The GMO Domestic Resilience ETF (DRES) invests in companies we believe will benefit from American reindustrialization. In a world obsessed with the potential growth associated with Artificial Intelligence (AI), we think of American reindustrialization as the “other” big long-term trend happening in the world, but one that receives far less publicity.
While AI is certainly an exciting technology, its use cases are still emerging, and investors are weighing its potential impact on a number of different companies and sectors. The market’s knee-jerk reaction has been to bid up the shares of technology companies. This makes sense as a first-order response, but we think it misses some of the broader investment opportunities created by AI’s emergence.
In Domestic Resilience, we’re finding AI-related opportunities in both traditional industrial companies likely to benefit from the changes AI can bring to their business and a subset of companies where fears of AI disruption seem overstated.
A Picks & Shovels Approach to AI Demand Growth
The holding that contributed the most to Domestic Resilience’s strong February returns was Regal Rexnord, a company we include in our Manufacturing & Automation category. Regal Rexnord’s stock rose more than 30% during the month after the company announced higher-than-expected revenues from its E-Pod product. E-Pod, as the name suggests, combines a number of the critical electrical power components needed for a data center in a single pre-assembled unit (the pod) that can be delivered and connected quickly.
The AI buildout requires a significant expansion in U.S. electrical capacity and massive growth in data centers, specifically. As a result, Regal Rexnord, with its E-Pod product, offers a good example of a “picks and shovels” beneficiary of AI-related industrial growth. Picks and shovels investments (detailed in our November newsletter) are core to Domestic Resilience’s investment strategy, as they enable us to access the tremendous growth opportunities we see in industrial America without going too far out on a limb to predict the ultimate winner in a fast-changing area like AI.
Combining AI with Industrial Market Leadership
We also think AI presents excellent opportunities for what in the past have been thought of as boring businesses to reach new heights. Consider the case of Domestic Resilience Transportation & Logistics holding CH Robinson Worldwide.
CH Robinson is a unique company in the U.S. trucking sector in that it doesn’t own any trucks. Instead, the company leans on more than a century of history as a freight broker, connecting companies with goods to ship with truckers willing to bid on the work of transporting those shipments. CH Robinson is America’s largest freight logistics company, giving it a strong network of buyers and sellers. While its large network is a competitive advantage, size also represented a historical challenge for the company, as it often received more bid requests than it could conceivably address relying solely on a human staff.
Several years ago, CH Robinson embarked on a technology initiative aimed at using AI to improve its ability to respond to trucker and shipper requests. The combination of a significant financial investment in AI-based solutions and CH Robinson’s incumbent advantages as a large player in the sector proved very successful. The company has noted that before deploying AI, it could only respond to approximately 60% of quote requests, while with automation, it can now respond to nearly 100%. It is important to note that contrary to the prognostications of many AI doomsdayers, CH Robinson’s initiative didn’t mean the end of human employee work.
While the company did enact some small headcount reductions as part of general efficiency efforts, CH Robinson has described AI’s effect on its employees as freeing them up from time previously spent on routine, repetitive tasks to focus instead on more complex work that’s best performed by humans. The results of this human and technology partnership have been rewarding for shareholders, with the company’s fundamental results outperforming market expectations for several consecutive quarters.
Taking Advantage of AI Fears
While AI has considerable promise, all too often the stock market’s response to a new technology is overly rooted in fear. We believe that to be the case in the U.S. Engineering & Construction sector, particularly in our positions in Jacobs Solutions and AECOM. Engineering & Construction (E&C) firms play a critical but often underappreciated role in the U.S. industrial economy.
As their name suggests, these companies manage a construction project throughout its lifecycle, from the design to the building. Think of them as a supersized version of the general contractor you might use to build a house. What makes large E&C companies like Jacobs and AECOM unique is their scale. If you want to build a house, you have many contractor options to choose from.
If you want to build a data center, bridge, skyscraper, or any other type of major project, the list of firms with the experience and expertise required to do the job well shrinks quickly. As a result of their unique value proposition, we believe large E&C companies will play a significant role in America’s reindustrialization.
And yet this past November, the shares of Jacobs and AECOM sold off considerably amid fears that AI could commoditize the engineering part of the construction process, weakening their competitive advantage and leading to less revenue. We believe such concerns are short-sighted. The E&C industry has survived fears that efficiency gains would destroy its business several times in the past, from the emergence of the personal computer to the advent of the internet.
These technology advances presented similar opportunities to make these firms’ engineering expertise less special, and yet the opposite happened. Giving an engineer the power of a personal computer, for instance, made them more valuable, not less valuable, as the computer sped up the boring, repetitive work that’s part of a design process, allowing the engineer to focus more time on the areas where their human expertise could add more value. The internet provided similar efficiency, enabling quicker access to routine information, such as building codes.
While skeptics might believe that AI is different, our base case is that, similar to the past, AI advances are more likely to improve E&C firms than eliminate them. We believe these companies are poised to benefit from the combination of AI and the “human-in-the-loop” often mentioned in AI discussions, where AI advances improve the speed and decision-making of key employees, rather than eliminating them.
And while it’s tempting to believe that AI will eventually remove the need for the human entirely, we think the nature of the construction industry makes such a scenario unlikely, even if AI advancements continue at a rapid speed. There will always be a need for humans to double-check the work of a computer when building critical infrastructure, both because computers can sometimes get things wrong and because of the trust component that’s implicit in any large E&C firm’s relationship with its client.
As one analyst told us in conversation, “If the bridge you built falls down, you don’t get to blame AI.” We used the stock selloff as an opportunity to add to our position in Jacobs and initiate a position in AECOM. While AI fears might not go away overnight, we believe these firms offer good long-term value for investors with the patience to ride it out.
Invest in the Opportunity — DRES
The GMO Domestic Resilience ETF (NYSE: DRES) is an actively managed fund designed to provide focused exposure to American manufacturing and the structural forces reshaping the U.S. economy through a disciplined, bottom-up investment approach.
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