Investors should consider taking a leaf out of the investment book of ARK CEO Cathie Wood
Last week I wrote about the fact that it’s people who make the world of investing and finance so fascinating. So this week I want to write about Cathie Wood, probably the world’s most exciting investor right now. Though if you are an investor in one of her ARK ETFs, particularly in the flagship Innovation exchange traded fund (ETF), you may have found the ride a bit on the wild side.
Last year, all five (now there are six) of her actively managed funds gained more than 100%, with assets under management rising from $800-million in January 2018 to $50-billion at the end of 2020. But in March 2021 the markets got cold feet as concerns about inflation rose, accelerating a selloff of government bonds, pushing long-term yields higher and sparking a flight from high-growth stocks like those of technology companies. ARK’s funds, most of which are dominated by shares of unprofitable, early-stage tech and biotech companies, were hit harder than most, falling as much as 30%, wiping out the gains of 2021 and provoking a storm of commentary.
Wood has developed a cult-like following on the back of wizardish stock picking. This is partly because of her focus on disruptive innovation and partly because she makes information traditionally accessible to financial elites accessible to the masses, publishing ARK research free of charge and openly sharing her insights and opinions on social media. By the way, ARK stands for Active, Research, Knowledge, though it is also a reference to the Ark of the Covenant.
As she has devotees, she has her detractors, who, judging from recent media commentary, cannot wait to see her funds blow up. What’s with the Schadenfreude? The obvious answer is because people don’t like tall poppies – particularly eloquent women in their mid-sixties who are not ashamed to talk about faith and investing in the same sentence. But this is too simple. Perhaps it’s because she has backed a stock that has its equal share of supporters and detractors – Tesla – and the people rooting for her downfall are the same people who want to see Elon Musk crash?
She made the call in 2018 that Tesla, trading under $300 a share and facing liquidity pressures, would one day trade at $4,000 a share. In January shares reached $816, or $4,080 on a split-adjusted basis, but have fallen back slightly.
While Tesla has an 8% to 10% weighting in three ARK ETFs – Autonomous Tech, Innovation and Next Generation Internet, she has not ridden on the coattails of one lucky bet. The Innovation ETF also has large holdings in stocks that I had not heard of – like Crispr Therapeutics (151% gain in 2020), Square (248% gain in 2020), Zillow (183% gain in 2020) and the more familiar Baidu (71% gain in 2020).
What is fabulous about Wood, for me, is not whether she is right or wrong, it’s that she is shaking up the investment universe by thinking differently, and this is what some don’t like or trust.
As she says on the Ark website, “While traditional investors seek safety in benchmarks and passive strategies, ARK believes this behaviour is counterproductive. Innovation is causing disruption and the risks associated with the traditional world order are rising… [In] our view, any company not investing aggressively in one or more of five major innovation platforms and 14 technologies evolving today will lose its way.”
The five innovation platforms that she believes will transform the global economy are DNA sequencing, robotics, energy storage, artificial intelligence and blockchain technology, and the technologies are gene therapies, 3D printing, cloud computing, big data analytics and cryptocurrencies, which cut across economic sectors. This poses problems for research efforts that are short term, siloed and highly specialised.
In harm’s way, she says, are companies that have spent the last 10 to 20 years engineering their financial results to satisfy the short-term demands of short-sighted investors. Those that have leveraged their balance sheets to buy back shares and pay dividends are at particular risk.
Sound familiar?
Wood didn’t suck “disruptive innovation” out of her thumb. It is a way of thinking that has been honed over many years. This story is well told, but it’s worth telling again: as a young equity research analyst she didn’t have the first pick of what to cover, she had to cover the companies no one else wanted, which at the time were emerging internet and wireless stocks. She saw first-hand the value of these companies and how they had the potential not just for financial returns but to transform the way the world worked.
While working for AllianceBernstein in 2002 she shocked her colleagues by suggesting an investment in Amazon. At the time the market cap was $5-billion, it was right after the tech crash and it was down 85% from its peak. No portfolio manager wanted to go near it. But as a working mother with three children at home, she grasped the potential of online shopping. Today Amazon has a market cap of $1.5-trillion.
But these stories don’t change the fact that people who don’t like Cathie Wood have been chomping at the bit over the last few weeks. They’re hoping for a self-fulfilling cycle that will feed on itself. Her stocks go down, they say, resulting in redemptions. This will push her stocks down further, and she’ll get more redemptions. And then they win.
To these people, I’m sorry to say this is wishful thinking. DM168