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  • Fund Watch
  • disruptive innovation

Inside Cathie Wood’s Ark

Cathie Wood has emerged as one of the most successful investors of a generation, with her investment firm, Ark Invest, focused solely on disruptive innovation. The firm’s belief is that “The global economy is undergoing the largest technological transformation in history thanks to five innovation platforms evolving at the same time.” These areas of innovation include energy storage, artificial intelligence, robotics, genome sequencing and blockchain technology.

 

Technology for the win?

Ark believes the effect of new technologies will dwarf the impact of other innovative milestones such as the telephone, the automobile and electricity. In fact, the company believes the “long-term opportunities for companies and investors participating in this change could be measured in the trillions.”

Of course, in a world saturated with new technology, the trick to investing in disruptive tech is knowing which innovations are most likely to be a success. For this, Ark considers three key factors. Firstly, the firm will look at technologies that experience significant declines in how much they cost as this can drastically widen and diversify the addressable market for the said technology.

Following the same strand of thought, the second consideration is finding a technology that “cuts across multiple sectors and geographies.” Not only does this make it easier for the innovation to be “discovered” by multiple users, industries and sectors, but it also “provides better product-market fits, insulates against business cycle risk, and garners attention from multiple disciplines.”

Finally, finding a technology that can be used as a springboard for future innovations is another key factor Ark will take into account when looking for investment opportunities. Of course, it can be very difficult to accurately estimate the potential use cases for disruptive technologies and, in most cases, they’re often underestimated.

“Disruptive innovation is often not priced correctly by traditional investment strategies because people may not understand how big the ultimate opportunities are going to be. They aren't sizing the opportunity and they aren't analyzing [SIC] the disruption” - Cathie Wood

 

"Disruptive innovation is often not priced correctly by traditional investment strategies because people may not understand how big the ultimate opportunities are going to be.” Wood said at the Forbes Advisor Playbook iConference in 2015. “They aren't sizing the opportunity and they aren't analyzing [SIC] the disruption.”

For example, recent innovations in the world of batteries have helped propel the efficiency and adoption of smartphones, drones and even electric vehicles (EVs) — all of which are disruptive innovations in their own right and have propelled the energy storage sector.

 

Cathie Wood’s top stocks

Economic instability in China and uncertainty over the heavily-indebted Chinese property developer Evergrande [HKG:3333] led to a recent dip in multiple markets that saw key indices, including the Dow Jones Index [DJI], S&P 500 [GSPC] and the Nasdaq [IXIC] fall 1.78%, 1.7% and 2.2% respectively on 20 September.

In true Cathie Wood fashion, Ark Invest took full advantage of the dip to buy into and double down on multiple stocks, including Coinbase [COIN] and Robinhood [HOOD]. Ark Invest managed funds “bought a combined 404,020 Robinhood shares and 96,251 Coinbase shares as both companies dipped more than 5%,” reports Markets Insider. The moves were roughly equal to investing a further $22.8m in Coinbase and $16.4m in Robinhood.

While Ark states on its website that its an advocate for long-term investments of at least seven years, the firm also loves a bargain and will often “buy the dip” when it feels a potential growth stock is undervalued.

For example, the firm recently sold off a lot of its shares in China-based tech companies following the Chinese government’s ongoing regulatory crackdown. However, as the share prices started to fall for major stocks, Ark started buying into Chinese companies, including JD.com, JD Logistics, Tencent and farmer-to-consumer shopping platform Pinduoduo.

“If you were to look at what we were doing in those portfolios, we were really swapping them out for other names that we think will continue to be in harm’s way, or certainly under government pressure” - Cathie Wood

 

Wood states, however, that this was part of a strategic reshuffle rather than an opportunistic backtrack. “If you were to look at what we were doing in those portfolios, we were really swapping them out for other names that we think will continue to be in harm’s way or certainly under government pressure,” she said as reported by Yahoo! Finance.

 

Just how good is Wood? 

Wood’s rise to fame as a star investor isn’t without merit. Just four years after Ark Invest was established, the firm managed a total of $1.5bn in assets. Since then, Ark’s total assets have grown to be worth $52bn and the Ark Innovation ETF has grown 48.65% over a five-year period, which InvestorPlace estimates to be 3.5 times greater than that of competing funds.

Furthermore, the ARKK rallied more than 152% in 2020, trouncing even the Nasdaq’s 43.6% growth for the same period.

Despite the great track record and a stellar performance last year, 2021 has proven to be less spectacular for Ark — particularly its flagship ETF, which sank as low as $99.48 when it closed on 13 May. The ETF has spent much of this year in the red and, as of its last close on 23 September, was down 4.14% year-to-date.

 

Emerging scepticism

As a result of this year’s performance, some analysts and investors have lost faith in Wood’s strategy and a range of “inverse-ARK ETFs” have emerged while others are shorting some of her favourite stocks all together.

“Some investors believe there is no further upside in the tech sector as it is expensive, may be in bubble territory and other parts of the US economy are likely to do better as the world reopens,” said Debbie Fuhr, founder of ETFGi, to the Financial Times. She added that many traders have viewed the ARKK fund’s holdings in Tesla as “risky and expensive”. 

“When I see such negative sentiment out there, especially when it comes to valuation and longer time horizons, investment time horizons, I actually feel a little more comfortable. I like bad news. The discounting is worse now than the news actually will be. I actually feel better in that environment for our strategies” - Cathie Wood

 

However, Wood believes her naysayers are short-sighted and argues there’s plenty of potential for US equities in the long run.

“When I see such negative sentiment out there, especially when it comes to valuation and longer time horizons, investment time horizons, I actually feel a little more comfortable. I like bad news. The discounting is worse now than the news actually will be. I actually feel better in that environment for our strategies,” Wood said in an interview with CNBC.

“The innovation around which we have centered [SIC] our research, these five platforms: DNA sequencing, robotics, energy storage, artificial intelligence and blockchain technology, are barely off the ground.”

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

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