The post-pandemic technology landscape

CR: Hello and welcome to Silicon Valley Byte Size, an update on the tech sector from the Allianz Technology Trust. I'm Cherry Reynard. For our latest episode we're going to be looking at the post-pandemic landscape for technology and with me today is manager on the trust, Mike Seidenberg, to discuss how the sector’s changed over the past two years and how that's reflected in the portfolio. So welcome, Mike.

MS: Nice to see you again.

CR: Now the pandemic seemed to accelerate a lot of the trends within technology. So, from e-commerce to homeworking to delivery services.  Which of those have endured into the post-pandemic landscape and have there been any notable beneficiaries?

MS: Yeah, it's a great question. Look, I think the pandemic taught us a lot of things. I think as both businesses and consumers, what we really learned was just you need to meet your customers digitally. And that's such an important lesson from the pandemic, this kind of idea of taking friction out of whether it's a business-to-business sale or a consumer-to-business sale. The pandemic really taught us how to really focus on applications and services that really are digital. And I think once you get used to that, that doesn't go away. You don't revert back to calling a store and waiting for somebody to go check a size of a shirt. You continue to use that application from the retailer, in that example.  I think the pandemic also really taught businesses, just the relative importance of movement to the cloud. I think it was already top of mind, but I think that when you have a scenario, when you literally can't get your IT people into that data centre to make those changes, I think that that pressure that you've been feeling from the board of directors, really, I think there becomes an ‘aha’ moment for CEOs. We do have to be on this transition to the cloud and it does really give our business the agility that in this case, you had to have, right? I mean physically you couldn't do that for a period of time. So, I think that the notion of digital, cloud, and the last thing I was going to say is cyber, which is really as our lives become more digital, whether that's a business or whether that's a consumer, we really become more vulnerable from a cybersecurity perspective. And I think that was happening before the pandemic. I think that if you just think about it from a math equation, as you become, as these businesses become more digitally oriented, they become much more present from a mathematical perspective as points on a network, and therefore you have to think a lot more about cybersecurity. So, I think there were some key takeaways from the pandemic around those three major points. And I think that to varying degrees, I think that that has persisted in the world we live in today. And I don't think it's going to go away. As I said, you don't unuse your iPhone usually. You usually use it for more things if you think about that as an example.

CR: So one of the biggest trends to emerge post-pandemic has been artificial intelligence. I mean, where do you think we are now in the adoption cycle for AI?

MS: Yeah, I mean, I think that there aren't many businesses that are not considering how to at least trial it or think about how do they apply it. So, I think that we need to separate out testing and development from actual production. We are really in the early phases of companies saying, wow, how can we apply this to our business? What does this mean for our customers, how can we make it better for our products and services? And this is one of those technologies. And by the way, I'd kind point to an individual like Bill Gates who kind of called it out as something similar to the internet. And he's not somebody that I'd consider to be fad-oriented. He tends to speak very deliberately and very purposefully. I think this is one of those technologies that cuts across all verticals and their use cases. And it is something that businesses are really excited about. They're putting really good people on these projects. There's board-level awareness. So, I think it's something that's early days, but has the ability to really change how people do their jobs and how companies interact with various products. So, I'm very encouraged. Look, I think like a lot of things on Wall Street, there'll be some companies will be overhyped and be perceived winners, some companies will be perceived losers. And you just have to remind yourself and think about what is the right risk-reward for a particular company as they apply this or as they use this type of product or this type of technology in their own, either internal or external. So I just caution people not to get too excited or too upset one way or the other. And we've seen some great examples of that earlier in the year, stocks that were perceived losers just getting really walloped in the stock market. And now here it is less than a year later, and now people have decided that they're actually the beneficiary. So, I think that our job as a team, it's something we really focus on is just to think about risk reward and to be as levelheaded as possible because you can get fooled in the short run vis-a-vis stock movement and it's something we really remind ourselves to remember the game we're playing for our shareholders, which is really long-term capital appreciation vis-a-vis our investment process.

CR: OK, I won't ask you to pick your favourite AI stock then. Now, if we talk about the higher interest rate environment, because that's obviously been a big feature of the past couple of years as well. I mean that's dented the valuation of higher growth shares. Has there been a part of the portfolio where that's sort of hurt the most for you and have you adjusted to that new environment?

MS: Yeah, I mean as interest rates went up, obviously it really impacts higher growth companies. Just if you think about it just from a discounting perspective, I think that we trimmed some names as interest rates were going up. But I think that the interesting thing here, and I've talked about it on previous podcasts early on as interest rates went up, we went through and talked to the companies as we do regularly as part of our process. And there were some companies that a couple of years ago opted not to change their plans due to higher cost of capital. And that was just not something we could underwrite as a manager, and those companies we sold. I think we're living now in an environment where rates are higher, but the slope of that curve is really important for businesses to basically plan how they run their own business. And that appears to be flattening, albeit at a higher rate than we've seen. And I think that allows companies then to execute their own business plan. And we've seen better results. I mean, we've seen better results from some of these growthier companies in ‘23 than we saw in 2022. And I think that's a function of a couple of things. They are better prepared in that they have cost structures, they're probably running more efficient. And it's a little training for a sport. I mean, I imagine, and my brother played soccer, but I didn't play. I imagine to go out and run on a pitch for 90 minutes probably feels pretty miserable if you haven't trained. Yet, if you train for a year, you're probably much more comfortable. And I think it's similar for businesses. You get used to a more challenging environment, you tighten your message, you really figure out where are those areas of spend and you are able to execute and not everybody's able to execute, which is why I think that our approach to the portfolio has really been one more around a rifled approach of really figuring out businesses we can own that can do well in a higher interest rate environment and they're going to be some winners and losers, but that's the stock market. But I feel pretty good about the names that we have in the portfolio because they are being used very effectively by their customers. And here, again, going back to that kind of must-have versus nice-to-have, it's still a fairly tricky market for nice-to-have, but I think must-have products, you can see it in the results. And I'm encouraged, I mean I think I probably said the same thing last year, but I think ‘24 has the opportunity to be a nice year for some of these growthier companies because you can't hold off spending indefinitely because the demands from your IT user or demands from your users remain fairly consistent in good or bad economies. So, I'm encouraged by what I've seen. I think it's taken us longer than we thought, and that's obviously a little bit frustrating, but I think we're much closer to some of these spending spigots opening a little more.

CR: Yeah, absolutely. I wonder if we can just finally wrap up by looking at how you've reshaped the portfolio over this period to sort of reflect the changing environment. So, give me a big picture on that.

MS: Absolutely. So ‘23 was a year of a fair degree of pain, sorry, ‘22 was a year, a fair degree of pain. I'm already so excited about… I bumped myself a year forward. I think that the portfolio really kind of tried to find safer names in a very uncertain environment, and it was a tough year. I think in ‘23 where obviously we've seen some absolute performance recovery, I feel like we've really been able to be laser focused on certain segments within the broader tech industry to really try to monetise those and really understand the companies that are going to be successful. And I feel good about it, I think my biggest kind of frustration or not frustration is I kind of thought things would've been a little bit ahead of where they are now, but it's taken a little longer. And I think some of the reasons why we haven't seen as robust a bounce back in tech spending is just we've just had a lot of events that no one could have predicted, kind of impact us this year or over the last - not this year - over the last 12 to 18 months. So, I feel like as companies learn to navigate arguably tougher environments, the value proposition of their products remain fairly similar. So, I feel that the portfolio at the margin has a little more growth in it right now than it did a year ago. I think that with a little more clarity, I think that that probably continues to tilt that way. I think that we're seeing a nice rebound in some of the commodity semiconductor products. I still think that that's such an important industry. So overall, and obviously there's the mega caps which we own, but materially under benchmark. I think that those probably continue to be sources of funds as we enter ‘24, if ‘24 plays out the way we think it's going to play out. But here again, I go back to the notion of really wanting to make good long-term decisions for our shareholders and really working diligently with the team to try to figure out those businesses we want to own over multiple years. 

CR: Okay, great. We'll wrap up there. As always, if you have any questions on the trust, please do go to the website, allianztechnologytrust.com or contact one of the sales team. Thanks again, Mike, for all those insights today, and thank you all for listening.

MS: Have a great day. Thanks.