Lead-Lag Live

Inside AI: The Future of Technology Investments

• Michael A. Gayed, CFA

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Technology isn't just a sector anymore—it's the driving force reshaping every industry. Whether companies are creating technology or adopting it to avoid disruption, understanding this transformation is crucial for investment success.

Columbia Threadneedle's tech investment approach stands apart through its disciplined focus on three complementary buckets: moat-type businesses with sustainable competitive advantages, secular growth themes identified early, and value opportunities where market prices underestimate business quality. This balanced strategy has consistently generated top-tier returns, with their technology portfolio ranking in Morningstar's top third for 8 of the past 12 years.

What truly distinguishes their approach is patience. With just 7% annual turnover, they allow investments in companies like Microsoft, Apple, Amazon, and NVIDIA to compound over many years. This long-term perspective proves especially valuable when navigating tech's inherent volatility. As portfolio manager Rahul explains, even AI—their largest investment theme since 2016—has experienced two 20% pullbacks in the last 18 months alone.

Recent earnings revealed tech's continued strength, with mega-cap tech growing earnings 28% versus just 9% for the remainder S&P 493. Cloud infrastructure spending is projected to reach $390 billion this year, nearly nine times higher than a decade ago. While tariffs pose the most significant current risk, particularly for semiconductors, the team's diversified approach and deep research capabilities help manage these challenges.

With technology now representing 31% of the S&P 500 and nearly half the Russell 1000 Growth Index, investors increasingly recognize the value of specialist management in this complex sector. Columbia Threadneedle's recently launched Select Technology ETF (SEMI) offers another vehicle to access their expertise alongside their established funds.

Ready to enhance your portfolio with professional technology exposure? Visit Columbia Threadneedle's website to explore their SEMI ETF and discover how their research-driven approach can help navigate technology's opportunities and challenges.

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Speaker 1:

Appreciate another watching this episode of Lead Lag Live. I'm excited for this conversation with the good folks at Columbia Threadneedle, one of my clients. This is a sponsored conversation by Columbia Threadneedle. Got me touching a lot of different things with people that really know the ins and outs of thematic investing tech investing going to get really into the weeds here. So let's get right into it. My name is Michael Guy, a publisher of the Lead Lag Report. We got three very strong individuals here from Columbia Threadneedle. I'd like Mr McAndrew Jay to introduce himself. Talk about his background real quick.

Speaker 2:

Thank you very much, michael, and good afternoon everybody. My name is Jay McAndrew, head of ETF sales at Columbia Threadneedle. We're very excited about today's talk. Just a couple of quick things to open up. Number one as a franchise, we've crossed the $5 billion mark. We're having tremendous success with our REX R-E-C-S ETF, but today we're here to talk about a real strength of Columbia Threadneedle, which is technology investing, and specifically highlight not only our SEMI ETF, which is the Select Technology ETF, but also our Global Technology Growth Fund. And, michael, just to put this in perspective, rahul, who is going to be speaking today, is the portfolio manager of most of the assets in my portfolio, so if there were personal conviction, that's where we're going to get started today. So very excited and, as always, michael, we appreciate the partnership. We're also joined by Paul Shelton, who works with Rahul in supporting our growth solutions, and he will share some thoughts about what's on investors' minds.

Speaker 1:

So that's and Paul. I'm going to get to you in a second here, but I want to get right to Rahul, because if you're having that kind of responsibility, you've got to have a very strong CV. So let's talk about your background. What have you done throughout your career? How'd you get to this point?

Speaker 3:

Thank you, michael, and I appreciate the opportunity. So I actually started my career in technology in 1994 as a sell-side analyst with JP Morgan, covering computer hardware. After that I had the opportunity to move to the buy side and I worked for a gentleman by the name of Richard Fullerton who became a great mentor for me. He actually showed me and demonstrated how to really invest in businesses over the long term and think about stocks in terms of businesses. What was also unique about my background when I worked for Richard was that I was a short seller. So I was actually a short seller during the 1999-2000 tech bubble and learned a lot during that period. After that I worked for a couple different hedge funds and then I joined Rubico Boston Partners for seven years, where I learned the value side, and then I joined Columbia Threadneedle Investments and I've been here for 13 years now, based in San Francisco, running our global technology growth strategy.

Speaker 1:

And before I go back to you, rahul Paul, a little bit about your background. And I got to say it must be refreshing to actually work with somebody who's a legitimate investor.

Speaker 4:

Yes, I'm very privileged to work with plenty of great investors here at Columbia Threadneedle and, as Jay said at the beginning of the discussion, certainly technology is one of our pillars of strength. So in my position, I get to learn something new every day from the people who are doing the best in the business at it. So a little bit about myself. I've been with Columbia Threadneedle since 2006. I've been primarily within the product role, but for well over a decade as a client portfolio manager, working on a variety of strategies, whether it's technology, small cap, growth, investing so I get the view of a lot of different asset classes and I can say technology has always been one of the favorite topics of every advisor that we've had the privilege of talking to.

Speaker 1:

So I want to get into big picture, rahul, your investment philosophy, and I want to approach this from a different perspective than just what's the investment philosophy of the firm. When I think about investment philosophy, I think that the philosophy changes sometimes by sector and what you're looking at. I think for most people, their investment philosophy is momentum up into the right. It doesn't matter where it's coming from. It often comes from tech. But given your experience on the short selling side, on the investing side, everything you've mentioned as far as your background what exactly is your investment philosophy and how is that specific to tech?

Speaker 3:

Great. I really appreciate the question, michael, because this is foundational for us. So our philosophy has been to build a global, diversified strategy that offers a balance of secular growth opportunities and what we call value opportunities, and this consistent philosophy has really helped us generate strong risk-adjusted returns over time. And what I want to emphasize is that this is the investment philosophy we put into place in day one, and we're very process-oriented in our approach. So, just stepping back, our number one criteria is to own great businesses in our strategy, regardless of market cap or geographic location. So what does this actually mean? We're looking for sustainable competitive advantages, high barriers to entry, high barriers to scale, strong ROA, strong ROE, and we're looking for the most innovative firms with the best management teams. We really gravitate to what I call moat-type businesses, which could come in the form of cost advantage, high switching costs, strong IP, durable brand, global scale pricing, power, network effects and a durable platform, and we really try to avoid businesses that are in secular decline and weak balance sheets. So, in terms of portfolio construction, what we've done is put this into three buckets moat-type businesses, secular growth themes and value opportunities and the common thread is a focus on good businesses and good management teams. In terms of moats, I just described the business attributes earlier.

Speaker 3:

Names that we've held for over a decade include Microsoft, apple, amazon, netflix, avago, visa, mastercard, booking and NVIDIA. We are long-term investors with a low turnover it's actually 7% last fiscal year which has created good tax efficiency and compounding for our clients. We're also thematic investors, so the part of this is, if we can identify a theme early, ride the penetration curve over time. This has created tremendous shareholder value for our clients. Some of the themes we've been invested in include cloud, cybersecurity, digital transformation, defense tech, autonomous driving and AI. The last bucket is what we call value opportunities, and here we own companies where the valuation of the companies are cheaper than the overall strategy and we believe the inherent value of the business should be higher than the current stock price. We tend to avoid businesses that are in secular decline.

Speaker 1:

Paul, when it comes to talking to advisors and institutional investors, are they still focused on the AI theme? Are there other themes within the tech space that you're hearing more buzz about?

Speaker 4:

Absolutely so. Ai is still on the tip of every investor's tongue and by far the largest theme within the strategy. I know we're holding on to greater detail about it, but we're not new to AI investing. This has been our biggest theme in the portfolio, going back to 2016. So when we think about the themes that Rahul invests in and he says you know we identify them early and having the patience to let them move through that penetration curve, you know that's a really important thing and I think that that's one of the benefits of active management, where you know we're able to see some of these emerging themes that are coming into the market and participate and build those stories into the portfolio before a lot of other investors recognize that the change that's going to occur from that level of innovation.

Speaker 1:

On that point, rahul, of emerging themes, talk me through a little bit how you identify themes that are emerging, to be early on the themes but then, given the low turnover, is it more a function of trying to overweight the companies already in the portfolio that are looking to more lead into those emerging themes? Talk me through how that looks.

Speaker 3:

Yeah, michael. So this is a team effort. When it comes to resources, our team is very fortunate to be supported by many talented investors at Columbia Threadneedle Investments, and we have a deep and experienced bench of analysts that are based in Boston and New York. And what I love about our central research efforts is the collaboration across sectors and globally, which helps us identify these themes. So I actually was just in Boston recently and spent a ton of time with our research analysts. Let me give you an example.

Speaker 3:

So Dave Egan, who's our semiconductor analyst, puts out a monthly piece on all the different things. He's reading podcasts, he's listened to his notes for management meetings. So our research analysts really help us try to identify these themes. And then my job as PM is to say, okay, what inning are we in this theme, and then not overstay our welcome. For instance, cloud is a theme that we've been, that we identified many years ago, but we're still fairly early in the penetration, believe it or not. You know, ai is a theme that you know has these pullbacks. It actually has had two 20% pullbacks in the last 18 months and we've stayed with this theme over time because we know it's not going to be up and to the right, but with the help of our central research analysts as they dig into some of the use cases of AI, et cetera. Our conviction level remains high.

Speaker 1:

I always love that analogy of the innings. Innings presumably you can see in earnings. So let's talk about earnings for a bit here and the various themes, that sort of intersection, any sort of interesting insights as far as recent earnings in some of these companies, anything in the earnings that would suggest for late innings, early innings for certain themes.

Speaker 3:

Yeah, we just got through the bulk of Q1 earnings season. Going into Q1, there was massive uncertainty as worries about tariffs and trade wars were pretty big overhangs on the technology space Over the past few weeks. At a high level we've seen strong earnings from the group with some pockets of uncertainty depending on the end market or consumer cohort. There were a few clear standouts. Megacap Tech reemerged as the driver of earnings growth in the Q1 earnings season, excluding NVIDIA, which we report on the 28th of this month. Q1 earnings for large tech stocks grew by 28% versus 9% for the remaining S&P 493. A couple of big standouts were Cloud CapEx we heard from all the hyperscalers that actually reiterated their CapEx and Meta actually increased their CapEx. Just stepping back CapEx now for total cloud is expected to hit $390 billion this year, up almost 9x from 10 years ago. Some of the other standouts were very strong results from some of the other leading software companies such as SAP and ServiceNow.

Speaker 3:

In semis we saw strong earnings from Taiwan, semi, ti, microchip and Lam Research. Both TI and Microchip actually are calling for a bottom of the cycle, which was very interesting. We did see mixed results from Intel, qualcomm and Samsung. Within travel, airbnb booking and Expedia called out some US traveler weakening. Airbnb cited Soft inbound into the US from Canada and booking said higher and hotel demand actually is more resilient than some of the lower star properties. Expedia just last week did say US demand was soft, driven by declining consumer sentiment as they saw pressure on some of the key US inbound corridors. In payments we saw very good results from both Visa and MasterCard, pointing to a steady consumer, while Block underwhelmed due to cash app and Bill cited an uncertain spend environment for small and medium-sized businesses.

Speaker 1:

You used a good word we should focus on, which is cycle. It's the bottom of a cycle. How should we think about the cycle for tech in the context of tariffs and just what we've seen? At least kind of more short-term volatility?

Speaker 3:

Yeah, so, as I said earlier, one of the biggest overhangs on technology sector has been the tariffs.

Speaker 3:

And do the concerns for tariffs outweigh some of the cyclicality that we're seeing in some of the businesses? The two areas where the cyclicality of tariffs has maybe taken a bit of a toll on is perceived in semiconductors, which actually was the largest underperforming sector within technology and some of the e-commerce names. So if you look at Amazon, for instance, it had actually been one of the biggest underperformers of the MAG-7, going into some of the relief we saw over this weekend from Switzerland. So the overhang of tariffs is real and if we think about the biggest risk in the technology sector, I would say that tariffs would have to be the one. And then, just if you look at the counterpoint to the cyclicality that you asked about, software is considered less cyclical and, believe it or not, in the stretch coming into this tariff relief, we saw software had its best 10-day stretch in the last 15 years for large-cap software and that was driven by some of the considered more asset-light business models, somewhat more recurring and somewhat more immune to tariffs versus the semiconductor stocks, which are more cyclically exposed.

Speaker 1:

Paul and maybe Jay too on this. I think it's worth sort of addressing investor sentiment and nervousness, right, because I do believe that when there is concern around volatility, tech becomes sort of a target because it's been such a tremendous performer, right? So as you talk to allocators, advisors, wealth managers for those that are leaning more towards the bearish side of the asset class equities what do you tell them about investing in tech?

Speaker 4:

Yeah, it's a great question, Michael, and one of the things I think we have to be candid with is that technology is one of the more inherently volatile areas of the market, and so when we approach tech investing, we do it through that balanced approach, and diversification is really important because we know that a lot of investors will always come to the table when it's on top of the market, but with that volatility, unfortunately, they can get shaken out and move to the side, and a lot of times these pullbacks and these periods of volatility, while they're always scary, have historically set up for some of the better periods of performance after the fact, because, while the stories are in the news cycle and you hear about it, the quality of the better periods of performance after the fact Because, you know, while the stories are in the news cycle and you hear about it, the quality of the business model tends to get overlooked. I mean, these companies are generating earnings, they have the best balance sheets, good return on invested capital, high margins. So, as you know, one of the things I always think that's interesting is is a lot of, you know, people think about tech as a traditional sector, and I think that that's kind of the wrong way to think about it. Tech is spiderwebbing into every major sector and industry and as we continue to progress and we see these technological advancements whether it be AI or whatever else is next down the road either you are disrupting the market by creating technology, either you are disrupting the market by creating technology, or, if you're a legacy player and you don't want to be disrupted, you need to invest in technology. So you know, as Rahul was mentioning, you know we're very long-term patient investors and, from an investor standpoint, even when we get these pullbacks and these bouts of volatility, that consistency is really, really important.

Speaker 4:

And my favorite stat that I always like to share about our portfolio is that you know, under Rahul's leadership, we've been running the portfolio since July of 2012. We've only had one year out of the 12 where we are below median in Morningstar for our category rankings. Out of the 12, where we were below median in Morningstar for our category rankings and that year we were 53rd percentile and we generated nearly a 50% return. Eight out of those 12 years, top third. So the reason why I say that is to benefit from these long-term gains in tech, want to be on the right side of the fence. So diversification, patience and having a real process that looks for these quality business models, you can ride through some of these periods of volatility and hopefully generate significantly better returns on the other side. Michael, I would just add.

Speaker 2:

from an investor behavior standpoint, I think investors are behaving better and if you just look at the last six years, they've had an experience with COVID, where tech stocks took a hit but, due to stimulus, rebounded quickly.

Speaker 2:

And they've had an experience we saw tech stocks get hit with rising rates, say back in 23, as that long duration asset got a little bit less worthwhile but bounced back in 24. And now with the tariff overhang we've also seen them go down but come roaring back. And you know most of the financial advisors that we speak with absolutely understand technology is the largest sector. Throughout their careers they've seen it grow to be the largest sector. Now you have technology plus communication services makes it even bigger and it makes that third sector in the S&P, you know, a distant third because the great growth of these companies.

Speaker 2:

But I do think that many people feel that the technology that they're seeing and using, at least in some capacity, comes to life through these companies and again, I just knowing what destroys wealth over time. I think the most critical input to that is bad behavior and I think the good news is, with the corrections we've seen in technology. To Paul's point is that when we do see a correction. The swift bounce back keeps people in the frame of mind that they want to stay invested in these great companies for the long term and create wealth for themselves and generational wealth for their family.

Speaker 1:

Rahul, talk me through self-discipline risk management. When you're managing to mandate, obviously you've got to stick to the themes that you're putting out there in the fund and the prospectus. But how do you mitigate volatility and risk?

Speaker 3:

Yeah, so we actually work very closely with our risk group. Internally at Columbia Threadneedle Investments we have quarterly risk meetings. We have a budget of what's called a contribution to tracking error, where a specific name cannot exceed a specific amount. So risk controls is paramount in our process. Other ways, other clues we get. You know I talked about my experience as a short seller that really during that time we were hyper-focused on balance sheets. That's something actually Warren Buffett talked about at his annual meeting just, I believe, a week or so ago, where you know focusing on the balance sheet is really important. You can see clues where companies may be hiding potential earning misses, whether it's in prepaid expenses or capitalized software ballooning, dsos or inventory slowing. So that's part of our risk management is really paying attention to the balance sheet and cash flow statements. So those are just a few examples, michael.

Speaker 1:

Let's talk about that ranking point that Paul mentioned. I mean, as we know, there's a bunch of ways of getting access to tech, to AI. What is it about the secret sauce at Columbia, threadneedle or Hulu, the way you're managing these portfolios that results in that consistency of relative strength against other competitors?

Speaker 3:

Let's see the secret sauce. Would one have to be just surrounded by the team that we built here at Columbia Threadneedle Investments? I get support globally from, as I said earlier, so many talented individuals, whether it's in Boston, new York or Europe. There's so many talented individuals, whether it's in Boston, new York or Europe. We host earning callbacks with all the management teams. I'll give you a couple examples. Just in the past few weeks, we've had callbacks with Apple's CFO, microsoft's IR, asml's IR out of Europe. These are really important. I can't emphasize enough getting in a seat at the table with these thought leaders. When I attend tech conferences, I typically meet with 40 to 50 C-suite companies over the course of three to four days because of the relationships that Columbia Threadneedle investments have developed over time. So I cannot emphasize enough the team effort that really helps our success. Uh, here at Columbia Thread and Yield Investments.

Speaker 1:

Paul, you had mentioned this point that, um, tech's in pretty much everything, right? Um so when I hear that, my mind goes to well, why even bother with, you know, a sort of core S&P like uh portfolio? Why not just go into tech? Because tech is increasingly becoming more than just tech. Everything is tech. At this point, ignore you. How do allocators think about using tech as an allocation play?

Speaker 4:

It's interesting and I think that that over the last, you know, three, five, 10 years has shifted, because people were kind of tactically using sectors and what we've seen is that the persistent level of growth within the technology and, to your point, the diversification that we're seeing across, whether it's semiconductors or software or payment platforms you're finding all these different companies that are mature to very high growth.

Speaker 4:

You're finding all these different companies that are mature to very high growth.

Speaker 4:

And when you just step back and you think about the S&P 500, 31% of the S&P 500 is in tech, by a gig sector and even within growth, the Russell 1000 growth it's around 47%. So I think one of the stories and the ways that we've been working with a lot of advisors is if your bogey is to beat these broad-based indices and you're going to have a bulk of that within tech, this is probably a place where you want to use a specialist. I mean, if you need to have 30% of your portfolio and beat it, having a dedicated tech offering in conjunction with your other portfolios whether it be passive, other managers I just see that that's seeing more and more adoption and that's one of the reasons why we're so excited about the fund and also, you know, we just recently transitioned our new active ETF at the end of February so we're trying to bring more ways for people to bring this you know, intellectual capital and really that research discipline within tech into their portfolios and really that research discipline within tech into their portfolios.

Speaker 1:

And, jay, I know you and I have talked a lot about the research behind Rex, as you mentioned, and other products. Maybe you should talk broadly about Columbia Threadneedle and the offerings. I think it'd be good to give the audience a sense of sort of suite.

Speaker 2:

Well, absolutely. As I mentioned at the start of the call, like any manufacturing business, we're just in the business of manufacturing portfolios and client outcomes. We want to take what we're really good at and offer it in different packages at different pricing, so investors can choose the way that they want to access Columbia Threadneedle Investment's investment intensity. And so we've had really strong success over the last couple of years, with accelerating growth. As I mentioned, our franchise is now over $5 billion. The lead of that franchise right now is Rex, which is a research-enhanced core solution. The simple tagline for Rex is that we like to Windex the index. So we take the Russell 1000, we spray our Windex research on it and we wipe away any stock that is rated hold sell or strong sell, and that's resulted in a five-star ETF at 15 basis points.

Speaker 2:

And, as you know, we've done a number of calls on allowing investors to be more precise in their discernment around investing in emerging markets. So we have XCEM another billion dollar fund, emerging markets. Core X, china, which allows you to choose your own China in terms of magnitude and type. And then we've always talked about demographics. Most EM investors want demographics and the tagline now is really can you do it in a democracy rather than a dictatorship, and we have a five-star Indian consumer ETF ticker, inco, and so those have been our lead horses over the last 18 months.

Speaker 2:

But we're really excited because of what we just talked about SEMI. S-e-m-i is the ticker to the Columbia Select Technology ETF and, as I mentioned to start, we have a great growth franchise and technology franchise and Rahul is at the head of that, and so, when we were looking to take another initiative and launch an extension of a strong brand within our firm in the form of an ETF, semi is a natural fit. So I would expect that Semi is beginning its onboarding process at a number of platforms available to most, and you're going to see strong growth out of SEMI.

Speaker 1:

And the website where people can learn more about SEMI.

Speaker 2:

I would just look at Columbia Threadneedle, semi or type in Semi ETF and look for Columbia Threadneedle and you'll find it right there.

Speaker 1:

Appreciate those that listened to this short and sweet podcast. I think a lot of interesting things were said here, certainly on the tariff and volatility, integration with tech and allocation. Based on what Paul and Rahul were saying here, make sure you check out Columbia Threadneedle's various products, learn more about Semi and I'll see you on the next episode of Lead Lag Live.

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Michael A. Gayed, CFA

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