Year to date figures for ARK Invest, the thematic investment firm focused on disruptive innovation, show their flagship fund, available as an ETF, and in a variety of other formats, ARK Disruptive Innovation, has returned 101.8 per cent year to date (as of 17/11/2020), while the firm’s assets, totalled at USD4 billion when ETF Express last interviewed them in 2018, are now USD33.3 billion (as of 31/10/2020).
In the best possible way, the pandemic has suited the firm’s investment theses well. ARK Invest CEO Cathie Wood and her team believe that the global economy is undergoing the largest technological transformation in history and that investors in broad-based, backward-looking indices could be at risk as emerging technologies transform entire industries.
This thesis is expounded in their new ‘Bad Ideas’ report, which identifies five sectors that it believes investors should avoid given the risk of disruption and disintermediation: Physical Bank Branches; Brick and Mortar Retail; Linear TV; Freight Rail and Traditional Transportation.
Ren Leggi (pictured), client portfolio manager at ARK Invest, explains that the ‘tremendous’ growth in assets is partly due to the performance, but at least half is due to inflows.
“A lot of it has to do with the pandemic and its impact or even innovation’s impact on the pandemic,” Leggi says. “Innovation is all about solving problems and these innovative technologies that we have been investing in since 2014, and Cathie even further back than that, have been the solution to many of the problems caused by the pandemic.”
The solution for getting out of the pandemic is understanding and sequencing the virus and how that technology has improved over the last few decades is based on cost, Leggi says.
“As these technologies are hitting tipping points in the cost structure, it unleashes demand and the pandemic has exacerbated that acceleration.”
Leggi comments that across every single theme on which the firm is focused they saw an adoption as a result of the pandemic as businesses and consumers were faced with a very different world, locked-in and working from home, shutting their doors and turning to ecommerce.
“And then realising they should have been doing it all along,” Leggi says. “Some companies have seen increased market share.
“We saw this acceleration take hold and that has to do with the performance that has been so strong against the S&P500 which has done 12.3 per cent year to date. The big difference in figures is what separates innovation from the old world. Some of these companies have taken significant market share from these old world companies.”
The five innovation platforms focused on in the ‘Bad Ideas’ white paper are not only creating value but also causing a lot of disruption. ARK Invest describes itself as focused on ‘disruptive innovation’. “We talk more about the innovation part than the destructive part,” Leggi says. “Some of the sectors in the S&P500 are becoming more vulnerable as a result of these technologies.”
Geopolitical concerns around the US Presidential election or fears of a trade war with China have impacted markets, Leggi says. “But now in the long run, we don’t think it can slow any of these five innovation platforms from what Cathie calls ‘escape velocity’.”
The shift away from fossil fuels to the grid and the rise in electric vehicles is part of this and Leggi describes Tesla as a premium example of true disruption.
“Our team is set up to capture innovation,” he says. “The automotive analysts who are focused on that sector today, in which Tesla sits, are focused on a technology that has been around for 100-years and should not be analysed by them.
“Lithium ion batteries are what Tesla was founded on and you need someone well versed in the space to understand that – traditional auto analysts do not do that and we have an analyst who understands that.”
ARK Invest famously hires analysts with ‘domain expertise’ in the technologies in which they invest. ETF Express’s previous interview with ARK Invest in 2018 was with analyst James Wang, who came to the firm after nine years at visual computing firm Nvidia.
“We cover companies by technologies,” Leggi explains, which puts Tesla into three buckets: autonomous vehicles, AI and energy storage.
ARK Invest’s investments are so famously followed that there is a Twitter handle to help other investors follow them. Despite that, the firm has no intention of going to a semi-transparent structure.
Leggi was a former allocator to the fund who joined the firm’s investment team as a client portfolio manager just over two years ago, sitting with Wood and the director of research and the investment team.
He was formerly in research, due diligence and manager selection with in-house roles at Morgan Stanley and Legg Mason.
“I have a good handle on what is going on in our individual portfolios which I can communicate to our clients,” Leggi says.
The assets are largely from a retail source, but institutional investment is growing, with new ratings from two of the three principal institutional consultants, and assets coming in from overseas sovereign wealth funds and Aussie superannuation funds.
The flagship strategy dominates the assets, with USD17 billion under management, USD10 billion in the ETF format, USD5 billion in a UCITS fund and the balance in mutual funds and separately managed accounts.
The UCITS version is offered in Japan, a country that likes a thematic investment, and where ARK Invest has a partnership with Nikko Asset Management.
The white paper ‘Bad Ideas’ is available on their website, detailing the firm’s findings: ARK believes global e-commerce will quadruple to 60 per cent of retail by 2030 with retail real estate values likely to suffer. The number of US linear TV households could drop 48 per cent from 2019 levels in the next five years and US linear TV advertising revenue could drop 51 per cent from 2019 levels in the next six years, the firm predicts.
ARK expects electric and autonomous technology to dramatically lower the costs of trucking from 12 cents per ton-mile to three cents in the next five years, undercutting rail prices with more cost-effective door-to-door services. Meanwhile, autonomous electric taxi networks could reduce the cost of point-to-point mobility to just USD0.25 per mile for customers, becoming the dominant form of personal transportation in urban areas. This could pose a risk to airlines, public transit, ride-hailing, insurers, automakers, auto dealers, rental companies and oil, the firm says.
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