5 digital innovations to shape a new era of growth

Cloud-based software, informed by the Internet of Things (IoT), enhanced by Artificial Intelligence (AI), is enabling smart manufacturing and logistics services to respond more efficiently to both demand and supply signals. Combined, these digital innovations promise to lift productivity, improve margins, reduce waste and create new products and services.

At the same time, rising interest rates and slowing growth have depressed market enthusiasm for technology and innovation. Against this backdrop, within this report, we highlight five key technologies driving a new era of growth and outline our approach to investing in the long-term opportunity for the digitalization of enterprise and industry.

Built upon a strong foundation of semiconductors, cloud-enabled software, and secure networks we have reached an inflection point for several interrelated technologies including AI, IoT, digital twins, and robotics.

• While the hype around new generative AI tools like chatbots and image generation tools will likely fade, AI holds great promise to enhance robotics, industrial design, cybersecurity, and IoT. Notably, commercial AI applications are already hard at work in mundane and repetitive tasks like data processing and energy management. We expect a proliferation in AI-enhanced software tools as developers race to incorporate the technology in existing applications as well as to build new ones. Further, a jump in AI investments has been a boon for high-performance semiconductors and related software development tools.

• Driven by improved functionality and an enhanced business case, the steady growth of robotics could accelerate. Advancements in mechanical dexterity, machine vision, and on-board intelligence are broadening robotic functionality. Combined with internet-connected sensors to software equipped with artificial intelligence capabilities, smart manufacturing and logistics services will become far more efficient.

• Applications of IoT in the enterprise and industrial space are having a material impact on operations and margins in multiple sectors from factory automation to logistics. With real-time data, IoT facilitates optimized production, predictive maintenance, and resource management. The greatest challenge for IoT resides with implementation and integration. As a result, we take a systems approach, seeing opportunities with semiconductors, communications technology, software systems, and information technology service providers.

• Digital twins enable architects and engineers to simulate both the design and operating phases of physical structures, machines and complex systems. Similar to our systems-based thesis for IoT, we see opportunity within the digital twin market among software vendors focused on industrial design, data analytics tools, high performance semiconductors, and information technology services.

• Tying all of these solutions together is an expanding network of cloud infrastructure services secured by increasingly sophisticated cybertechnologies. While focused point security solutions continue to thrive, we see expanding opportunity for platform solutions that integrate multiple technologies to secure data, manage access, and dynamically respond to an evolving threat landscape.

These technologies arrive at a time when enterprise and industry urgently seek new sources of competitive advantage, greater efficiency, and more sustainable production processes. Similarly, production bottlenecks, labor shortages and geopolitical security considerations have driven renewed interest in automation, shortening supply chains and reshoring manufacturing closer to home. For example in the US, corporate reshoring announcements have risen four-fold versus pre-Covid 2019. Further, government policies in nearly all global regions increasingly seek to promote domestic manufacturing and modernize an aging capital stock.

Although technology and growth stocks retreated in 2022, long-term growth drivers continue to generate profits and build value. For instance, after generating a compound annual return of 21.9% in the five years ended 2021, the MSCI Global Robotics and Automation index fell 29.2% in 2022 as slowing growth and rising interest rates depressed valuation multiples. Across the broader technology sector, sales and earnings declined modestly in 2022 relative to difficult growth comparisons from strong results in 2021. Looking ahead, growth in the sector is forecasted to resume, particularly for those aligned to key trends including AI, cloud software, and security.

The Robeco Digital Innovations strategy seeks to capture the value creation potential derived from companies supplying foundational technology and enabling the digital transformation of enterprise and industry. The investment universe spans semiconductors, computing hardware, cloud infrastructure, cybersecurity, software, robotics, precision engineering, and information technology services. We focus our investments on three distinct but related themes:

1) Robotics & Automation, technologies benefiting from the structural growth of investment in digital production and processes, 2) Digital Enablers, software and services that facilitate the transformation of business processes and corporate functions, and 3) Secure Digital Infrastructure, providers of critical services and technologies that enable an exponentially growing stream of digital data to be delivered securely across corporate, public cloud, and mobile computing environments.

We focus on long-term themes expected to play out over several years that provide ample opportunity for a broad universe of potential investments. In constructing a relatively concentrated strategy we seek to identify innovative quality companies holding a leadership position in their respective domains and focus on those delivering consistent profitable growth.