Sunday 25 Feb 2024
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This article first appeared in Wealth, The Edge Malaysia Weekly on January 30, 2023 - February 5, 2023

After a tough 2022, which saw a drastic fall in its net asset value (NAV), Ark Invest (Ark) aims to turn its fortunes around by focusing on and raising stakes in the best companies in its portfolio. At the same time, Ark has reduced the number of companies in its flagship portfolio from 58 to 30.

Ark, founded by Cathie Wood, had a spectacular run in 2020 and 2021 when the NAV of its exchange-traded funds (ETFs) more than tripled. Wood was named the top stock-picker of the year in 2020 by Bloomberg’s chief editor for news, Emeritus Matthew Winkler.

The firm soon experienced a drastic change in fortunes, however, as the US Federal Reserve started to hike rates aggressively last year to tame soaring inflation. As investors discounted the present value of the future cash flow of tech companies, the NAV of Ark ETFs nosedived.

As at Nov 30, 2022, its NAV had fallen between 30% and 60%, according to Ark’s official website. As at Dec 31, 2022, the NAV of its flagship Ark Innovation Fund had plunged by almost 80% from its peak, according to Bloomberg.

Local investors did not escape the collapse in prices, as Ark ETFs are distributed to the market through various channels, which include unit trust funds, such as AHAM Capital’s World Series — Global Disruptive Innovation Fund. Those who invest in robo-advisory firm StashAway’s thematic portfolios, including its Technology Enablers, Healthcare Innovation and The Future of Consumer Tech, also have exposure to Ark ETFs. So are individuals who invest directly in Ark ETFs via brokerage firms. 

So, what is Wood’s plan to turn the situation around? In an interview with Wealth, she says the firm concentrated the holdings of its ETFs by raising stakes in the “highest-conviction names [the best companies in Ark’s portfolio, based on its scoring system]”.

“We concentrate our holdings with the highest-­conviction names. We have reduced the number of names in our flagship portfolio from 58 to 30, using the six metrics scoring system,” says Wood, who is also CEO and chief investment officer of Ark.

The six metrics include visionary management, company culture and economic moat, which is a company’s ability to protect its market share from competitors. Overall, the scoring system focuses on the capital spent by tech companies on research and development as a percentage of their revenues, and whether they are spending the money in the right place to facilitate innovative products and services. 

From a valuation perspective, Wood says, these companies are looking attractive. “Our assumption is that the valuations of companies in our portfolios went from very high to within a multiple of five years [average]. We use enterprise value to Ebitda (earnings before interest, taxes, depreciation and amortisation). And they have dropped from over 50 times to 15 to 20 times.”

She says Ark’s growth investing strategy remains intact over the long term, but it took a beating mainly because of fast-rising interest rates. 

Despite a potential recession this year, Wood believes the prices of Ark’s ETFs are nearing their “ultimate low” and could stage a comeback once the Fed’s interest rate hike starts to pivot. “Our strategy was hit so hard because the interest rate went up so much. When it starts coming down, we should enjoy a tailwind in terms of performance going forward,” she says.

Wood takes pride in Ark’s ability to sniff out companies poised to disrupt markets with cutting-edge technology. These are also companies excluded by traditional benchmark and equity indices.

Instead of Big Tech, such as the FAANG stocks (Facebook [Meta Platforms Inc], Inc, Apple Inc, Netflix Inc and Google [Alphabet Inc]), Ark invests in less typical tech names that common investors might not have heard of. The more popular ones under its flagship fund are Zoom Video Communications Inc and Tesla Inc, while those less well known to Asian investors include Exact Sciences Corp, Roku Inc and UiPath Inc.

“You don’t recognise the names in our portfolios because they are in their early stage [of growth]. We are the closest to venture-capital firms among asset management companies that invest in the public markets.” 

Wood says some of the companies that Ark invests in, such as those in the genomic or space industries, might not be profit-making at the moment, as they are investing heavily in research and development for exponential growth in the future, pending regulatory clearance. 

“For instance, one of the companies in our portfolios is waiting for regulatory approval for its drugs. It is in a great position to achieve that and will ultimately get royalties from many companies around the world. 

“Much of our job right now is trying to figure out who is the most likely to get approval from the regulators and which drugs are likely to get it. These companies are loss-making for now.”

Zoom, Tesla, Roku and Coinbase 

Among the companies in which Ark raised its holdings last year were those such as Zoom, Tesla and Roku. Zoom gained tremendous traction during the peak period of the pandemic. It had a total of 200 million users from just 20 million before the pandemic, which thrust it into the limelight among investors globally.

However, investors often misunderstood the company as a stay-at-home stock and a consumer play, says Wood, pointing out that it is actually gaining a sizeable market share in the enterprise communication sector, where companies globally are using it to communicate with each other for online meetings and virtual meet-ups.

“Already, its business is 56% enterprise. Since the early 1990s, when Cisco was laying the backbone for the internet, [online communication] was all hardware-centric. Now, enterprise communication is moving into the cloud, with US$1.5 trillion in sales per year. 

“Zoom is a prime beneficiary of this. It is using artificial intelligence to help salespeople extensionally as they come out with their IQ for Sales products, helping them figure out where to best spend their time and make sales calls,” she says.

Tesla, whose share price fell about 70% to US$123 at the end of last year, is another company in which Wood has increased stakes recently. Her bet is on the company’s autonomous taxi or robotaxi platform, which is expected to be launched by 2024. 

In its research report published in April last year, Ark estimated the total addressable market for autonomous ride-hailing at US$11 trillion to US$12 trillion. 

In the worst-case scenario, the firm expected Tesla to launch its robotaxis in 2028, which is highly unlikely. Ark believes a more realistic timeline would be 2024 or 2025. Wood expects Tesla’s shares price to be US$1,500 by then, which is more than 10 times what it is currently. 

The future of robotaxis is not as far off as some might think, says Wood. This is evidenced by the robotaxi proof-of-concept by Waymo, an autonomous driving company and a subsidiary of Alphabet, and Cruise Automation, a subsidiary of General Motors Co. 

Late last year, Wood and her analysts took a ride in a Cruise Automation robotaxi in San Francisco and the experience was more than impressive. She says: “It wasn’t a preordained route, as they took me to my son’s house in that area. They did it at night because that was when traffic was the lowest. They wanted to test it to make sure they were perfecting [the technology]. It was really unbelievable and good.”

Still, Wood expects Tesla to be the main player in this new market and command the lion’s share of it. 

Roku, whose share price fell more than 80% last year, is another favourite of Wood’s. The company manufactures digital media players — sold from as low as US$29.99 to several hundred dollars — that allow its users to stream a variety of free and paid channels on their TVs with internet connection.

Based on Ark’s research published last July, Roku was the top TV streaming platform in the US, Canada and Mexico and has been growing the number of its active accounts steadily over the years. 

As the market share of connected TVs rises and that of linear/traditional TVs falls, Ark expects many more advertisers to switch their advertising money to streaming platforms and connected TVs in the future, benefiting players such as Roku.

The firm expects Roku’s share price to hit US$605 in 2026 as the company continues to expand its businesses and grab market share.

Another company that Wood likes is Coinbase Global Inc, which operates a cryptocurrency exchange platform. She expects more cryptocurrency investors to return to the market after a bad year in 2022. The more regulated players are poised to benefit from their return. Wood also predicts the price of Bitcoin will hit US$1 million by 2030. 

Grave mistake to shun disruptive tech companies 

Wood says many asset managers in the public market are still haunted by the dotcom bubble burst of 2000, which was how they ended up being value managers. Terms such as “exponential growth” associated with early-stage companies worry them. 

“They have ‘muscle memory’ when they hear words like that, which has to do with their experience in the late 1990s. The last time they heard such a phrase as ‘exponential growth’, it did not end well.” 

She believes this apprehension is a grave mistake because technology in the 2000s was in its early stages, but it has matured in two decades. For instance, real cloud computing services did not really come about until 2006, with the emergence of Amazon Web Services. The cloud trend had its major breakthrough only in 2012 on the back of technological advancement and falling business cost. 

DNA sequencing was expensive back then. It cost US$2.7 billion and 13 years’ worth of computing power to sequence a person’s genome. Today, it takes about US$500 and a few hours of computing power, says Wood. An exponential increase in computing power also means that artificial intelligence is becoming much more advanced such that it can predict future trends more accurately than before. 


Is Cathie Wood a big risk taker?

Given the huge swings in the net asset value of investment management company Ark Invest’s exchange-traded funds, is Cathie Wood — its founder, CEO and chief investment officer — an enormous risk taker? 

Wood says she is, to a certain extent, as evidenced in Ark’s being the first public asset management firm to gain exposure to Bitcoin when its price was US$250. 

“Am I a risk taker? If you are talking about the willingness to look outside the usual [companies included in traditional benchmarks and indices], then I’m considered a risk taker,” she says. 

Some investors might label Wood’s investment style as thematic investing, but she prides herself on being a fundamental investor. The investment decisions she makes are based on fundamental research on the technological capability of each company.

She says: “Many people call it ‘thematic investing’; I call it ‘fundamental investing’. The only difference is that we have a longer-term horizon of five years and a different research team and infrastructure than most firms.” 

Wood says Ark’s analysts are not categorised by sectors or industries, but by technology clusters. They are “technology specialists, sector generalists”, as Wood puts it. 

“This is why Tesla is much easier for us to analyse. In a traditional asset management firm, it would go to the auto [sector] analyst. But it shouldn’t go to them. They are experts in internal combustion engine parts. 

“Our analysts, the three of them [who cover Tesla], are experts in battery technology, energy storage and artificial intelligence. That’s Tesla. And they collaborate. There’s no turf war on who is trying to figure this [company] out. 

“The way a traditional firm is set up, there’s a lot of turf war. The auto analysts would say, ‘This is my stock.’ The tech analysts would say, ‘Hey, wait a minute; this is an energy storage play, a renewable energy play!’ And they are all kind of tied up in knots.” 

Wood forms her research team structure based on lessons learnt from experience as a portfolio manager at an asset management firm. When she took on the role, she had a hard time figuring out which stocks to cover. 

She says: “Most of the analysts there were lifers. They weren’t going to give up their stocks to me [to do research], you know. So, I had to figure out my own stocks, my own universe, which meant I had to pick stocks that they didn’t want.

“What happened then was the emergence of data publishing firms like Reuters. They came out in the 1980s. They had their publishing business, but the publishing analysts didn’t want them, as they had a tech component in them. The tech analysts didn’t want them either. I said, I’ll take those ‘fall-through the cracks’ stocks.”

From there, Wood began to dive deeper into data, internet and technology companies, which laid the foundation for her to launch Ark in 2014.

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