Building Better Portfolio's - Thematic Investing (Technology)

In my last article, I mentioned that I would start to touch on different parts of portfolio construction and why that helps become the foundation to our success going forward. At the heart of portfolio management is your strategic asset mix, which put is your ratio of cash, stocks and bonds. What can get lost in the news and the various individuals promoting ETF’s or other specific investment products is your asset mix keeps you sleeping at night when we are navigating troubled waters. Your asset mix is not static and should change over time (this is called tactical rebalance) as we move along the business cycle. Sometimes its more appropriate to be more heavily invested in cash and bonds, and sometimes it is better to overweight stocks. The data that we track helps us make these decisions, not short-term noise. That’s probably enough on that topic for now. Let’s focus on something a little more fun; I should say “fun” as I am a finance guy.

Theme #1 – Technology

Not surprising to many of us, this is not just a theme, but a megatrend. The use and need for technology in our personal and working lives are probably pretty evident given our environment. While never experiencing a pandemic would have probably been the ideal for all of us, I could not imagine what it would have looked like if we didn’t have the technology to support us. It would be an understatement to say that technology touches everything:

• Economic
• Environment
• Socially
• Politically

Given this knowledge, it makes a lot of sense that our portfolios continue to reflect this. While we own technology positions, we will continue to grow this part of our portfolio. Canada is a very commodity-focused country, and what we have seen in portfolio’s over the last few months is how resilient technology names have been through the market correction. If someone told me that going into a market correction, the best elements of a portfolio would be cash, bonds and, oh, yes, large-cap U.S. technology companies; I may have expressed some disbelief on the third one. It has helped us as Canadian investors that the U.S. dollar has also helped shelter some volatility in our portfolio’s as well. That being said, it is not hard to see that great technology companies with a lot of organic growth capability are the crown jewels in portfolios. That doesn’t mean that it will always be that way, but the information I read tells me that continued investment and build-out in technology will not slow in the near future.

It is important to note that when my team and I are evaluating tech-related investments, it is not limited to the smartphone that you use or the computer programs you run on our desktop/laptop. Technology investments extend into SMART buildings, Automation (innovation through the convergence of physical and digital worlds), Electronic payment systems, Cloud computing, and Smart software (Artificial Intelligence), to name a few.

Going through market corrections allows me to continue to review and revisit our risk-management process. As discussed at the beginning of this article, your strategic asset mix is at the heart of keeping the portfolio consistent and predictable. Once we have established our comfort level with that mix based on the environment that we expect to be coming at us, the deep understanding of our holdings is constantly vetted… why do we own what we own? How much of it should we own? If it’s not attached to a major theme or important element of the economy, what is our plan to remove it, and how do we ensure we don’t repeat any past missteps. Tech-related names have certainly helped us weather this storm.

To wrap up, technology has helped revolutionize the global economy, especially through the digitization of work and information. It provides a faster, cheaper and more personalized solution for businesses and consumers and touches all industries and everyone’s life to varying degrees. I would consider technology to be one of the most important foundational pieces for our portfolio’s going forward. And no, to any of my children, who might be reading, it doesn’t mean you are allowed to avoid reading books… that still helps calm the mind.

I will touch on more portfolio construction next week.