'COVID-19 has turbocharged all our innovation platforms'

Listening to Cathie Wood explain her innovation investing philosophy feels like hearing an oracle from the future. The founder, CEO and CIO of ARK Invest has been a shining light on Wall Street, with her company, which launched its first ETF just six years ago, now managing nearly $19 billion.

Its flagship fund, ARK Innovation ETF (ARKK), posted a 94% return this year through October 26, topping 99% of funds in its categories, according to Morningstar. It focuses on DNA sequencing, robotics, AI, energy storage and blockchain technology. Wood and ARK have also caught the eye this year for being one of the smartest harbingers of the Tesla bull run.

As previously reported by WP, investment firm Emerge Canada brought ARK’s suite of ETFs to the NEO Exchange more than a year ago, with impressive results. Emerge hosted a webinar with Wood, which WP attended, to lift the hood on ARK’s approach.The pioneering investor, now 64, initially took stock of the state of innovation amid the coronavirus pandemic and also weighed in on the upcoming election. She believes COVID-19 has turbocharged all of ARK’s innovation platforms.

“During crises, consumers and businesses are afraid and they are willing to think about doing things differently,” she said. “They want to find faster, cheaper, more productive and more creative [solutions], and innovation happens to solve their problems. We had been expecting not only a V-shaped recovery, but we thought that our innovation platforms would lead that recovery. That, indeed, is what is happening.”

She said the five innovation platforms, which involve 14 different technologies, have all hit escape velocity, albeit with 3D printing lagging slightly.

Wood said innovation investors should be watching the U.S. election with interest, with the two candidates presenting two distinct platforms – one (Republican Party) that will continue to cut taxes and encourage tax reform and deregulation, and the other (Democratic Party) that will increase taxes, especially marginal tax rates, which are those most sensitive to investing. Wood believes the election will be much closer than the polls suggest but that a Joe Biden win raises concerns about the longer-term future of innovation in the U.S., not the short term.

She said: “So many people are asking ‘if Joe Biden wins, will that turn off innovation?’ Quite the contrary. If he were to win, and costs were to go up as taxes go up, then I believe innovation would be even more necessary to continue helping companies cut costs and offset that hit.

“I'm not worried about innovation in the short term in the U.S., I'm worried about the future of innovation, meaning beyond the next three to five years, because I think that other countries will be more friendly to this kind of capital, and innovation will migrate abroad. We will follow it - we're going to invest wherever we see innovation.”

Wood also explained how ARK translates a good company into a good investment, screening not via an index but by research. For example, its knowledge on the autonomous vehicle space began with a blank white sheet of paper and figuring out what actually goes inside an autonomous vehicle.

They learned very quickly that GPUs (graphics processing units) were going to be the brains of an autonomous vehicle and, by chance, they already owned a company, Nvidia, that made these chips in Nvidia and which back in 2014 specialised in PC gaming capabilities.

“We had no idea in 2014 that GPUs were going to be so important to autonomous vehicles,” Wood said.

ARK hired someone from Nvidia and soon realised that GPUs were going to be central to everything A.I. The stock was in the $14-20 range, so they snapped it up and moved it straight to the top of its flagship portfolio.

Assisting the bottom-up analysis is a six-point scoring system evaluating variables ARK thinks are vital to success in innovation. These include themes around company, people and culture, and visionary management that’s willing to sacrifice short-term profitability in order to capitalize on long-term, exponential growth opportunities.

It also turns a lens on barriers to entry. Enter Tesla and its eccentric owner Elon Musk.

Wood said: “For a couple of years, [people] were saying, ‘what the heck, why would you have a stock with that kind of nutcase at the helm’. We had been focused not on the person, but on the technologies he was spearheading and we were saying ‘no one else is doing this’. He was putting Tesla years ahead of any other auto manufacturer.

“We then kept our eye on the next [barrier to entry] - battery technology. Tesla was three years ahead of everyone. Artificial Intelligence chip? No one else was doing that, except for Tesla.”

Add in its 15 billion miles of real-world driving data – rival Waymo isn’t even up to 100 million – and its over-the-air software and Wood said Tesla’s score kept going up.

She said: “We’re as stock-research driven as any other team out there, but our time horizon is five years and that's very different from others. If you look at the difference between one to two years as an investment time horizon, and five years-plus as an investment time horizon, this concept of exponential growth makes a big difference in the early stages of growth in a company's life.

“Exponential growth and linear growth might not look that different from a very low base, but you give exponential growth some time, it pulls away from linear growth in a way that most analysts do not expect because they don't think it's possible for a company to drive revenue growth by 25% for 5, 10 15 or 20 years.

“Amazon's the poster child. We were very early there when it was a $5 billion company. Now it's over a trillion dollars. That's what exponential growth does. And we believe the stocks in our portfolio all have that potential to deliver revenue growth north of 25%.”