Ark Invest CEO has had a history betting on Wall Street's most popular and arguably oversold technology stocks.
Cathie Wood has recently gained more traction on financial news and social media through stock picks in the world's largest technology firms with arguably questionable price targets. Wood's investments are hugely popular including the likes of Twitter, Shopify and Square. Most choices are heavily weighted in global passive indices, traded with large volume and subject to large amounts of speculation. Although, this is the essence of her investment strategy and allows liquidity and a premise for scalability.
Building an Ark
Before the beginning of her career Economist Arthur Laffer, a supply-side economics advocate and an economic adviser under the Reagan and Trump administration became her mentor through her alma mater, the University of Southern California. Supply-side economics emphasises the improvements in the quality or quantity of factor endowments for growth. No doubt this formed or elevated the basis for her investment strategy, aiming for returns as a consequence of technological advancement and innovation. Laffer has also since said that her investment horizon was infinite, which he argued was positive. Confirmation bias and inflexibility for long-term holdings could be a downside to this. Wood's flagship fund, the Ark Innovation ETF, fell 20% in 2021 and Wood has gone 'soul-searching' to reestablish conviction in her research. As a side note, she has made significant donations to the Republican party and conservative politician campaigns; Wood is also a dedicated Christian, one aspect to her very unconventional character on Wall Street.
At Jennison Associates, she was authorised by Spiros Segalas to find her own investment cases that were overlooked and undervalued by the market separate from other analysts at the firm. In her tenure, Jennison Associates' share price increased 250% including dividends within a 7 year period, an implication of her influence and work. Wood has progressed through a conventional path in investment management, taking leadership positions in Tupelo Capital Management and AllianceBernstein (AB). Woods's ideology was too risky for AB, leading to the founding of her own firm, Ark Invest, which attracts a wider market with exchange-traded products. Surprisingly, the initial capital to the entity was provided by disgraced hedge fund manager Bill Hwang. Wood now manages $85bn in assets.
Big Returns
Wood divides her investments into 6 broad categories: genomics, robotics and artificial intelligence, financial technology, mobility, space exploration and 3D printing. All segments provide managed accounts to investors and actively managed exchange-traded funds (ETFs) reduce the cost for savers. Model portfolios and UCIT funds have been created for the most popular product, the Ark Innovation Fund. In terms of returns, there are a few points to make on the sensitivity of the products to governments and macroeconomics.
There is a strong fiscal reliance on these assets to generate alpha, Wood sees this as a positive and regards support as inevitable. For example, Wood sees Tesla's fair value at $4,000. A catalyst for Tesla demand is the convenience and cost of charging; Biden has budgeted $5bn to state governments for half a million charging stations to be installed across the United States. There is an additional $7,500 tax credit pending to lower the cost of electric vehicles. Despite conservative mentors, her investment strategy relies upon the US debt ceiling being constantly elevated and the expansion of government. Her principles match with what politicians aim for. Furthermore, the acceptance of financial technology and cryptocurrency requires increased financial regulation; Wood expects Bitcoin to reach $500,000 over the long term. Lastly, space, genomics and robotics are heavily used and have revenue streams from federal government contracts.
Wood aims for the stocks to perform well in all aspects of the economic cycle. Either because they're necessities, including genomics and financial technology, or will be used to stimulate an economy's growth, such as AI or 3D printing. The flagship ETF has been recently hit due to an underestimation of the persistence of inflation, with central bank models of the consumer price index incorrectly judging the price path of some components of the basket. Technology stocks have valuations heavily weighted with opportunities for growth. These valuations are discounted by interest rates in discounted cash flow models used by equity analysts in most investment banks, which then impacts their allocations. The Fed's more recent hawkish tone has struck technology stocks specifically in Wood's innovation fund. Despite this, there is still a significant tailwind with Biden's fiscally expansive ideology. At the end of 2021, there was criticism towards Wood when she predicted an unrealistic return of 40% in a report to her flagship fund, an overestimate for this stage in the economic cycle based on previous data.
Having such a long term investment horizon, as touched upon earlier, may lead to inflexibility in regards to rebalancing. Wood's strategy needs to be as innovative as the companies she is investing in. The strategy is reliant on market timing and asset selection, as many technology start-ups fail, overleverage and burn cash quickly. Choosing the most popular stocks may not always be a good idea, as most of the opportunity is baked into the price. Therefore, precise position scaling is needed when corrections occur. Ark Invest manages relatively specialised funds. This equips Ark with unexpected benefits in regards to talent and communication; often stocks exposed to technology behave in a similar way.
Criticism towards Cathie
As explained, the assets are very sensitive to interest rates making returns year-to-year uncertain. Hedge fund short interest has increased to 5% in March. A prominent Twitter spat Wood has was with Michael Burry, famous for an $8.4bn exposure of credit default swaps before the financial crisis. Two months after the debate Burry removed his short position worth $31mn (200,000 ETF units) after Tesla reached a $1tn market capitalisation. Once again, this may have been a case of market timing as Tesla secured a Hertz contract and reported record sales in 2021, Burry still has the conviction that one day he will be correct.
Lastly, Wood has an unconventional approach to transparency and is very popular with meme-stock holders, appealing to the masses through social media. Wood discloses daily positioning through email updates and regularly appears as a guest on financial broadcasts. Her influence is arguably a risk if Ark was ever to go public, this is unlikely at the time of writing. In addition, Wood hires unconventional staff with questionable experience in investment management. One crucial member of staff was a Stanford senior studying Ocean Science when first meeting Wood in 2013, Chris Burniske, that pushed Wood to consider investing in crypto assets. These are changes that many old-school investors dislike.
Unorthodox figures, including Wood, or those who are bold enough to do something different appeal to social media and the masses. Appealing to social media is a reason for her popularity, she can capture headlines and influence prices. However, it is curious to see her investing in companies that strongly rely on government expenditure and investment given her former mentors and the strong conservative views she possesses. Wood is now experiencing greater pressure around her performance in a tighter monetary environment; it is likely that returns will become mean-reverting, returns seen in the pre-COVID era.
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