Do you think today's financial markets have all areas efficiently covered? Do you believe that exceptional returns are hard to come by unless investors have millions to place into a private equity fund? ARK Invest is here to prove otherwise.
The New York-based investment advisor offers five actively managed and two passive ETFs that focus on disruptive innovation companies in the publicly traded markets. The company uses an open research ecosystem to select those innovators that are in the prime of their growth cycle. As a result, regular investors can get in via their ETFs on possibly the best returns these fast-growing disrupters might provide.
Catherine Wood, CEO and CIO, founded the firm six years ago when she saw a void in the innovation public equity market. Today, the company has over $11 billion in assets under management. While indexing and valuations in the private equity world took off after the 2008 financial crisis, she says research, investment and values remained underappreciated for innovative public companies.
ARK Invest ETFs Get Disruptive
ARK Invest's funds cover disruptive growth areas such as autonomous transportation, robotics and artificial intelligence (AI), 3D printing, space exploration, genomics, blockchain, cloud computing, e-commerce and fintech. It pushes its research out into social media and has become a recognized name on social platforms in the areas of blockchain, AI, genomics and energy storage.
Investor's Business Daily spoke with Wood about the ARK Invest's investment philosophy and research methods, the best and newest funds, as well as what holdings contributed to their strong performance. Wood has over 40 years of experience in the financial industry. Before founding ARK she worked at such companies as AllianceBernstein, Tupelo Capital Management and Jennison Associates.
IBD: What was the premise for starting your firm and launching the ETFs you now have?
Catherine Wood: I founded ARK Invest to focus solely on disruptive innovation, primarily in the public equity markets, and to add new dimensions to research. Innovation typically offers long-term growth opportunities. But with an accelerating shift of funds toward passive and index-based investing, as well as outsized flows into private markets, I believe a void in research and portfolio management has opened up in the public markets. With our focus on public equities, ARK aims to fill this void by investing in the most innovative companies that we believe will deliver long-term growth during the next five to 10 years.
IBD: In what way is your firm and funds different from other funds investing in disruptive businesses?
Wood: ARK believes that its sole focus on long-term disruptive innovation, proprietary open research ecosystem and active management makes us unique relative to other offerings.
ARK's Open Research Ecosystem seeks to capitalize on rapid change through an open approach and the convergence of insights. A combination of top-down and bottom-up research allows us to size the investment opportunity of disruptive innovation and then detect and rank companies best positioned to benefit. Inputs include theme developers who are thought leaders in their fields, social media interactions and crowdsourced insights as people respond to ARK's public research.
IBD: ARK Invest's active ETFs seek to capitalize on the adoption curves of innovation: How exactly does that work and when do you buy and sell stocks of your funds?
Wood: ARK recognizes that true disruptive innovation is technologically enabled, which causes rapid cost declines and demand growth, cuts across sectors and geographies and spawns further innovation, stimulating growth over extended time horizons.
ARK believes that the best way to forecast a technology cost decline is that instead of forecasting cost as a function of time, the better formula should incorporate the mechanic behind cost declines: production volume.
ARK will trim or add to positions to (1) take advantage of opportunities created by short-term negative market actions or market sentiment; (2) provide liquidity to invest in companies in which ARK has relatively more confidence; or (3) fund names that ARK believes offer relatively more market opportunity relative to current price.
IBD: After a tough 2018, most of your ARK Invest funds did exceptionally well in 2019: What has changed, and do you expect this strong performance to continue into 2020?
Wood: During "risk-on" markets, ARK's strategies should outperform. Volatility can be positive on the upside, and investors come to recognize the misunderstood nature of many companies' fundamentals and look to identify companies that are leaders rather than largest market capitalization company in a passive index. The names ARK invests in generally do not comprise significant portions of broad-based indices.
ARK's strategies normally underperform in "risk off" markets. This happens, in part, because other investors and advisers tend to return to benchmark names at such times, which ARK generally does not.
IBD: ARK Genomic Revolution has been one of the top 10 sector ETFs with a 44% return in 2019: what contributed to it?
Wood: In a year when the health care space has trailed the market by an enormous amount, we're very proud that our Genomic Revolution fund has outperformed by so much.
The reason behind this is I think investors are starting to wake up to the fact that some of the companies in our portfolio are actually going to cure disease.
Invitae (up 46% in 2019) is a molecular diagnostic testing company that is being very aggressive in cutting the prices of its tests down so that they can increase access.
Genomic Holds CRISPR
One of the top companies that are curing disease is CRISPR Therapeutics (up 113% last year). They just published, for the first time in human trials, results which are suggesting that two people were cured of blood diseases, because CRISPR edited the genes that had mutated and caused the problem. They basically reprogrammed their genome.
IBD: ARK Innovation and ARK Next Generation Internet also did very well, outperforming the S&P 500 in 2019. What were the drivers behind their returns?
Wood: Both of them own Tesla (up 26% in 2019 and 74% in Q4).
In ARKW (up 36% last year), you've got two semiconductor manufacturers, Nvidia (up 77%) and Advanced Micro Devices (up 148%), both of which are becoming more and more important in artificial intelligence (AI). And we have one genetic testing company, Veracyte (up 122%). The reason we put it in ARKW is it is leading the way with AI in terms of diagnoses with its tests. Pinduoduo (up 69%), which is an e-commerce play in China, is a little like a combination of Groupon, eBay and Amazon in China. It started in the rural areas but it's finding surprising success in urban areas.
IBD: Several of ARK Invest's funds, e.g. Innovation, Next Generation Internet and ARK Autonomous Technology & Robotics share similar holdings. How would you advise investors which fund to pick?
Wood: The great thing about Innovation (up 35% in 2019) is when we see one of our innovation platforms being 'treated badly' in a way that people don't understand what's going on, we tend to weight it heavily in our portfolio. Innovation is the combination of all of the innovation platforms: DNA sequencing, energy storage, robotics, AI and blockchain technology. It's weighted more heavily toward the platform that we think is not being treated as it should be in the marketplace. So, right now it's more heavily weighted in genome (30% weight).
Whereas Next Generation Internet has very little having to do with the genome. It's much more involved with Software-as-a-Service companies and cloud — all of these companies are going to be made better with AI, which is a very big part of the Innovation portfolio. The reason Tesla is in there, is because the only way it's going to get into the autonomous space is through AI. We think it might be one of the most important AI plays in the world today. You'll also see more of the e-commerce plays in Next Generation Internet, especially the Chinese ones.
Autonomous Technology & Robotics is much more focused on Mobility-as-a-Service, so (it holds) Tesla and the autonomous ecosystem. You've got drone plays, collaborative robot plays Teradyne (up 119%) and Amazon, and a much heavier dose of 3D printing and space exploration.
IBD: In early 2018, you discussed (Grayscale) Bitcoin and its big contribution to the ARK Invest funds' performance in 2017. Since then, bitcoin has struggled. I see GBTC is no longer in ARKK, but is still a 1.5% position in ARKW. What explains this difference in investment allocation?
Wood: We rode that from the days when bitcoin was $250 to when it hit $20,000. And as it began to fork and as we had to sell it when it passed 10% of our portfolio, we learned that we were at risk of having too much unqualified income, which is what commodities throw off. So, we decided to take our money and run, and we took it out at a good time. We did that for business reason, not for an investment reason. As fiduciaries, we had to protect our investors against tax consequences associated with unqualified income.
We're optimistic about bitcoin as we have ever been, and so we're keeping it in ARKW and in our discretionary accounts.
IBD: ARK Fintech Innovation is your most recent addition. What kind of companies does it invest in?
Wood: The Fintech Innovation theme-based investment strategy invests primarily in domestic and foreign equity securities of companies that are relevant to the investment theme of financial technology, or fintech. This includes companies focused on and
expected to benefit from shifting the bases of the financial sector and economic transactions to technology infrastructure platforms and technological intermediaries. They may also include ones that develop, use or rely on innovative payment platforms and methodologies, point of sale providers, transactional innovations, business analytics, fraud reduction, frictionless funding platforms, peer to peer lending, intermediary exchanges, asset allocation technology, cryptocurrencies, mobile payments, and risk pricing and pooling aggregators.
IBD: How often do you rebalance the portfolios? Is it at set intervals or constant?
Wood: ARK Invest uses its own scoring system to continuously value companies and monitor the underlying investment thesis. As scores change, ARK's investment team adjusts stock positions in the portfolio. ARK believes that its consistent investment process and active management of high-conviction portfolios capitalizes on rapid change and avoids industries and companies likely to be displaced by innovation.
IBD: How do you control risk in the portfolios?
Wood: Thematic portfolios built around disruptive innovation face certain risks. For instance, a primary risk to ARK's investment strategy is that a disruptive technology or disrupter company that we believe will be one of the leaders of the future becomes disrupted itself or does not fulfill its promise.
To mitigate this risk, ARK continuously monitors the investment thesis to each of its portfolio companies using the Portfolio Tracker. The Portfolio Tracker amalgamates bottom-up scores, both qualitative and quantitative, for all stocks in the portfolio. Changes in analysts' scores trigger discussion with each portfolio team during daily morning meetings and Monday stock meetings. Any score downgraded to 6 or lower triggers full stock review.
IBD: Where does ARK fit in the industry regarding fees and how to you decide to set them?
Wood: We are at 75 basis points. We're trying to communicate that our competition is not other ETFs, but actively managed mutual funds. Those often have expense ratios of 75 basis points, but then they have another 50 to 75 basis points more in hidden fees. There are no hidden fees in ETFs.
The other thing we're communicating, is we're the closest you'll find to a venture capital fund in the public equity markets, but we're much more liquid, tax effective and transparent. And we think that innovation in public equity markets is hugely undervalued relative to innovation in the private market.
