ARK Invest is making waves with its innovation funds, which look to take advantage of ''backward-looking benchmarks'
Innovate, don’t imitate – especially when you know you can crush the leading indexes.
ARK Investment Management is very clear about what it focuses on, with their championing of Tesla having propelled its strategy into the spotlight in recent weeks.
The investment advisor, which was registered in 2014, focuses exclusively on disruptive innovation in the global public equity markets. Its CEO, Cathie Wood, has been dubbed the “best investor you have never heard of” but while she hasn’t dominated headlines the past three years, that’s probably because she’s been too busy beating industry peers and indexes.
The numbers so far back up ARK’s approach. In the US, its ARK Innovation ETF has increased 127 times to $2.4 billion from its initial $15 million beginnings. Wood’s laser focus on areas like genome sequencing, robotics, artificial intelligence, energy storage and blockchain has, since the company’s inception, earned almost 2.4 times more than the S&P 500 and 1.7 times more than the Nasdaq, according to data compiled by Bloomberg.
In a recent interview, she explained that her success comes down to doing the opposite to the benchmarks. “We’re all about finding the next big thing,” she said. “Anyone hewing to the benchmarks, which are backwards looking, they’re not about the future. They are about what has worked. We’re all about what is going to work.”
Canadian investors can also get a taste of ARK’s forward-thinking investment strategy. Last July, Emerge Canada launched six active ETFs, with ARK as the sub-advisor, on the NEO Exchange: Emerge ARK Global Disruptive Innovation ETF (EARK); Emerge ARK Genomics & Biotech ETF (EAGB); Emerge ARK Fintech Innovation ETF (EAFT); Emerge ARK Autonomous Tech & Robotics ETF (EAUT); and Emerge ARK AI & Big Data ETF (EAAI).
Tom Staudt, COO of ARK Invest, sat down with WP while in Toronto to talk about his firm’s approach. In the first part of our interview, he laid out why Tesla is “chronically underestimated” and then explained why structural inefficiencies mean investors are often missing out on significant exponential growth opportunities in part of their portfolio.
Central to this is ARK’s belief that there are more technological and innovation platforms taking place simultaneously than ever before but that global financial services are less prepared than ever to take advantage.
The first reason, he said, is that we have crossed a tipping point of equities held in passive funds, resulting in investors not having a fundamental reason why they hold or don’t hold a name. Staudt said passive funds are, therefore, specifically disadvantaging innovation, either because a new public company is smaller or because, for larger companies, it’s market-cap weighted. The latter fails to take into account the fact an innovator is investing aggressively on R&D, which takes down their earnings in the short term for a much larger return in the future.
“The index doesn't represent that,” Staudt said. “It just says you're spending more, your market cap’s lower, your weight in the index is lower, or in the case of smaller companies, it's not in there at all.”
Staudt believes the other inefficiency is that passive index-trackers tend to encourage a more short-term or trading focus, rarely featuring an outlook beyond 12 months. ARK sets its outlook at five years.
He explained: “There are a lot of very exciting, very high growth, potential technologies and industries, and thus companies that are doing amazing things with huge growth potential. They might not hit the P&L [mark] in the next 12 months but they’re definitely going to be within five years.
“We feel confident that if we can find those companies that are going to have explosions and growth in 12-24 months, 24-36, 36-48 and 48-60, we can discount that back just like everybody else.
“We're going to put our investors in the best situation possible to recognize exponential growth rather than just linear growth because when the market recognizes it, it tends to do so quickly; it’s just not always clear when.”
To do this effectively, ARK must protect investors against the two biggest risks of investing in innovation: being too early and paying too much.
Part of the latter is weeding out the value from the hype, a challenge epitomized by the recent IPOs of Uber, Lyft and Snap. The active management element also avoids the potential passive pitfall of merely tracking what’s going on at any one given time. ARK, naturally, attempt to stay ahead of the game.
Staudt said: “There are other technology or innovation funds available that are passive and based on an index that was written at a moment in time that may or may not have any actual bearing on where these rapidly changing spaces are going. What we want to do is make sure you're always staying on the leading edge, which by definition has a changing set of characteristics and rules.”
Always providing exposure to the next big thing is ARK’s mantra but it also wants to have that active ability to take profits or reallocate to a name that’s been punished “because the market misunderstands what's going on”.
He added: “It’s really using a private equity, long-term value mentality in a very growth phase, and then actively managing around market volatility and market sentiment to try to position the portfolio. Our EARK here in Canada pulls from all the things that we cover and if you were to look at it a couple years ago, technology would have been the highest sector but right now healthcare's the largest – it’s not a technology fund it’s an innovation fund.”
