Semiconductors – a core ingredient.

CR: Hello. And welcome to Silicon Valley Bitesize, an update on the tech sector from the Allianz Technology Trust. I'm Cherry Reynard and with me today is Mike Seidenberg, manager on the Trust. So welcome, Mike.

MS: Great to be here. Good to see you.

CR: Now, today, we're going to be talking about semiconductors. I don't think it's an exaggeration to say that they’re the foundation of modern computing and continue to play a vital role in the development of AI and EV’s and just about every other technological innovation that you can mention. I wonder if we could kick off by discussing a bit about where semiconductors are used and why they're so important.

MS: Well, you know, as you alluded to, they really are the foundation of technology, given that, you know, in order to compute the ones and zeros. Semiconductors are a primary input, if not the input. What we've seen over time is the complexity of the chip grow. But we've also seen the proliferation of semiconductors into things that they never were in. If you think about an automobile and the amount of semiconductor content, that it's in the car today, versus where it was even 10 years ago, it's really shocking. And that has a potential to even go higher, depending on the adoption of whether it's EVs or hybrids you know, and if you pivot and just think about your everyday life, and think about just, you know, whether it's a household appliance, whether it's a… you know, good luck fixing your washer and dryer, right? They all have these digital panels that are really run on chip boards that have a semiconductor. So, it's really amazing where the industry has come. I'm always just kind of, you know, it's really thought provoking to me, if you think about just kind of how pervasive they are, in technology.

CR: And am I right in thinking that the evolution of semiconductors has kind of allowed the evolution of technology over the past 30 years.

MS: 100 percent. I mean, there's no doubt that Moore's law has really driven whether it's software, whether it's, you know, data centres. Whatever it is, it's really been at the at the benefit of semiconductors and in shrinking… shrinking the die on a chip and getting more and more transistors. You know, that's been the driver.

CR: Absolutely. And Moore's law is the expansion of computing power over time, yeah?

MS: It's an equation that basically talks about compute power relative to the size of a chip. I don't have the exact definition. But all I know is we're running into a bottleneck around the actual physics because of an electron going down the circuit. Now that's how complex it's become, which is why people are today are really doing a lot more stuff with what they call chip-like architecture, which is actually building a system on a chip, in order to kind of get around some of the challenges associated with Moore's law.

CR: OK, interesting. And I wonder if we can talk a bit about the different types of semiconductor companies because presumably, there are people involved in every bit of the sort of production show.

MS: Sure. You know, I mean, it runs the gamut from commodity storage. Which, you know, you hear people talk about whether that's D-RAM or NAND to very specialised manufacturers that may make a chip for a medical device, and somewhere in between, depending on who you are. So, I think you have a breadth of industry that affords us as investors to really think about investment in the space and a variety of times and a variety of market cycles, depending on, you know, just kind of our view on something. For example, there may be a time where we are more overweight commodities things like, just commodity chips. And there'll be times where we have more focus on specialised chips. And I kind of think of the two industries along with memory, just to be clear, in the same bucket as I think about semiconductors.

CR: OK, so they are differentiated. You know…

MS: They are differentiated. There are semiconductors and then there’s memory. But the food chain kind of includes a little of both.

CR: OK, and there are times in the cycle when some perform…

MS: 100%

CR: And presumably your decision making will also depend on pricing and valuation.

MS: I mean, not only pricing from a stock price perspective, but also from a market price perspective where if there is a shortage and allows semiconductor companies to price more aggressively versus if they have excess capacity where they may end up having to cut price. Because, remember the constant here is the production tends to be a continuous process, not a batch process, meaning that they run these fabs continuously because shutting them down is really expensive and really complex. So, you know, there is definitely an element of supply and demand here, that really is pervasive throughout the sector.

CR: And what about sort of further down the supply chain? I mean, you've got something like ASML, which designs the machines that design the chips, But then, presumably you also have other smaller companies all the way down the supply chain. So, I mean, what sort of things are you finding there?

MS: They're just so many interesting companies within the semiconductor space that really aren't the household names. For example, we own a position in a company called Monolithic Power, which has really been a share gainer each cycle. What they basically do is help manage the power associated with whether it's a data centre or whether it's an automobile. Here again, they have a manufacturing process. They outsource their manufacturing. They’re really an interesting example of a company that has a very close relationship with our customers and that, not only do they outsource it, but they actually control the manufacturing process. So imagine, I guess the analogy would be. It's your factory, but I'm going to run the line. I think that's a good analogy there. Companies like that, similar to Monolithic Power - they really exist throughout the semiconductor food chain, and our job is really to go out and figure out those companies that we think have the ability to not only take share, but also become more important to their customers, cycle after cycle.

CR: OK, And I mean you hold a number of the sort of mainstream semiconductor companies in the portfolio, But I wonder if you could give the case for the whole kind of semiconductor market and holding, sort of, exposure today?

MS: I mean, I think the case really is, and similar to some other sectors in technology, just an increasing relevance cycle after cycle, So, going back and looking to see, you know, how much looking at a bill of materials, potentially in a given thing, like a data centre, like looking at all the costs associated with that data centre and how much of it has semiconductor content in it today, versus five years ago. I mean, remember, you can have, lots of semiconductor in things like communication equipment, right? So, it really is what I think of as kind of this core ingredient to so many other sectors and technology. But one can make the argument that this is a space, you know, in a lot of ways similar to software, in that just increasing relevance slash use - you know, when I say relevance, I think use. I think this has similar characteristics and what we've also seen is because it's more cyclical the valleys have been shallower over time, and the peaks have been higher. So, net-net, there's the challenges associated with the down cycle have been, you know, less dramatic than they used to be.

CR: OK, and then, semis have also become a bit of a geopolitical football. You know, there are concerns over the dominance of Taiwan and that's kind of a disputed territory. And then, obviously you've had the Chips in Science Act in the US and then Europe's now got its own Chips’ Act. How does that play out in the market? And I mean, does it interfere with the market? And the companies benefit from that? Or…

MS: Well, they’re definitely beneficiaries of, you know, this desire to have manufacturing not just in Taiwan, where TSMC is the leading manufacturer and they've been very difficult for a competitor to surpass. And that really hasn't happened at this point, But I think that the beneficiaries are that if countries like the United States and the United Kingdom want to be less dependent on a global supply chain that has vulnerability to it - and I think we would agree that, you know, Taiwan has some vulnerability to it, given their neighbour - the desire to have more manufacturing locations is really beneficial, not only to the design companies, whether it's a software design company that specialises on chips, whether it's equipment company, whether it's a provider of wire bending - whatever those key ingredients are, need to be replicated. So that really expands your market opportunity, if I use your example for, ASML, as opposed to selling, you know, a lithography only in potentially, Taiwan. They will now need to sell it in Taiwan, in addition to you know, some place in Europe and in the United States.

CR: And just finally, I'm wondering if there are any risks to the long-term growth of semiconductors. There’s been a bit of a wobble on TSMC and ASML recently. I mean, not really enough to suggest some permanent impairment. But you know, just a slight nervousness that the growth trajectory might not be as strong as they think.

MS: Well, I mean, like every sector we invest in, and it's something that we're very cognisant of with the trust There's always some risk associated, right? I mean, you know, if you had told me four years ago, and we were sitting here in February that we’d be, you know, in a lockdown in March, you probably would have thought I was crazy, right? So, there's clearly risks associated with what we do. Our job, and my job specifically as manager of the Trust, is to make sure that the portfolio is diversified. Even diversified within the sector we're talking about, and that's not just from a subsector product perspective, but that's also from a kind of risk perspective, whether that's high growth companies, whether that's GARP companies and whether that's value companies. We really want to make sure that we think about that type of risk profile. So, yeah. I mean, I do think there's risk. I also think that from a long-term perspective, and we really encourage our shareholders to think about holding periods that aren't numbered in quarters, but rather years, I think that this is a really strong, you know, core technology sector that is just doing really interesting things. So, I mean, I'm constructive about it long term, you know, there will be wobbles - I think was the word you used, or wiggles - I'm not sure which one but, there will be both of those along the way, and that's just part of the job. And you know, here again, our job is to really think about long term. What are the businesses we want to own?

For clarification purposes, there are a number of terms I used today that I wanted to give you some rough definitions on. DRAM and NAN, both referenced on this podcast, refer to storage types and GARP, which is ‘growth at a reasonable price’ was also referenced.

CR: Brilliant. OK, we'll wrap up there. Thank you so much, Mike, for all those insights today. For any more information, please do go to the website Allianz Technology trust.com. And thanks so much for joining us today.