanned delivery of goods”, which he puts in the connectivity sleeve of the fund’s theme.
The average holding period is 2-3 years. After meeting criteria mentioned earlier, companies are screened through fundamental metrics and visits to management.
One sell signal concerns valuations. When a stock overheats and exceeds the set target price, the position would be trimmed or exited, Boon said. R&D budget cuts could turn from a red flag to a sell, depending on the reasons for the reduction.
Another sell signal is if the original thesis for investing no longer holds. He gave the example of an investment in XPO Logistics, a leading-edge logistic company that derived about one-third of revenues from its customer Amazon.
“Recently one issue we never thought would happen, did. Amazon said it will do its own logistics and slowly exit [as a customer].
“When one-third of revenue goes away it’s a big red flag. We made a tough decision that the thesis had changed and sold out of the position.”
|NB – Next Generation Mobility
|BNY Mellon – Mobility Innovation
|RobecoSAM Smart Mobility
|LGT – Global New Mobility
Source: FE. *As of February 28, 2018. **As of March 26 2018
It is still early days for the mobility funds that invest in long-term trends. Below is performance versus the MSCI World since the launch of the NB fund in September 2018.
Source: FE, in US dollars. Not all funds use the MSCI World as a benchmark. It is provided for comparative purpose.