Hello and welcome to The Download. I'm your host, Dave Richardson and a really timely guest today. We've got Marcello Montanari, who leads the technology investment team at RBC Global Asset Management. We wanted to get Marcello on earlier in the week, but it's been a busy week for a tech investor. And as we're watching here, if we look at the Nasdaq, we're sitting down at maybe 12.5% from the all-time high. And even if we're not directly investing in the technology sector— say we own an S&P 500 index fund, for example, we're about one third invested in technology. It's a big part of the global economy. Any investor almost has exposure to technology. And so, we're sitting here as technology investors thinking about what to do. I thought I'd bring on a professional investor who is managing a large technology portfolio and ask him what he's thinking today and how he thinks about this market in general. So, Marcello, welcome back. You've laid out in previous appearances your philosophy around investing, and I guess, it’s very important to stick to that as you come into a period like this. What's on your mind, and what are you doing as a tech investor today?

Thanks for having me on, Dave. First of all, I've been doing this for quite a long time, and the tech sector had an incredible run to the point where people were asking if it was in bubble territory. We could circle back on that, but just in the last five years, we've gone through multiple drawdowns in tech markets over and over again. And it's actually served as well to keep our wits about us and not panic back to that kind of bubble argument. And if you listen to us in previous conversations, we went over the arguments why we were not in a bubble. The conditions are very different. The quality of the company is very different, much better today and with customers and real revenues, which was different than back in the tech bubble days. But we did point out that there were segments of the market that were exceptionally highly valued, and then there was some that were mid valued and some that were relatively on the attractive side. Coming back to the S&P 500, most of the technology stocks that you have in there are what we call stalwarts; the Microsoft, the Apple, the Oracle of the world. And the way we manage portfolio is, we try to have this barbell approach where we basically balance off what we call stalwarts and optionality names. And again, the stalwarts are the Microsoft and Apples, and then the optionality names would be things like Twilio, Avalara, names like that. So the portfolio has been weighted more towards stalwarts. So despite the really terrible headlines of this stock down 50% and that one down 39%, the portfolio has held up much better than that. So we're at the point now. This is the big question because we've endured a lot of pain, the tech markets in general have endured a lot of pain, for those highly-valued stocks, the drawdown started months ago. So we've seen a lot of these names come off in that range of 35% to 65%. As that's happened, our approach has been to, out of those optionality names that I'm talking about, trying to pick away at names that we think have fallen into a range that starts to look attractive. And then the next big step would be, where do we start to start shifting from taking weight out of Microsoft or Apple and putting it into something like Snowflake or MongoDB, or whatnot? So that's where we stand right now. And we've tried to do a little bit of that and to be quite honest, every time we do it, we've gotten slapped around a little bit, but we haven't been doing that in large amounts. We've just been doing it around the edge. When DocuSign collapsed, we waited a little bit and then we said, okay, still expensive, but it looks like this might be an area where you might want to dip your toes in. So we bought some small position there and we've done that with a number of names. Now, what's interesting is that in the software patch, we're starting to actually see some relative performance from names that have come down. And even though some names are still continuing to fall, some of the software names seem to be outperforming, in that they're not falling or not falling as much. Companies like Salesforce, Adobe, etc. And then again, the stalwarts never fell as much as the others. So that's where we stand right now. And it's just a question of trying to pick these names that have come down and when they hit points that we like. And we're totally aware that we'll never pick the bottom on this. So you got to start doing it at some point. And so here and there we've started doing it. That's where we stand right now.

I guess what we try to do on this podcast, when we're talking to investment professionals like yourself is, we're talking about investing. And we've had this discussion on many previous episodes, if people go back and listen to them. We're not talking about speculating, we're not talking about trading, we're not talking about gambling. We're talking very much about investing. In your view, the fundamental reason for why you would have technology or exposure to technology in your portfolio to begin with; the justification for that hasn't changed, has it?

No, not at all. And if I didn't mention it before, our approach has always been to have a longer-term approach. We're not playing for quarters and things like that. It's just too hard to do. There are firms that like to do that. We think that the numbers bear out. That's not really a winning formula over time. So, we take a longer-term approach and we try to get it right and sit tight. And as a result, we tend to endure higher valuations because these names tend to trade at higher valuations. But the themes are still all there. Nothing has changed, really. I was talking to someone earlier, there was an analyst report talking about how customers facing software had been pulled forward and that basically brought a whole bunch of the names down again, like Adobe and Salesforce, for example. But since then, there's been a number of other surveys that have come out with much larger sample numbers, by the way, that have said that that is not happening at all. In fact, the IT budgets are really pretty strong. We're looking somewhere between 4.5 to 5.5% growth this coming year. So things look good for IT budgets and the systems integrators who basically have their pulse on all these type of projects, they're saying it's all systems go. They're number one issue? They can't find people. Still all systems go. As I said, the themes that we've been playing, data analytics, the digital transformation of business, 5G, robotics is still all in play. Nothing has really changed.

It was really interesting; I was talking to Stu Kedwell earlier this week and we were talking about the bank earnings from the US that were starting to trickle out. JPMorgan; the stock got hit because they had higher costs and the higher costs were all associated with a massive plan spend on technology. For a traditional bank to catch up to these new financial technology companies. And so, it seems like the businesses are all strong, but that's with a backdrop— and we talked about this the last time we were together—, the potential for higher interest rates and a much more hawkish Fed. Is that something that really concerns you? Or again, is this one where we know rates are going to go a little bit higher but not dramatically higher, so we're pretty comfortable with companies that are still growing at a very fast rate with very solid businesses?

You just answered the question for me. Our view is yes, rates have to go up, especially short rates. But right now, despite all of this hawkishness, the ten-year bond is still at 1.74%. So, we're where we were last time we spoke. We think that these companies can withstand higher rates. I mean, if they go to 6% on a ten year, all bets are off. But we don't think that it's going anywhere near that. We think it's probably going to be somewhere in the 2.25% range ultimately. And tech stocks have done very well at those type of rates in the past. So I don't know why that would be different. And it's interesting because you just harped on something that I was talking about with someone else the other day, which is how JPMorgan talked about inflation impacting them today. Obviously, they're not getting the benefit of higher rates yet, but inflation is impacting them and their costs are more than most tech companies, by the way, and then they're spending all their money on technology. It's interesting that we're more worried about technology stocks. So again, to a certain degree, we're rightsizing a lot of the highly-valued stocks. And there was a lot of stocks that we wanted to get involved in, especially some IPOs, like Snowflake is a perfect example. And we just weren't able to get into the IPO, and it immediately doubled and just took off from there. And now it's actually held in better than a lot of stocks. But it's down to 200-day moving average, and we're starting to look and that's just an example. We're starting to look at these companies that are just so well positioned for where technology is heading, that have just up until recently have just been completely out of reach in terms of valuation. And now they're coming into a range where we're starting to look closer. I'm not saying we're going to buy Snowflake, but I'm just using that as an example.

Sure. Again, for the average technology investor or investor in general who has a portion of their portfolio and technology, given the backdrop and everything we've talked about, is this a time where you would want to have a little bit less weighting in technology where you were a year ago, or do you still think it should hold that large place in a client's portfolio as it does right now?

Like I said, everybody has their own unique circumstances. But given the correction we've seen so far, we're getting into the range where this thing is hopefully closer to the end than the beginning. And like I said, the way we do things, we're very careful and we don't make gigantic outside bets on single names, and we view the future as very favorable. Maybe not the next two weeks, but looking a year out, two years out, which is our horizon. We're always looking out at least two or three years. That's the way we're doing things, and we don't see a change to the underlying fundamentals and the trends that are powering the technology industry.

Marcello, out of everything you said, I think that's the most important thing, that you just have to look beyond. You're always going to have periods. We did an interview with Scott Lysakowski a couple of weeks ago, and again, that's a recent posting. If you're looking at the list of episodes available and over 15 minutes, Scott went through a whole bunch of stats around markets and drawdowns within individual years and expectations around drawdowns after lower volatility years and such. These kinds of drawdowns are going to happen. They're going to happen and sometimes feel particularly scary in sectors like technology that are, by their very nature, just a little bit more volatile. So you've got to see through and you've got to think about where you're going to be down the road and if you're in the right companies, then you're ultimately going to be successful.

That's our plan. We're sticking to it.

All right, Marcello, I really appreciate you getting on today. I know how busy you are this week. It's just one of those times where you're a portfolio manager and things are going to be particularly tough so I really appreciate a few minutes with you today and keep doing what you're doing.

Thanks, Dave. Thanks for having me on. I appreciate it.