Hello and welcome to The Download. I'm your host, Dave Richardson, and it is Tech and Health Care time. We've got two people that you'll be fairly familiar with if you have already subscribed to the Download podcast, or you have subscribed and you're following us on YouTube. And if you haven't done that, by the way, you should do it because you never want to miss updates like this in areas that are of particular interest. So we've got Marcello Montanari and Rob Cavallo, who lead portfolios that focus on technology, health care, and I think more even broadly, we'd say US growth stocks, and you even get outside of the US a little bit with some things, but growth stocks, technology, health care in general. And Marcello, we're riding along, everything's great. Things are looking fantastic. We've got, apparently, a growth agenda coming from the new administration, we've got unlimited potential for artificial intelligence, and it's never going to stop. And then all of a sudden, we get this announcement out of China with DeepSeek and perhaps a different way to approach AI that changes the paradigm of how much it's going to cost. And I'm sure we'll get into that and you'll have some thoughts on that. And of course, we get the tariff discussion coming out of the US, which everything altogether unnerves everyone, not just in the technology and health care space, but just in the market overall as we sit here today. We're in correction territory, 10% fall in the S&P 500, we're well over 10% in the Nasdaq. Marcello, what are your thoughts around everything that's happening, what you're seeing, and then how you and Rob, and we'll get to Rob as well, how you're thinking about managing through this?

Thanks. How many hours do you have?

Well, you know what? It's an unlimited format, Marcello, you know that. We can go on forever. I can even spend a couple of hours on my trip to Azerbaijan and Georgia, and we can have a debate about the quality of Georgian versus Azerbaijan wines. I know Rob is an expert on that area, so we'll leave those questions for him, but we can talk travel with you.

Yeah. So like you said, everything was going well for the most part. We've had some bouts of softness throughout 2024. I can get to that in a minute. But at the end of the day, technology in particular—and Rob can add more on the healthcare side, which has been a different story—but technology in particular has been the best performing sector since that fateful morning when Microsoft unleashed ChatGPT on the masses back in, I guess it was February of 2023. So it's been all systems go for technology for the most part, but like in 2024, we hit a couple of road bumps where the narrative's changed a little bit. I keep repeating myself, but in the summer, we had all this concern about, look at all the money that in particular, the hyperscalers are spending, and what's the return on investment going to be here? Well, it's a little bit premature to be talking about return on investment on something that you're just rolling out right now and doesn't have that much in terms of revenues yet. But everyone got freaked out, and the whole AI complex came down with that. And it called into question, what's going to be the demand for NVIDIA chips going forward. And NVIDIA is at the forefront, right at the front edge of the picks and shovels segment of all this. And then we kind of recovered after the market realized that we shouldn't be focused on returns on investment capital at this early stage. We recovered, and then in the summer, sorry, in the fall, we came into the, oh my gosh, scaling laws have maxed out, and we're not going to be able to get the improvements in the algorithms and the LLMs or large language models that we've been seeing. And as a result, all this money is not getting the type of returns that we want in terms of scaling and the pre-training and all that. And then it turns out, well, there's other avenues to basically improve the models, test time, compute and all sorts of other things and reasoning and things like that. Reasoning, for example, it's an iterative process where it just keeps running the same question through and processing it multiple times, so that uses a lot of computing, a lot of power. And then in January, it actually started in December, but DeepSeek, this company from China, comes out and has this model. The first thing was the model, which was called version 3, which was actually quite impressive from everything I’ve read. I follow a lot of people who know a lot more about this stuff than I do. And then they came out with a reasoning model, which was R1, and they basically said, hey, this only costs like six million bucks to do. And I was like, okay, that's not exactly true because the reasoning model is what you call a distillation model where they distill it. It was based on a much larger model, and they didn't tell us what that cost. And for all we know, maybe they were using LLaMA, which was open source and stuff like that. But anyway, we became freaked out over «oh my gosh, it's so much easier». We can get massive improvements in these models with no spending. And oh, by the way, DeepSeek, apparently, they had a very limited number of old GPUs from NVIDIA that got out of a flea market or something. So that's probably not the truth, but that was the narrative. So everyone freaked out. So that's the whole AI thing that's going on. And then on top of that, you layer on the tariffs and all the noise on that. And to be quite frank, some of the numbers that have been coming out of fourth quarter results have not been spectacular. So all of that just combined to put a lot of pressure on the market. But like I said, it's been the top performing sector for two years. Things don't go up in a straight line forever. Historically, we've always had pullbacks. Just look at a chart of Amazon since 1997. Every year, it has the pullback of a pretty material amount. So this is normal, and obviously the noise adds to that. And then it all comes down to individual stocks and what we've seen. Especially some of the bigger names like Microsoft. Again, coming back to some of the noisy results, Microsoft was basically short of capacity, so they didn't achieve their growth projections that the street was expecting. There were some sales issues as well, but for the most part, their capacity constrained, they don't have enough data center space. And AWS at Amazon, the CEO Jassy there was saying «we have unlimited demand for this, we can't keep up». Everybody's got capacity issues. So I don't think that there's an issue in terms of where this is headed. It's just a normal correction and a normal uptrend, I think. I'm sure Rob has some things to add to that.

Sure, and Marcello, we've talked about this before, and maybe we'll go to Rob for a response on this, but we've talked about this. Certain areas of technology have been priced for perfection. Again, the returns have been spectacular. The results have been spectacular, too. But you get to a certain point where the results have to continue to be spectacular, and you get a couple of things like DeepSeek, which changes in some way the whole narrative about how much it might cost to build out all this artificial intelligence. And that takes some of the expectations down for some of these companies, and then you say for the companies that are actually deploying this stuff, the return for them on what they're spending may not be as high. But maybe they've spent a lot of money they didn't even need to spend. All kinds of speculation around that. And then you get some results that are great, but not super amazing. Like my kids, they come home with 99 on a test from school. It's not 100. Come on, you got to do better. And again, when the valuations and the expectations are that high, it's got to be 100. So you got a few 99s, and that, again, creates some form of correction. You know, I was very short in high school early on, I was actually a pretty good basketball player. I was very short. I was about 4'11. And then I had a growth spurt in a year, maybe 18 months, where I went from 4’11’’ to 5'11’’. And so that's a tremendous growth. It's spectacular. Now, if someone had chopped an inch off the top of my head so I'd only grown 11 inches instead of 12, I'd still be pretty damn happy with the 11 inches I grew over that last year. Now, that would be provided, there were some things in place that my head was going to grow back and be normal again. And that's what you're saying, Marcello, all this stuff is in place. But Rob, maybe you can take it from there in terms of the valuations and how this plays out into this correction.

Yeah, I think from a micro level, I think you both really nailed it. There were a few expectations misses, and that's fair. And the stocks were duly punished for those expectations misses. But I think a lot of what we've seen over the last two or three weeks is much more macro than micro-driven. So one, I'd say, clearly the Nasdaq has done worse than the S&P 500, for example. But really, all the indexes across US, whether it's S&P 500, mid-cap, small-cap, or the Russell, everything was not spared here. Some of the things to keep in mind here. I think there's a couple of important scenarios. So there was this degrossing in the industry. Hedge funds are very important. And what happened here, as the market started selling off, they had to de-risk their books. A lot of these hedge funds were a lot of tech and growth stocks. So be it short squeezes and a lot of selling of long stocks that they owned, exasperated some of the move as well. I also think it's important to say, internationals outperformed the US over the past couple of months. Some of that rotation from US into international. Where a lot of the US money is, is in large cap growth and tech, and as the money moved from the US to international, that also was a factor. So I don't think this is really a micro phenomenon. I think this is much more macro. The Nasdaq being down 13 to 14% year to date, on this pullback as we are today, is also not out of line with what it does on an annual basis. It's not uncommon for a mid-teens’ pullback in the Nasdaq. And the other question is, is it a growth scare versus a real recessionary fear? And if it's a growth scare, you look back to this since the global financial crisis, we've had five or six of these episodes and we've had turmoil in the market. CNBC will flash that turmoil in the market, and that generally marks the bottom. In each of those scenarios, the Nasdaq has averaged a 16% pullback. We're almost there today. So we feel like we got to get through this correction phase as we are today, get the new US presidential agenda in place with tariffs and all the likes along those lines. And then eventually it turns back to fundamentals. And excusing the expectations misses, fundamentals are still in place for a lot of these gross stocks that we look at, and we feel good. And corrections are healthy over the long run. So we're trying to look at this as more of an opportunity to look for new names and add weight to names that unjustly come down with broader market fears. And we got to look at this as an opportunity to not get scared.

Yeah. The only market indicator better than that market turmoil banner on CNBC is when my wife asked me, and she comes and says, hey, I hear stocks are down a lot. And that's when I know it's hit pretty much everyone. The wonderful woman does not watch the stock market very much. And thank goodness, she's not looking at my portfolio right now. So you have this correction. And Rob, I really love the way you set up that this is not out of line with what you get in a higher growth sector like tech. And if we just use the Nasdaq to represent that, it's not uncommon. Just in the normal course of a year, because Marcello, as you said, nothing goes up in a straight line. You have a pullback, and the pullback, as you said, 16%. So the question then becomes, if I'm an investor and I'm looking at this, and I still see all the potential in the world in these sectors, in this sector and the different areas, AI and that. Should I be in bargain hunting now or is this one where maybe I sit out or even go, hey, maybe I've invested too much in this sector. Maybe I should be thinking about diversifying, and this is the lesson you learn when you get too concentrated in tech as a lot of investors in Canada have?

I can start. I'd say first, it's a difficult question to answer because a lot of that is going to come down to each individual circumstance. I can maybe talk about how I think about it from my perspective personally and in managing the fund. You're never going to pick a bottom. If we learn that a hard way, it's always very difficult to pick the bottom. What we like to do in these circumstances is, you think about high grading. So these are opportunities we look to really buy into our best ideas, not be afraid of those best ideas that have true idiosyncratic growth opportunities in front of it. That's where we're trying to add value because we think irrespective of market backdrop, market environment over the two-to-five-year period, those are the stocks that are going to work regardless. Those are the first things we look towards. In terms of, do we have too much exposure to tech? From our perspective, we're tech and growth investors, so that's what we're paid to do. The other question is a bit more for your financial advisor. It wouldn't be fair to say this is exactly the time, but I think it's the time to not be scared, and it's the time to think about your portfolio and really increase the weight where you have your highest confidence and use this opportunity for blanket pullbacks to really add to where you feel most strongly about the longer-term opportunity in front of you. That's how I approach it, again, personally and professionally.

Yeah, I know. That is a great point. I mean, a lot of it does come down to everyone's individual circumstance in getting that advice from your advisor. And what we try to do on this podcast is get guests like yourselves on to highlight some of the best practices when this is happening. Rob, I think that's something that everyone should always think about when they're looking at their portfolio, if for whatever reason you may have even drifted away from what you really want to own in your portfolio, the real quality stuff that you know represents a great opportunity over the long term. These are a reminder to get back to that quality. Don't be out on the fringes. Take advantage of that opportunity to buy your best ideas. And Marcello, I imagine you've got some other things that you think about as well at times like this.

Well, for the most part, I would just agree with everything Rob just said. Personally, I've been writing a bit more cash than I normally have, and I'm going to be looking to put it to work. But even within the funds, in a number of the funds, we've been running higher cash levels, waiting for better opportunities. And everybody always freaks out when prices are down, but it's like, well, I'd rather buy when prices are down and when they're up on a pole. So again, these are opportunities to make a few switches here and there. And at times it gives you the opportunity to high grade the portfolio. Sometimes you can make some tough decisions about some past mistakes. Maybe you've got good names that have come down as much as the mistakes and you go like, okay, I'm going to get rid of the mistake and go into the good name.

Go into the good name. Yeah, I really like that high grading as a term for something you can do in your portfolio and something you should be doing regularly anyways. We all get into some of these story stocks and different ideas and get away from the base fundamentals, and it's always a good time to take a look and make sure you own the quality that you really want. A lot of focus in terms of the impact of the new presidential administration in the US and their economic policies, specifically around tariffs, but there's also some noise around health care. So along with MAGA, we have MAHA. We've got «make America great again», but also, «make America healthy again». And Rob, is that something that has forced you to take a different look at the sector? Is it having an impact on the sector, even in anticipation of the policy? Or, similar to the tariff, has a lot of the back and forth created some more uncertainty that has created some downside and created some opportunities for people?

Yeah, I'd say that there's two really important things to think about here. So there's the MAHA movement, and then there's the DOGE impact around spending cuts where health care is front center. So when RFK Junior was first put up for nomination just after the election, the health sector felt like this is the worst case scenario. It's going to be the end of the FDA. It's all of this stuff. You've flashed forward a year to date. Health care has actually led the way. It's been the best performance sector in S&P 500. Now, granted, a lot of that is more macro defensive positioning as opposed to complete comfort. But I think the market is getting more comfortable with what could really happen, like what are the worst-case things that could happen from an RFK Junior. You look into some of the other selections at key leading organizations, the FDA notably, and it's a reasonably sensible selection in Dr. Makary. I think the sector and investors in the sector are getting more comfortable. Clearly, lots can change. My gut tells me things like the food industry are a little bit more at risk than, let's say, drug manufacturing. My whole contention is anything that's innovative is going to continue to get rewarded. That's where we try to follow and try to continue to stay focused on real innovation. And I don't think he's going to have a huge impact there. But look, anything can happen. And disruption at the FDA could delay drug approvals. And there's a lot of things that can happen. But I think the market, myself included, feels a bit more comfortable now. A few months post the initial, I don't know if you want to call it shock, but the proposal of him leading one of the most important health care organizations in the US. DOGE cuts and other spending cuts, that's a whole other debate. And clearly, they need to identify lots of areas of cut if we want to allow the previous TCGA or tax cuts to be pushed forward by the Trump administration. Things like Medicaid spending is going to be under scrutiny, potentially even Medicare. So these are organizations, Medicaid that pay for poor, Medicare that pay for seniors and older people. Again, I don't think it's blanket. I'm not worried about it that it's going to destroy the sector. But there's clearly been some companies in particular that we're seeing on the sidelines or pulled away from and gotten out of that are a bit more in the crosshairs. And for those more idiosyncratic ones, we'd rather wait and see what happens. But in general, I feel better about the sector today than it did three months ago when all this started. And like I said, I continue to think, demographics are favorable, and innovation will continue to get rewarded. AI is going to drive big upside for health care over the next 10 years, not necessarily this year, but over the next 10. I feel good about the sector overall.

Yeah. In fact, one of the best or maybe priority or easiest applications of AI is in medicine. I know when there was an early press conference in the administration where they had Trump and some tech leaders, and they talked just about that, how the difference that AI can specifically make in health care.

Yeah, I think the drug development opportunity is going to take a little bit longer. Where I see the more near-term opportunity is if you really want to attack waste and you really want to relieve some of the administrative burden, like helping with case decisions in terms of what's covered, what's not, making sure documents are filled out appropriately and the right requisitions are put forth. That's where AI is going to have a huge opportunity in the next two years. Longer term, yeah, 100%, the drug development, I do see an opportunity for acceleration, especially at early stage in terms of screening out candidates that are more likely to fail and advancing ones in human trials where there's a greater opportunity. I just try to be a little bit more realistic with timelines, but definitely, healthcare is right for the picking in terms of what the upside could be from AI developments.

Correct me if I'm wrong, but I think AI is already having a positive impact in terms of diagnostic and imaging and things like that, isn't it?

It's too early to say 100%. I think there's probably small breakthroughs here and there, but I still think it is relatively early. And I don't know how much of those developments on the diagnostic side that today I would characterize as being AI-driven as opposed to just broader advancement in the specific diagnostic equipment or assay test or whatever the case may be. But yeah, that's It's fun to come to, for sure.

Yeah. And then maybe just one more on health care. I guess there was a lot of optimism around the GLP-1s and the next evolution of that and how many more people might benefit from those drugs. But we've seen some disappointing results in the sector more recently. Is that something you're still excited about?

Oh, yeah, 100%. Circling back to what we talked about a few minutes ago, a lot of the issues over the last couple of quarters were a little bit around messaging and expectations of near term results as opposed to any signal on a longer term upside from GLPs and obesity categories in general. What we saw was, we’re re still in a position last year where we're in supply shortage for both Eli Lilly, and Novo Nordisk. And you had these compounding pharmacies like Hims & Hers that were stealing a little bit of share because they had some volumes, and it created just a bit an issue around the prescription growth trends towards the end of last year. And to be honest, the companies didn't do themselves any good in terms of how they guided the street. So I think we've worked through some of those issues. We're going to get through supply shortages very much easing over the first half of the year. Novo Nordisk had a couple of setbacks with next generation obesity drugs. But again, in my opinion, that’s very much poor messaging versus the drugs are no good. So 50,000-foot view, I'm still very positive. This is still going to be by far the biggest drug category ever. You got to understand, none of this stuff is up and to the right in a straight line. And we're gone through a little bit of the, I guess, I don't know if it's the-ebb-and-the-flow portion of it in the back half of the year. I think as we get to the middle part of this year, I think the opposite, the good part of that terminology will kick back into full force.

Yeah. And Marcello, we always ask you about emerging sectors or even existing sectors across technology and health care that you're looking at and finding particularly interest or might be the next story that no one's talking about right now. And now let's throw in a discount on some of this stuff from 10 to 20% versus where it was at peak pricing. What excites you right now? Is there anything that someone like me who's not following this stuff at the depth that you do, isn't reading about, even really thinking about, but that is something we should be thinking about.

Well, I think we talked about it in the past, but I've been doing a lot more work on it. It's basically everything to do with robotics. And basically, robotics is a physical manifestation of artificial intelligence. And so the advancements that are going on in this area is just fascinating. So the process that's used for developing large language models can actually be used to train robots. I'm sure you've seen, especially Elon out there, at Tesla, talking about humanoid robots, and there's going to be like 20 billion robots and all that stuff. He's obviously exaggerating, but there's an element of truth to this because the world is designed for humans, and a humanoid robot will be able to fit into the existing world as it is easier than something that's on four gigantic wheels or something like that. And the large language models or the process for building them can also be used to train a robot. So to simplify things, the robot could basically be watching millions and millions of hours of people doing things to basically learn how to manipulate a cup, a glass. How do you swing a bat? How do you shoot a basketball or whatever? Or how do you pick up a bunch of boxes out of a truck and move them over to the shelf in the warehouse? So all these types of things. So there's a lot of advancements going on in this area. And what's interesting is that the usual suspects are all involved with it. And even today, Google came out with a whole bunch of videos of some of the training they've been doing with some robots. NVIDIA is right at the heart of all of this. There's a guy there named by Jim Fan who runs their robotics department. So I'm following him really closely to see what advancements are taking place. And it's just really fascinating. And I just think the way new technologies basically penetrate society and the economy at a faster and faster rate. I'm just thinking that this is probably going to hit us faster than we think. And just like the whole large language models starting with ChatGPT took everybody by surprise, and the advancements we've seen have been so rapid. I think that we're going to get surprised here as well. So that's just an area that I've got a lot of interest in. I'll leave it at that.

Well, we've had Rob and Marcello on before, and on those different podcast appearances, we've gone a little bit deeper into some of these things. We don't have that much time today to do that. But if you want to go back and listen to some of their previous appearances, there's all kinds of fantastic things. When Marcello is talking about things like large learning models and AI application. There's much more detail on that and deeper explanation. Rob talking about some of the health care stuff and GLP-1s and the impact there. So we've got all that content there-. So if you subscribe or you go into the archives on the podcast, all that content is there. But what I always get when I talk to either one of you, or particularly both together, is how amazing it is that you have to have one eye on all of this stuff that's going on. And it's in so many different areas. You say tech. Well, tech is just a blanket scenario. And you follow this stuff. You have to be on top of every innovation. And at the same time, you have to understand how that translates into the valuation of a stock in the market and whether you want to buy or sell that, how you put together a portfolio that has what an investor really needs to take advantage of this space and not blow themselves up, because it's an area where that can happen. It just really highlights, as we highlight all the time on this podcast, just how special professional investors are.

We do our best. You highlight an interesting point. I'm talking about all this robotic stuff. That doesn't mean you go out and do anything with it today. Because there's a fine line between being early and being wrong. You need to keep that in mind.

One of the things that you've always highlighted is that in the tech space, and then we get down into each category, there tends to be a big winner. There's a couple of other companies that make a little bit, but there's a big winner, and then there's everybody else. So you say, you might be on what you think is the winner early, AOL, and you might miss Google. That's maybe the best example. You probably have a better one, but that's the idea that you've got to be in the right company and the lead company to really win.

Well, I think you're touching on a really important point here. The way we manage this, it's actually the philosophy of RBC, but in particular, the way we manage the tech funds is, we believe in breadth and not concentration. If you're putting all your money into AOL, and don't have a chip on the Google square, you're going to miss something pretty big. When there's a new sector, you need to spread your bets out a little bit, just in case your original thought that this is going to be the winner doesn't end up being right and it ends up being your second or third choice. But at least you put something on there, because like we always say, sometimes it's the errors of omission that kill you, not the errors of commission.

Yeah. And so maybe we'll just finish off where we started. So I'm an investor. I'm in a diversified portfolio, but I'm worried about my equity holdings. If I'm in the US, I've got a high weighting of technology, even if I'm in a diversified US portfolio because tech is such an important part of the S&P 500. Should I be worried here? Or as Rob was talking about, this is something we go through every year with this sector. And it's just a case where if you want to be here and you want to benefit from it in your portfolio, as you have over the last decade, you got to be on this. You got to accept that this is just part of the ride.

Yeah. I mean, look, I think we have to think about time frame. So if you have a time frame beyond six months or twelve months, then I think absolutely, this is still, I believe, the area growth areas with tech health care and other similar growth opportunities. That's probably where you want to be. That doesn't mean that there's not going to be years where the market is scared about something, and these stocks get sold off or some value type area has some prominence, and you see a bit rotation within the sector or within the market. Look, that can happen on short time frames, but over a longer time frame, I still think this is the area you want to be. It doesn't mean you put all your eggs in one basket. That wouldn’t be smart advice, but I still think innovation is what gets rewarded over long periods of time. And tech, health care, comm services, and some of these other areas we look at, that's where the innovation is. And I feel confident that's where the innovation will be 5, 10 years henceforth.

Makes a lot of sense.

I would agree with that.

Excellent. Well, I hope what this has done and what we wanted to do with this podcast, because, again, I'm a big believer in tech, and I'm particularly a big believer in what you two do in terms of the way you think about managing in this space, and your track record is impeccable. But we're going to go through these corrections, and what we don't want to have people do is panic and make rash decisions around it. I thought it was important to get you on just to back up the power of this sector, the importance of this sector to have exposure in your portfolio and just expect some periods like this. But if you've got that long term time horizon—and Rob's really important point on that, If you're worried about the next six months, this is not where I want to have my money. And really, if I've only got six months, I don't want to have my money in a sector like this ever. But if I've got an appropriate time frame and I'm thinking about it from that perspective, 10, 20, 30 years or longer, you got to have the exposure. But again, you've got to expect that you're going to live with these types of periods here and there caused by micro or macro factors.

I 100% agree.

Wow. I don't know if you've ever done that before, Marcello. You usually want to squabble at least a little bit, but that's good. Maybe I'm actually learning something from having you on all these times. My wife would appreciate that. I know that. She's not too worried about the stock market, but she would like me to be a lot smarter than I am. Anyways, guys, thanks for always being so generous with your time. Thanks for coming on, particularly right now, because I know investors are concerned. And as always, just a fantastic job. And we'll see you next week. We're doing some live events next week together, so I'm excited about that.

Us too, thanks.

Unplugged. We're going to be unplugged.

Unplugged. Beautiful. Take care, guys. All right.

Take care. See you.