Global review: Ark’s Wood stays on target with conviction bets on disruptive technologies
An MBA is typically a prerequisite to land various plum jobs in the financial services industry. For fund manager Ark Investment Management, there is a conscious decision not to hire MBAs as research analysts. Rather, deep subject matter experts are preferred, so that they can be in a better position to analyse industry trends, and help shape winning investment decisions.
“It is easier to teach rocket scientists how to read financial statements than to teach MBAs rocket science,” says Ark’s founder, CEO and CIO, Catherine Wood, referring to the hiring practice first made popular at her previous firm AllianceBernstein. “It now ever so true in this new world,” says Wood at a July 9 webinar organised by PhillipCapital.
The introductory remarks for the webinar were made by Luke Lim, managing director of Phillip Securities. Linus Lim, CEO of Phillip Capital Management, moderated a question-and-answer session after Wood’s talk.
One analyst with Ark, for example, was hired as the analyst has prior experience editing genes in the laboratory. “Most seasoned healthcare analysts wouldn’t have meddled with gene editing,” notes Wood, speaking to more than 4,000 participants.
Individual expertise matters. But more often, there is a lot of teamwork involved. Three analysts collaborated to come up with Ark’s bullish call on electric car maker Tesla, with a US$3,000 price target over five years.
While most fund managers prefer to keep their best ideas to themselves and build up their positions quietly, Ark goes the other way round. It put out its half-formed thesis online, inviting support — or criticisms — from people who care. Presumably, they are the ones with a certain level of domain knowledge to be bothered to comment.
On the other hand, via these active engagements, Ark’s analysts can learn about the new innovations being put together by their creators, who are often eager to share. “They want to talk to us, and we help them size up the opportunities so that they can go faster,” says Wood.
This operating model has led to some winning bets. For example, Nvidia, famous for creating graphics processors, was seen as stuck within the personal computer gaming industry, which was suffering from declining volumes as smartphones become more popular.
Back in 2014, Ark’s analysts found out that the image-processing capabilities of these Nvidia chips can be repurposed for autonomous driving controls, thereby opening up a new, huge market. “My jaw dropped,” recalls Wood.
S-curves
The way she sees it, there is an acceleration of various technological innovations, which broadly has resulted in much more power and capabilities at much-lowered costs. The result is an exponential growth in the value of the addressable markets when some of these trends converge and feed off one another, says Wood.
As an investor, to better capture the growth opportunities brought about by these trends, a good understanding of the technologies and innovations is certainly more than just a good-to-have.
From the research of Ark, five socalled “major innovation platforms”, poised to experience exponential growth over the coming five years, have been identified. They are DNA sequencing; robotics; energy storage; AI; and last but not least, blockchain technology.
With these five platforms as the base, Ark has further identified 14 different technologies that are “barely in the lift-off stage” and “ready for prime-time” (see table). The growth is further accelerated when these 14 technologies feed off on another as they converge.
To be sure, these new technologies did not come about overnight and the foundation was built by some pioneering companies. Wood points out that two decades ago, when the tech bubble was forming, Cisco Systems and Oracle Corp were two companies that helped drive the adoption of networking and database management technologies, forming the backbone of the largely Internet-based economies today.
For example, Ark’s five- year US$3,000 price target on Tesla is a bet that the overall electric vehicles (EV) market is riding on the convergence of three major platforms: energy storage, AI and robotics. On each of its own, these three platforms are now at a stage where growth is accelerating — and even more so when applied together. “The S-curves will feed off one another, creating more powerful growth opportunities,” says Wood. The stock closed at US$668.54 on July 13 after reaching a recent peak of US$880 in early January this year.
In recent years, there is plenty of hype over EVs. Yet, to put the numbers in context, the 2.2 million EVs sold last year were but less than 4% of all vehicles sold. With the convergence of these technologies, including more powerful battery packs, Wood sees the sale of EVs hitting 40 million, or nearly half, in five years’ time.
Furthermore, the cost of these technologies, prohibitively expensive initially, have come down sufficiently for mass-market adoption. For example, DNA sequencing, one of the technologies cited by Wood, used to cost US$2.7 billion in computing power to complete for a whole human being back in 2003. It now costs just US$500. When medical professionals can do this cheaply, it means chronicle ailments like cancer can be detected early, and therapies created to address specific mutations unique to each human. “This is a very exciting time, and we believe innovation solves the problem,” says Wood.
Stay on target
From Wood’s perspective, the world is now undergoing a new wave of “creative disruption” of a magnitude unseen since the early 1900s, when telephones, electricity and automobiles were adopted around the same time. The innovations today are going to “change the existing world order”, she claims.
The five platforms and 14 technologies, according to her, will be causing “a lot of problems” for traditional companies — including those that make up stock market indexes. These companies are included in indexes because of their past successes. And that is no guarantee of their future performance. Wood estimates that half of the S&P500 component stocks are “in harm’s way” and they are going to be disrupted, disintermediated by these new innovations. “It is really very important to at least have a hedge with innovation strategies against the disruption of traditional benchmarks,” she warns.
“Now with everything revolving around benchmarks, they are missing everything around explosive innovation,” says Wood, referring to the tendency for asset managers to buy stocks that are already included in indices. By doing so, they are lowering their risks of becoming outliers to the “benchmark” since most of the peers are holding largely similar stocks at roughly equal proportions.
The way she sees it, such a mentality is a legacy from the first burst of the technology bubble just over two decades ago, and further exacerbated by the 2008-2009 Global Financial Crisis where markets were in turmoil. With the pain of those stunning losses still fresh, or not yet forgotten, asset managers thus gravitate towards the benchmarks, with few like Ark that have the appetite to make big convincing bets on new technologies and innovations.
Wood recalls that when Ark was first started, and began to be “benchmark agnostic”, many people were “uncomfortable”. Last May, MSCI, one of the leading index creators, asked Ark for help to develop innovation indexes, thereby validating what Ark has been doing.
Wood’s pleasant, friendly demeanour at the talk underlies a steely conviction. Without prompting, she lets on that her flagship fund dropped 37% between midFebruary and mid-May, a magnitude and pace enough to make any investor shiver. She attributes the selldown to broader fears over inflation and looming rate hikes.
So, what went on in her mind during that period? In mid-February, her team’s price targets represent a CAGR of 15% over the next five years for the stocks that make up the fund. That is Ark’s minimum hurdle rate. The fund dropped even further in May. At that point, with the same price targets, a new CAGR of 29% is needed instead. Wood, rather than worrying over the losses, holds the bullish view that their prices, instead of doubling over the next five years, are now expected to more than triple.
According to Wood, the speed at which certain tech-based ideas can disrupt very deep-rooted operations in a big way, very quickly, can be surprising. She points out the key reason is that the innovations from these disruptions have created new products and services that are able to “delight consumers” — something she has observed to be the case for the past three decades.
Back in the early 2000s, for example, CTOs were the ones making the top-down decisions on which tech products or services their organisation should adopt. Blackberry, with its instant messaging system, gained popularity quickly as one CTO after another CTO allowed their colleagues to use these devices.
Enter the Apple iPhone, and the smartphone very quickly moved from being a fancy new consumer product; it also “infiltrated” the corporate world. “Why had this happened? Because CEOs love their iPhones; CFOs love their iPhones; and of course, employees want their iPhones too,” says Wood.
The same reasoning is behind the creation of policies favourable to the new products and services: delighting consumers, including government officials. For example, Uber was allowed widespread adoption. “It blew right through the New York Taxi Commission — because Uber was delivering to consumers what taxi companies were not,” says Wood. “They are consumers too, and that’s a good way to get innovation adopted throughout the system.”