-Discover generative AI's future in Canada's economy and businesses and how it can impact every Canadian's life. -Learn what companies need to do in order to grow, thrive, and succeed in an environment using generative AI. -Understand how AI in finance is a powerful tool, but should be used in conjunction with other trusted resources.
Artificial Intelligence (AI) has been a popular topic in recent years, especially with the advancement of generative AI and the creation of tools like ChatGPT. People and businesses alike are exploring ways to integrate the technology into our daily lives from education and services, to businesses and investing.
To look at the growing opportunities for generative AI in finance, Robertson Velez is here to join us on Smart Advice. He is a Portfolio Manager with CIBC’s Global Equities team responsible for stock selection, portfolio construction and risk control for the Technology and Communications sleeves of the Renaissance Global Technology Fund and CIBC Global Technology Fund. He also has a 12-year career in computer engineering. This makes Robertson uniquely qualified to help us better understand the impact of AI on finance and beyond. He dives into how AI has been used in the past while identifying opportunities for the future.
Join us as we discuss the growing use and potential of generative AI on this episode of Smart Advice.
Resources
· Read the CIBC Asset Management Market Spotlight on Generative AI
· Watch Generative Artificial Intelligence: What investors need to know
· Listen to Robertson Velez on the Advisor To Go podcast: Identifying investment opportunities in AI
· Learn more about the CIBC Global Technology Fund
Carissa Lucreziano: Welcome to Smart Advice, a podcast bringing you financial advice, investment strategies, and economic trends. I'm CIBC’s financial advice expert, Carissa Lucreziano. And today, we have an episode I know you're gonna find very interesting. Everything on the topic of AI and investing.
We've been hearing a lot about artificial intelligence. Everywhere you look, there is an abundance of discussion forums, insights and forecasts on the ongoing and future impact and benefits of AI. People are eager to gain a better understanding of how this technology can and will be leveraged to transform business operating models. The way it will transform the way we invest, and impact our day-to-day lives.
One of the overarching concerns with the future of AI is how it will be integrated in a responsible and ethical framework. But AI isn't a new technology. It’s been around since the 1950s and it's already embedded in our day-to-day lives. We're used to it as acting like our own personal assistant. Think of Siri and Alexa and recommendation systems on streaming platforms like Netflix and YouTube.
But the new aspect that has emerged is generative AI, which has the potential to have a much bigger impact and might be more difficult to wrap our heads around. In simplified terms, it's AI that is capable of actually creating brand-new content like text, images, or other media. The most talked about example of generative AI is chat GPT, the hot topic chatbot tool that can respond to questions and prompts to create a wide variety of written content, like articles, essays, social media, posts, emails, and much, much more.
Generative AI has the potential to improve efficiency and processes and to assist companies in becoming more agile. And there is a lot of money to be made in AI, as seen with companies like Nvidia. So not only are Canadians interested in how to integrate AI into their day-to-day lives. They're also very interested in it as an emerging investment opportunity.
So joining me today about this fascinating subject is Robertson Velez, Portfolio Manager with CIBC Global Equities. He manages a Global Technology Fund, which isn't a surprise considering his unique background and expertise in two very distinct worlds, computer engineering and finance. He spent the first 12 years of his career designing semiconductor chips in the computer graphics industry with AMD, formerly known as ATI Technologies.
He then pivoted to the world of finance. He spent the last 15 years on the buy side covering technology stock as an analyst and now as a portfolio manager. Robertson covered a lot of ground in educating the Canadian investing public at length on opportunities to invest in the AI sector in recent podcasts, videos and publications. There's no one better to unpack this extremely interesting subject with me.
Robertson, thank you so much for being a guest today on our podcast. I can't wait to dive right in.
Robertson: Thank you, Carissa. Thanks for having me.
Carissa: AI is new for many of us but this has been your focus your passion, your career for many years. You wrote a very insightful piece on investment opportunities in generative AI that can be found on cibcassetmanagement.com, titled Market Spotlight. You were recently a guest on the Advisor To Go podcast, you've hosted some videos on what investors need to know about generative AI.
I have so many questions for you today but I wanted to start off to hear about your story. It's extremely interesting. You have an incredible career. How did you build your career in this space?
Robertson: So let me start with a bit of a background on myself. I spent the first half of my career, as you said, as a semiconductor design engineer, designing graphics chips at ATI Technologies before they were acquired by AMD. These are the same graphics processing units that today are now powering the AI chips used in the industry. So I feel well-qualified to talk about it.
So after a long career in chip design, I pursued an MBA and switched to a career in finance, where I spent many years analyzing and investing in technology companies, first as an analyst and then as a portfolio manager. So my career has really been this blend of technology and finance that I think makes me uniquely well-suited to managing a technology portfolio.
Now we are at this junction where we are now seeing a lot of interest in artificial intelligence, particularly in generative AI because of the advances that it's made over the last decade in terms of advancing the capabilities of that platform and what we can now do with AI, with the technologies that we have. I think it's a very exciting time to be looking at the technology and the companies behind it and finding opportunities for investment.
Carissa: Yeah, and the time is now. I was reading a wealth professional article that was titled, We Need To Stop Talking About AI As Future Because It's Here Now. And you just mentioned generative AI, something we're gonna get into, and I'm looking forward to your insights here. Nvidia CEO has been quoted to say, “A new era of computing has begun.”
I know this is a very big topic for you. You're very passionate about generative AI, and how it's going to be this tool for the future. Can you unpack generative AI for us and how it's really going to improve Canadians' lives?
Robertson: First of all, as you said, AI is not new. There has been research into this topic for several decades. The current interest in AI has been going on over the past decade when the industry married artificial intelligence with graphics processors, discovering the graphics processors because its capability to process data in parallel is an ideal vehicle to solve many of the AI problems that have challenged us in the past. So we've made significant advances in machine learning and now generative AI.
So in a nutshell, all of AI is really about prediction. Whether it's predicting what you're likely to want to buy or movies that you might want to watch. It's just about predicting things from a statistical point of view.
Generative AI, is also about prediction. It's predicting what is the most likely next word in a sentence or likely next pixel in in a picture based on a large language model that incorporates knowledge and context about the subject. So why generative AI is so useful is that it allows the machine to communicate with us on our own terms, whether it's through text pictures, or videos. And over the next several years, we'll see this technology incorporated into applications such as chatbots or search and productivity tools, and even coding, so it'll have a huge impact on productivity and growth. And that's why we're very excited about it.
Carissa: Yeah, like when you and I chatted last time, I thought it was really insightful, you compared the AI phenomenon to previous tech-led booms, like .com, crypto, and metaverse. How is this different?
Robertson: So I think there is this common misperception out there that the success of new technologies is based on how superior the technology is. But historically, what I found is that the success of the technologies depends more on the level of friction, or lack thereof to customer adoption. So for example, in the .com boom, the Internet was relatively accessible for most people, requiring only access to a computer and a modem. In the smartphone boom, mobile phones were already well-penetrated in the market and upgrading from a mobile phone to a smartphone was relatively easy.
When we look at some of the less successful technologies or ones that have taken longer to adapt, the level of friction to customer adoption was higher. So for example, cryptocurrencies required people to change their mindset about money and put their trust in cryptocurrencies that they were unfamiliar with. The Metaverse required people to buy expensive equipment and don an uncomfortable headset to have the experience. I think this is why these technologies tak longer to go mainstream.
Generative AI just asks people to interact with it by asking questions and getting answers in their own language, whether it be English or other languages. So the level of friction to customer adoption is low. And this is why I think this technology will be so pervasive in a much shorter time.
Carissa: Some companies and industries might benefit from generative AI more than others. In your mind, which one stands out to benefit the most? Or should all companies consider it in some form or fashion?
Robertson: So as is typical of many tech-led booms, practically every company now claims to be incorporating general AI into their business in some way or other. What I think is important to identify is which companies actually benefit directly from generative AI, as opposed to having this become part of their business model. So for the most part, generative AI is largely deflationary for most businesses in that it becomes just table stakes to keep up with competitors adopting the technology, resulting in increased costs.
But there are some companies that directly benefit. So in my view, there are two types of companies that benefit from AI. So one are the companies that provide the infrastructure for generative AI. The picks and shovels of technology so to speak. Examples of this are Nvidia, which provides the GPUs required to enable the technology and has a practical monopoly within that space in the industry. And Microsoft, which provides software tools for productivity as well as for enterprise to supplement this technology through their cloud service.
The other types of companies that benefit are those with access to a lot of data, either through their clients or their own, that they can leverage with AI. Examples are companies such as Google, in search, or Meta, in social, or software companies, such as ServiceNow and salesforce.com, that service enterprise clients and can bring this technology to those services for their clients.
So I think we need to be very selective about sifting through which companies in which industries actually benefit from generative AI. I think careful selection and due diligence. I think this is what we have been doing successfully in the technology fund.
Carissa: Yeah, and like just to take it a little step further, I read that PWC noted this year to spend and are will spend approximately 200 million to support their clients transform their businesses. And as we talk, many are doing the same. How will these types of investments reshape business models, products and services that are coming out to market?
Robertson: Yeah, so I think it's important to identify that this applies to companies that have sufficient data to leverage with AI. And I think for most companies, the upside is significant. At the most basic level, there is improved productivity, as AI can help significantly boost the effectiveness in such areas as communications, analysis, graphics, design and coding. On the other side, generative AI can also massively improve customer service and satisfaction in many areas.
For example, search results can now provide much more detailed context than what they could previously. Chatbots can actually provide useful responses to detailed questions about a company's products or services.
I think a more useful way to think about it is what is the downside for companies that do not effectively adopt AI into their strategy because over the next few years, I think the general level of expectations from AI will increase significantly, and companies that don't keep up with the technology will be at a disadvantage. So I think it's quickly becoming just table stakes. That this is the level of service that customers will expect and AI will be a big part of it.
Carissa: That's a great way to put a table stakes. Some businesses are already there, some are thinking about how to integrate it, but to your point on those that utilize rich data, it absolutely can transform, and will be able to transform their business.
Let's talk a little bit about how Canadians can benefit from AI, whether that's from an investment or just as a tool in general in day-to-day lives. Many polls and stats that are out there, and I'm sure you've seen these several times, the sentiment on AI, that I have seen, is quite positive. Now, depending on the age demographic, more than 50% of people feel confident that AI will be a differentiating tool to use for investing in growth and future growth for their wealth over the long term. How will AI transform the way Canadians invest?
Robertson: AI is certainly a key driver of growth in the current environment and we'll see further growth over the next few years as the technology evolves. So there is certainly an opportunity to grow wealth through investing within this theme.
In terms of tools for investing, I think what AI does is it creates better tools to analyze information and make predictions. This may change the pace of analysis. I think what used to take days to analyze with the help of AI might take minutes. I think certainly how we do the work will likely change. But I don't think it will fundamentally change the nature of investing, which is that you still have to do your due diligence, exercise judgment against all of these predictions and make the best choices.
The way I look at it, I don't think it fundamentally changes the nature of investing. But I think it will certainly accelerate our ability to process information and make decisions
Carissa: Yeah which will result in more efficiencies and investing, and maybe the thought of even quicker access. So from the portfolio manager side, how do you believe AI is starting to be used, or maybe it's been used for a while now, how's it been used as a tool to help asset managers, portfolio managers optimize return?
Robertson: There have been many AI tools explored over the past few years to help optimize investment returns. I've been involved in a few projects myself. I was working on a machine learning project to try and predict returns and optimize a portfolio.
What I would say is that it is still early stages for AI technology to see wide adoption in Finance and Investment Management. I think part of the reason for that is that the standard required for an AI tool in a conservative industry like finance is very high and it has to pass a much higher bar to be adopted. Similar to how a self-driving car would need to pass a much higher bar to be accepted on the road due to safety concerns. So being a very conservative industry, I think it just has to do significantly better than humans for it to be widely adopted.
Another point is that while AI may make better predictions over time, you only really generate relative returns if your AI predictions are better than your competitors, who will also have the same AI tools. So AI tools help with better predictions, but returns still depend on good judgment. In that sense, our tools will get better and better but it's a constant process of having to keep up with our competitors and still exercising good judgment.
Carissa: There are a lot of write-ups on investors who are serious about building wealth for the future need to consider or have exposure to AI in some form or fashion within their portfolio. And there's probably a good debate about how much. But you manage the CIBC Global Technology Fund. How much allocation are you giving to AI as part of your portfolio? And where do you see those opportunities?
Robertson: So the CIBC Global Technology Fund is designed as a moderate risk, diversified portfolio focused on innovation. As such, it has a 60-40 split between technology and healthcare. And the way I think about is that technology is the offence where we try to drive growth and healthcare is the defence during times when the economy is more challenged, which helps to manage volatility through different parts of the cycle.
This has served us well over the past several years. We've gone through ups and downs in the technology cycle, where if the technology sector was challenged, healthcare helps on the downside, and vice versa. Now we're seeing technology go through a quick growth phase, and healthcare is there just to provide the defensive buffer.
So within the technology allocation, I would say that AI themes cover about 80% of those selections, just because it is such a prevalent theme today and it is driving a lot of the growth in the sector. So overall, within the portfolio, the AI thesis makes up about half the portfolio, which makes it the most pervasive theme in the portfolio currently.
Carissa: So let's talk about the sustainability of some of the recent AI-driven runs in company valuations like in Nvidia. What's your thoughts on the long-term growth in the AI space?
Robertson: So companies driven by AI themes have certainly went up here to date. So Nvidia, for example, is now up over 200% here to date and based largely on what they've guided to in terms of generative AI demand. So there are certainly short-term cycles where valuations can get stretched, leading to near-term volatility.
But this isn't the cycle that we're playing for. We're looking out over the long-term potential of this thesis. We're still at very early innings in terms of generative AI. To determine the valuations of the stock, we have to look over the long term, over the full length of this thesis as it rolls out, to determine what the value is. And from our perspective, there is still significant potential for growth ahead.
So in terms of what Nvidia, as an example, has reported. They've had really strong growth over the past two quarters and guided to strong growth ahead. But when you look at the opportunity ahead for generative AI for Nvidia, there is potential if the market evolves, as we expect, for multiple times that growth over the next several years as generative AI expands into the market and into the industry.
Because at this point, even though we've talked about generative AI for almost half a year, there's really not a lot of adoption in the market yet. Nvidia is practically the only company that has seen this explosive growth. We haven't seen it yet, from the software companies that are implementing this, or many of the other companies where this will be widespread and used. And that's still coming. Over the next several years, we will see a lot of that growth ahead of us.
Carissa: Yeah. And that's in a lot of talk about Nvidia, the theme is there. They're ahead of the game to your point, but there may be and will be others that could surpass or could start to have that significant growth. How do you balance all of that? The speed with which trends are changing in the industry while focusing on that long-term growth, how do you balance that within the portfolio and the names that you're investing in?
Robertson: So there's a saying in finance, that investors generally overestimate the short term, but underestimate the long term. This is particularly in tech. In the short term, there's a lot of volatility because investors get overexcited about short-term trends. But if you look at the long-term trends, the trends don't actually change that much.
Over the past half-century. Moore's Law has basically doubled the computational power per dollar in the industry roughly every two years, which has resulted in exponential growth in the technology sector. So the AI trend is not a one-year phenomena but has been going on in its credit duration for the past decade, while research into the field has been going on for several decades. And if you look at it over a longer period of time, you will see that there is this steady growth as the technologies progress.
At the margin, we do position the portfolio around these shifting trends but we're really more focused on the longer-term trends. We're looking at the one to three-year to five-year thesis in terms of how this technology will play out, not over the next week or month. So by taking a longer-term view, I think we're able to identify and invest in the trends that have the ability to really drive significant returns.
Carissa: Is there any core table stake for a company's fundamentals when you're looking to invest?
Robertson: Yeah, so what I look for are not so much specific themes, even though there is all this interest in AI in the short term because that may change from year to year. But I’d rather focus on the fundamentals of the company. Specifically, I'm looking for quality companies that demonstrate both growth and free cash flow generation, with potential for high return on invested capital. And what that drives is a credible source of sustainable competitive advantage.
So what drives our performance in tech? Just stepping back a bit and looking at it from a higher-level point of view. Tech companies over the long term, what drives our performance, is our ability to grow top-line revenues, and generate strong free cash flow, which they can invest at high return on invested capital to generate more revenue growth. So it drives a virtuous cycle of compounded growth over the long term. And so that's really what I'm looking for, quality companies that can demonstrate a sustainable competitive advantage.
Carissa: And absolutely when you're looking at building your own portfolio and focused on long-term wealth accumulation that growth component can be very impactful, and very, very important. Thanks for taking us through that. That's very insightful.
I just wanted to end off with kind of going maybe back to the beginning of our conversation. What's your thought about Canada? Now there's a lot of talk about Canada being an innovator, several cities becoming Centers of Excellence for AI, generative AI, whether that's gaming. Montreal has been cited to be one of those centres. How do you feel Canada, at home domestically, we're going to embrace this technology with new companies or current companies, and how we'll be a part of this big phenomenon?
Robertson: When you look at Canada, Canada has a lot of potential within the technology space. We have a lot of startups within our ecosystem, we have great universities that put up great talent and engineers. What I think Canada lacks is the scale and the infrastructure to be able to take those companies within those technologies to the next level. Although I think over time that has improved.
We certainly have our winners. We have Shopify, for example, has been very successful within its niche and it is also adopting generative AI as part of its portfolio of tools within its market to help vendors put together websites and sell products. Many other companies within the Canadian landscape have that opportunity as well.
Now, for generative AI specifically, what is really needed is either the infrastructure or the data. And I think in terms of infrastructure, Canadian companies digitally don't have as much scale as some of their US counterparts. I think that in terms of massive scale, to be able to train these large language models, I think Canada is at a disadvantage. But in terms of having access to data, there are a lot of Canadian companies as well that do have access to data. Even just thinking about the Canadian banks and many companies that serve those Canadian banks, where they can make use of this data to use generative AI to improve customer service, and customer satisfaction, and improve just overall the quality of service of what can be done.
I think that there is a lot of potential for Canadian companies. And I think that the way we'll see it is in Canadian tech companies that make use of data and, and generative AI to come up with new products and services to service this need. So I see the potential but I think we need to see over time how that develops and whether Canadian companies can effectively compete with their US counterparts.
Carissa: Yeah, that'll be interesting to see but we need the time but there's a ton of opportunity.
Robertson, thank you so much for taking the time to be our guest today. I could talk to you for hours. And I know you don't have that but I could talk to you for hours, you are a wealth-.
Robertson: I want to talk to you for hours.
Carissa: You are a wealth of information, your experience, I can't wait to have you back. Thanks for taking us through some of the fundamentals and really trying to unpack generative AI and what that means.
There's so many questions out there from Canadians, people are interested about it. You've made it very compelling to learn more, stay connected and, in terms of the fun that you're writing as well, it's very interesting to see what the structure is, but also that there is a focus on that long-term growth.
So again, thank you so much. I can't wait to talk to you again. And thanks for being on our podcast.
Robertson: Thank you, Carissa, for having me here. It was a pleasure.
Carissa: If you're interested in investing in the CIBC Global Technology Fund, talk to your advisor.
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