Hello, and welcome to the Download. I'm your host, Dave Richardson, and it is tech time. I know these are everyone's favorite episodes because we've got Marcello Montanari, who's part of the Canadian, or, sorry, north American equity team at RBC Global Asset Management and is our tech guru. You're very uncomfortable with me saying that, aren't you?

Well, I have a whole team behind me. I'm a generalist. I'm pulled in different directions. But thankfully, I have a good team on the tech side, covering. There's so many different ecosystems and technology that it's not homogeneous, like the oil market or something like that. No offense to oil analysts or anything.

Oh, yeah. Because that's an absolutely easy job that never bounces around at all. You can call the price of oil day to day. The man on the street can do that. We’ve got the oil analysts on the next episode, and they're going to be all offended to start, so you’re making my job harder Marcello.

Let’s start a little war here.

But, hey, speaking of markets that were not particularly good last year, that would be energy. After 2022 was a very strong year in energy and commodities in general. But 2022 was a little bit tough on tech. And then it came roaring back in 2023. As you look back on 2023, what stands out for you in that area?

Well, I think it's good that you pointed out 2022, because it was not a great year. Like I've said on your show before, we had this desynchronized economy where technology went into its own recession before any other sector. I always point out that industrials were flying, and technology was in the doldrums. So 2022 was not a great year, after a spectacular 2021. But at the end of 2022, you had valuations that were washed out. You had the stocks that had been washed out. You had basically every single strategist on the planet basically calling for 2023 to be a complete disaster. The recession is coming. It's three months out. It's coming. You don't want to own anything like this. You had rates. We had like 13 rate hikes. So it was a bad set up. And we looked at that and said, you know what? I've never seen the street so on one side of the boat like this, and so we took the other side and said, given that we think that the tech market had pre-crashed versus the rest of the market, we just thought the risk reward was actually pretty good. And so we added a little bit more torque to the portfolios. And then, I forget the exact day, but it was the end of February, Microsoft basically unleashed Chat GPT on Bing and basically introduced it to seven billion people and here: play with this thing. And that just ignited a whole AI hype cycle. But I think this hype cycle is for real. There are hype cycles that are fake and then there are hype cycles that are real. I think this one's real. That doesn't mean we can't have a bit of a drawdown at any point as we go forward. But anything that had a legitimate AI story to tell basically started to work. On top of that, on the ecommerce side of things, you had a dismal 2022. And I think we've spoken in the past about how Apple had basically cut everyone off at the knees in terms of advertising. Digital advertising is joined at the hips with ecommerce. So with Apple cutting off the digital advertisers at the knees, that hurt ecommerce. But Apple started fixing its tools at the end of 2022. They'd realized what damage they'd done to the entire market. On top of that, all the other guys, the Metas of the world and Googles had basically been doing workarounds to get around all of Apple's roadblocks. So you had this coming together. Apple's tools now are working better. Plus, we've done all these workarounds. So basically, you got a re-acceleration of digital advertising. The whole ecommerce market came back, which also benefits payments. Everything just started coming back together. But the numbers didn't show up yet. So what typically happens in markets, it's always forward looking. So you had multiple expansion. You had the multiples expanding before the numbers start to show through. And if I guess where we're going to go next, maybe I'll just give it a little preview. Going forward, are we going to get more multiple expansion? Maybe a little bit on the edge, but that part of the cycle is probably behind us. So now it's really about watching the numbers start to come through and more of stock picking and identifying the idiosyncratic stories going forward.

A lot to unpack with everything you said. And I just wanted for the listeners, the last time we had Marcello on — you can scroll back in the episodes, I think it was around July or August of last year — Marcello gave a really great overview of AI and how AI impacts the global economy, the potential for it as something you can invest in. So I'd encourage you to go back and listen to that episode. But I think another important point you made, just from a general investment standpoint, is this whole idea of zigging when everyone else is zagging. And the idea that when everybody's piled up on one side of the trade or one particular viewpoint, that's often when you can take advantage by going the other way. And I remember when we were talking last year around this time, that was your view. So, congratulations on that. The first thing I want to drill in on is, when you use the expression «adding torque», you decided to add some torque to the portfolio. For listeners who wouldn't connect that with what they do in their portfolio, what did you mean by adding some torque? It sounds pretty cool.

Well, the way we manage the portfolio, depending on conditions, valuations and whatnot, we shift back and forth between two types. We have what we call stalwarts, the really big players, the Apples and the Microsofts of the world. They're still growth companies. And then we have a bucket of stocks that we call optionality names. And that's where you get torque. These are smaller names that, if everything goes right, should have better growth prospects than some of the stalwarts who are more mature. And then there's cash. So we can shift back from having a bit more cash if we're defensive, to more stalwarts. But then when we think things are lining up, we basically shift more of the assets towards optionality names, or what we like to call torque. So that would be like Trade Desk, Pinterest, things like that. Smaller names.

Yeah. So if things move in the direction you think they're going to move, that you're making the bet on, they're going to move farther and faster than some of your bigger names, as you call them, stalwarts.

Correct.

And that's the torque.

Yeah, we added torque to the portfolio.

As we look forward to 2024 now. So we're sitting here and everyone off of last year is somewhat excited about tech and I think one of the other things about last year is, who would have thought you could get the kind of movement you saw across the sector with yields on the US 10-year going all the way up over 5%. Now they're down back in the low 4s, and most people think they're going to go lower. As you sit here today, how are you positioning the portfolio for this year, not specifically, but in general?

We're still positive on the sector. We think interest rates will go lower. We've been of the higher-for-longer camp, but we still think they're coming down. We just don't think that there’s going to be as many cuts. If we back up two weeks ago — I don't remember what the numbers were — but there was this view that we're going to have eight cuts this year. But you know, the economy is still pretty strong. We're in an election year. You typically don't get a recession in election years. So we were a view like, we're probably not going to get that many cuts. So you might get a little bit of a pullback as things recalibrate to our view of the world, which I think has happened over the last week or two. That's not to say that we're going to be right, but at the moment it looks that way. And so, we're still positive. If you do a two-year view of what's happened to tech stocks, they're not up that much. When you go back to the end of 2021, like the first days of 2022, we were here — I don't know if you can see that — we were here, we did this, and now our fund is actually above where we were at the end of 2021, which is great. The returns are not that great on a two-year basis. So we think there's definitely more upside. Like I said, I don't think it's going to come as much from multiples as it is from actually just conditions getting better. And we're already starting to see that amongst the cloud providers that the news flow is starting to get better, the volumes are starting to get higher, which is going to benefit a lot of software companies, especially those that revolve around what they call consumption versus seats. Things are getting better there. Ecommerce and digital advertising continue to get better. You're also seeing a shift from linear advertising dollars, from traditional television. It's finally starting to move over into the digital realm. Probably why Netflix did what they did. Sorry, I segue here, but Netflix added an advertising tier, clearly, to make sure that they could get more customers, because it would bring down the price point. But they could also see that there's a $70 billion prize, which is linear tv advertising, and they had to have been looking at that, saying it's going to start shifting and we need to have a position there. So conditions are improving. Hopefully that will result in higher results for the companies. Hopefully, we can identify the ones that are going to beat expectations. It's not just about meeting expectations. You got to beat them for the stocks to continue working. So hopefully we can pick the right stocks there. And this will be a year where I think the stocks will work, based on just improving conditions and companies beating expectations.

And going back to the front end of the podcast, that’s why having a team is so important, because you need those people to be doing the digging and doing the research and the work to make sure that you've got the right companies, that you're picking the ones that are going to fulfill on the expectations. And really, in the tech world, oftentimes you need them to beat those expectations and even beat what people are whispering about what those expectations might be.

Yeah, there's a lot of whispering going on in tech. And on top of that, you have all these third-party data companies that are looking at credit card data. A lot of these stocks move well before the quarters, things like that, just because there's so many different leading indicators here and there that can be gleaned from alternative data sources, and they've been flooding into the market and having impacts, for sure.

So what are the key elements that the team is focused on to work to try and identify those winners? And, of course, obviously, not giving away any of your secrets out to everyone.

Well, we don't have any secrets. We've basically stolen everything from other people and remixed it. No, you know, technology is driven a lot by product cycles and innovation. I'll say that we're business analysts first and then stock analysts second, and so we're always just trying to make sure that we're positioned in the right companies that have the right technologies. As an example, this whole AI thing, you've got all the pretenders putting their hands up saying, hey, I'm an AI play. They all want the aura of AI because it can help their multiples and things like that. And that's why I say in this sector it's so important to have history and experience because it all builds off of itself. After doing this for a while, you start to become pretty good with your BS detector. Am I allowed to say that? Is this a real AI play? Is this a real cloud play? Is this a real data transformation play? So you need to have that kind of experience to help identify those things. And then hopefully you basically pick the winners. And as we cite quite often, technology is very unique in that the markets tend to be winner-take-all or winner-take-most of a market. When you think of how many database companies are there, well, there's really three. There's Oracle, IBM and Cybase. But now you got these new age database companies coming out like MongoDB. But you tend to have winner-take-most or winner-take-all markets. These are also companies that have very high returns. So you end up getting companies that, because it's winner-take-all or most, they just get bigger and bigger with really attractive financials. So you end up with what we call mean-repulsion versus mean-reversion. They just keep getting bigger. That's what helps explain the size of the Mag Seven. I actually think it's Mag Six. But Apple is what it is just because it took all the economics out of the wireless handset market. Microsoft, basically, owns the operating system of your computer. On top of that, it is one of three big players and probably, I would argue, the most important player for enterprise in terms of cloud computing. So are we going to have ten cloud computing infrastructure players? No, there's three right now. Maybe Oracle's got to play as a fourth. The big just keep getting bigger. I think I veered away from your original question.

That's what we love about having you on, because when you veer away, we learn lots about the sector and get some insights into what to think about. So the Magnificent Seven — or six as you prefer, trying to think of what would be the equivalent way of labeling Six instead of Seven. So the businesses, as you say, long-term position to continue to win, no doubt about that. We didn't see as much of that split in tech because you had a lot of smaller companies that people weren't paying a lot of attention to, that aren't sitting in the S&P 500, that did fairly well, along with the big names. But do you think the stock performance of those companies is something that continues, certainly long term, but in the near term right now, or do you look at those as being somewhat overvalued and overplayed at this point?

I don't think they're overvalued in the fact that some of them are still cheap. And when you look at Nvidia, there's so much fear that sales have been pulled forward that the multiple actually looks cheap on near term numbers because people are more fearful of the future than the present. So I think they can definitely continue to work. Like I said, AI is for real. The way we look at AI or any new technology is you basically have those who enable — kind of picks and shovels —, and then you have those who deploy. Like the Royal Bank; we will be deploying AI and we'll be hopefully using it to improve our operations and hopefully increase sales. And maybe it can help sell more of our funds. If you do a Venn diagram, you've got the middle, the almond in the middle, and some of these companies play in both. So Microsoft is both an enabler and a deployer. And so is Meta and Google. Nvidia is more just on the enabler side rather than a deployer. So we see that there's still a lot of upside here. We're early days, and if you listen to a lot of people who are a lot smarter than me, whether it be Bill Gates or Jensen Huang, they're all calling this the iPhone moment, the PC moment, the Internet moment, where a brand spanking new technology, which is a real technology, really starts to take off. We still see a lot of upside. These particular names are really well positioned. That being said, whenever you get a hype cycle, usually you kind of peek out and you'll come down, and that's where you get a culling, usually of the weak players. The ones who are the pretenders, they get culled in all that, but it tends to bring everyone down at the same time. And then you get the turn and you go on a long term growth trajectory. So is it possible that we peek out on the AI story this year sometime and you get a little bit of a drawdown? I think so. It's possible. If I had a crystal ball — I wish I did — but we don't know. But we have enough confidence in the long-term thesis, or thesis on these names that we're not really that worried about them longer term. So we're prepared to live through any short-term downturns here that's associated with this hype cycle. A process that has basically repeated itself in history over and over again.

But as you say, it's really important that you've got a process in place. Or if you're an individual investor looking at these stocks, that you have a depth of understanding because you've got to find the winners versus the losers — because it's winner-take-all or winner-take-most. And so when you go through that culling, as you say, that's a point where you got to get it right if you're going to experience the growth that you should get out of the next wave up.

Yeah, for sure.

And then let's just finish off with one quick question. We will ask you to throw the crystal ball on. Back in high school, I was a bit of a loser, and I never had the right fashion. I was never forward, so I'd get bullied and all that stuff. So now I'll go down to Los Angeles over the holidays, or I was down in Brooklyn trying to figure out what the cool kids are going to wear this year. So AI was the big thing last year in tech. Anything else on the horizon, maybe this year or a couple of years out, that you think is going to garner some headlines and be big news in the sector in terms of innovation. And again, maybe it's something that comes to fruition now, but as you say, you're looking out at businesses and the direction things are going. Anything cool coming that may be investable now or ten years from now?

Well, peripheral to AI, basically companies need to get their data in the right place at the right time in order to basically create their own domain specific and company specific models so that they can improve their operations. So there's a whole bunch of companies involved there. Something I'm really quite excited about. When you think of marrying up a large language model that can seemingly understand with robotics. I think that the ability to talk to a robot and give it instructions that it'll actually understand and follow is quite something. So that's something that I'm keeping an eye on. Veering off into stuff we haven't really talked that much in the past, which is the green transition. To me, when you look at the evidence, it feels like nuclear energy is going to have a renaissance here. It's starting to look that way. I think it's become clear that all the intermittent green solutions to the energy problem, they're not the greatest solution. They're positive. It's great that we're doing it, but you still need that baseload. And the more of these intermittent solutions you bring onto a grid, the more fragile the grid becomes. And on top of that, you have more points of ingress for malicious actors like cybercrime and things like that. So doing a lot of work in the nuclear space. And yeah, those are a couple that jump out. Then again, cloud seems to be reaccelerating. Companies went through a period of curtailing and what they were calling optimizing their use of cloud compute services, and now it looks like they've right-sized things, and now we're ready to start redeploying with new applications and things like that. So there's a bunch of things coming together.

That's why I love throwing questions like that your way, because you always surprise me. I didn't see those answers coming, particularly the one around nuclear, which is really interesting. Is that going to be a Canadian phenomenon, US, or is that more in other parts of the world, Europe in particular, but who have always had a little bit more?

My opinion is not fully formed here, so they're half baked. But I have been looking at it quite a lot. Canada is well positioned. Our Candu reactors are pretty good. In fact, Quebec has the cleanest grid on earth because of Hydro, followed by Ontario, because of the immense amount of nuclear energy we have here. We have a lot of skill and domain knowledge around this. So, in order to manage all the risks around new nuclear facilities, we're actually talking about making them smaller and making them such that large parts of them can be manufactured in a manufacturing facility, rather than pouring tons and tons of concrete to make larger reactors. And then basically, you daisy chain smaller reactors, and that's what they're calling SMRs. And we've actually contracted to put, if it's not the first four, it's within the first ten SMRs at Darlington. They're going to put in four, 300 mw each, which comes out to 1.2 gigawatts, which is the equivalent of a large reactor. If this starts taking off, and as Canadians, if we can harness and market our abilities around here, it could be quite interesting.

Wow. Yeah, absolutely fascinating.

It is.

Well, Marcello, always great to catch up with you. I asked the question earlier in terms of the team and what the team has to do to be ahead of some of these emerging trends, to make sure that you're in the right names at the right time in all of these evolving sectors, all of this innovation that's going on all around the world. And I think as people listen to you, they get an understanding of the intellectual curiosity and the depth of knowledge and research that you have to do to understand those things. So it's always great to catch up with you.

Well, it's always great to be with you.

For this year, I've changed the spelling of my name. I was always capital D and A, V and E. So now I'm going with lowercase D, capital A, capital I, lowercase V and E. It is still pronounced Dave, but I've got the AI emphasis. Your favorite living robot right here, Marcello.

That sounds great. I'm going to try to figure out how to put it into my name.

Marcelloperating system. Anyways, we'll get you on in a couple of months and take a look where things are progressing. But thanks again for all your time.

It's great to be here. It's always fun.