Masters in Business: From Technology in Focus to Finance with Tony Kim

Release Date: December 12, 2024

In this insightful episode of Masters in Business, Bloomberg Radio host Barry Ritholtz engages in a comprehensive discussion with Tony Kim, Managing Director at BlackRock. Tony leads the Fundamental Equity Technology group, overseeing BlackRock's active technology investments. Their conversation delves deep into the intersections of technology and finance, offering listeners a nuanced understanding of tech investing, market dynamics, and the future of active management in the ETF space.

1. Transitioning from Engineering to Finance

Tony Kim begins by outlining his impressive academic background, holding a Bachelor's in Industrial Engineering from the University of Illinois and an MBA from Columbia University. Barry shares his own journey, starting as an engineer at Rockwell Automation, where he worked on automating manufacturing processes across various industries. However, seeking a more strategic role, Barry transitioned into investment banking in the mid-1990s.

Barry Ritholtz [02:07]: "I grew up in the Midwest... I gravitated initially to engineering... but eventually I ended up in New York and then transitioned into finance."

Barry recounts his time at SG Warburg, which underwent several acquisitions, ultimately leading him to Merrill Lynch. At Merrill Lynch's West Coast M&A group, Barry collaborated with future notable figures like Draga Rajkovic of JP Morgan.

2. Insights into the 1990s Investment Banking Boom

Tony and Barry reminisce about the vibrant investment banking landscape of the late 90s, marked by the dot-com boom and significant transactions in networking and telecom.

Tony Kim [06:36]: "Your timing was perfect. The 1990s, great time to be doing investment banking and technology."

Barry highlights pivotal moments, such as the Netscape IPO and the rise of Cisco, which catalyzed numerous deals in the technology sector. However, the transactional nature of investment banking led Barry to seek a more persistent and strategic role in investment management.

3. Embracing Active Management in the ETF Era

Since joining BlackRock in 2013, Tony Kim has navigated the shift from passive to active management within the ETF space. BlackRock's active ETFs, particularly those focused on AI, represent a strategic move to capture dynamic and rapidly evolving sectors.

Barry Ritholtz [15:02]: "We are also launching many active ETFs... especially an industry that is in rapid change like AI."

Barry emphasizes the importance of specialized knowledge in active management, especially within the technology sector where domain-specific insights can lead to superior investment decisions.

4. Mapping the Technology Ecosystem with a Deconstructionist Approach

A significant portion of the discussion centers on Barry's method of deconstructing the technology landscape to identify growth drivers. By breaking down technology into subsectors like semiconductors, AI, and software, Barry creates a comprehensive map that reveals interconnected supply chains and emerging trends.

Barry Ritholtz [23:15]: "I like to break things down... create a map of the whole landscape."

This systematic approach allows Barry to anticipate how innovations like AI ripple through various industries, impacting everything from chip manufacturing to cloud computing and beyond.

5. The Dominance of the Magnificent Seven (Mag7) in Tech

Barry introduces the concept of power laws in the technology sector, where a handful of dominant companies—often referred to as the "Magnificent Seven"—command significant market share and influence.

Barry Ritholtz [35:31]: "There's a power law... you want to be betting on number one or number two."

He argues that these top companies, such as NVIDIA, Microsoft, and Google, benefit from economies of scale, superior free cash flows, and continuous innovation, making them attractive investments despite their higher valuations.

6. The Role of AI in Shaping Future Investments

AI emerges as a central theme, with Barry discussing its transformative impact across the technology stack. From foundational infrastructure like semiconductors and data centers to applications and services, AI's influence is pervasive.

Barry Ritholtz [26:57]: "Once you have mapped all of these things out... you say, well is it worth investing in these companies or not?"

Barry highlights the cascading effects of AI advancements, emphasizing the need for investors to understand the entire ecosystem to make informed decisions.

7. Navigating Valuations and Market Concentration

The conversation touches on the current valuation landscape, where the broader tech sector remains undervalued compared to the Mag7. Barry believes that as technology, particularly AI, continues to drive market appreciation, valuations for top tech companies will remain justified or even expand.

Barry Ritholtz [43:09]: "I think valuation, broadly speaking, is at a fair level... the max 7 and a few companies are at higher levels."

He also notes that passive investment vehicles are highly concentrated in these top performers, which could limit exposure to the broader, still-depressed tech segments.

8. BlackRock’s Annual Silicon Valley Bus Tour

Tony Kim sheds light on BlackRock's unique approach to staying ahead in the tech sector through its annual bus tour of Silicon Valley. This initiative involves meeting with leaders from over 30 public and private technology companies, fostering strategic discussions and gaining firsthand insights into emerging trends.

Barry Ritholtz [45:12]: "It's a great way... to see what the key topics are."

These interactions provide BlackRock's investment teams with a panoramic view of the tech landscape, enabling them to identify and capitalize on nascent opportunities.

9. Balancing Long-Term Vision with Short-Term Performance

A critical aspect of active management is maintaining a long-term investment perspective while being accountable for quarterly performance. Barry explains how BlackRock navigates this balance by adhering to a consistent investment framework, even during turbulent market periods like the tech downturn in 2022.

Barry Ritholtz [57:09]: "We try not to focus on the short term... make systematic bets to the best of our ability."

This disciplined approach ensures that long-term investment theses remain intact, allowing for sustained performance beyond transient market fluctuations.

10. Personal Reflections and Advice for Aspiring Tech Investors

Towards the end of the episode, Barry shares personal interests, including a passion for history, chess, and epic historical narratives. He also offers valuable advice to recent graduates aspiring to enter technology investing:

Barry Ritholtz [70:46]: "You gotta be a great thinker... have flexibility to reason and plan in a holistic and flexible manner."

He emphasizes the importance of critical thinking and adaptability, especially as AI continues to automate many analytical tasks.

Barry concludes by reflecting on his career trajectory, suggesting that a deeper immersion in Silicon Valley's innovative environment might have influenced his path towards active investing in technology.

Barry Ritholtz [72:00]: "Always bet on the future, not on the current past. Bet on the future."

Conclusion

This episode offers a rich exploration of technology investing, highlighting the strategic frameworks that guide BlackRock's active management in a rapidly evolving sector. Tony Kim and Barry Ritholtz provide listeners with a deep dive into the mechanics of tech investing, the significance of dominant market players, and the transformative potential of AI. Their conversation underscores the importance of specialized knowledge, continuous learning, and a long-term investment perspective in navigating the complexities of today's technology-driven markets.

Notable Quotes:

• Barry Ritholtz [02:07]: "I grew up in the Midwest... I gravitated initially to engineering... but eventually I ended up in New York and then transitioned into finance."
• Barry Ritholtz [15:02]: "We are also launching many active ETFs... especially an industry that is in rapid change like AI."
• Barry Ritholtz [23:15]: "I like to break things down... create a map of the whole landscape."
• Barry Ritholtz [35:31]: "There's a power law... you want to be betting on number one or number two."
• Barry Ritholtz [57:09]: "We try not to focus on the short term... make systematic bets to the best of our ability."
• Barry Ritholtz [70:46]: "You gotta be a great thinker... have flexibility to reason and plan in a holistic and flexible manner."
• Barry Ritholtz [72:00]: "Always bet on the future, not on the current past. Bet on the future."