If you ever need an example of the saying being in the right place at the right time ARK Invest would be the perfect illustration. Over the course of 2020 their assets under management grew from US$3.5billion, to US$41.5billion, growth of over 1000% in a single year, as their listed funds possessed all the stock names that investors were clamouring for.
Perhaps you’ve heard of ARK, or its founder Cathie Wood. They’re frequently mentioned in passing on stock market related podcasts or in press. Justin and I regularly mention both of them in Market Noise. But if you’re like me, you perhaps only know a little of the surface level story. So I thought I’d take the time to use this wonderous thing we call the internet to learn all that I could about ARK, it’s founder, and why they are relevant to us investors today. I hope you enjoy.
General Advice Warning – Please note, this piece is for information only and in no way intends to be investment advice. Read our full disclaimer here.
What is ARK?
ARK Invest is a fund manager. They currently offer 9 different funds, though it is their 6 actively managed ETF’s that get most of the interest. Their active funds bear very little resemblance to standard benchmarks, and they don’t restrict themselves to only US stocks. This appears to be a key ingredient in successful active management today. Vanguard and friends have made broad index investing so cheap and effective, that an active manager trying to produce a diverse, market wide, portfolio is likely to be doomed to failure.
ARK make their positioning very clear. From the front page of their web site:
We Invest Solely In Disruptive Innovation
A key underpinning is Cathie Wood’s belief that traditional fund manager research is not well suited to following innovative companies. Again, from their web site:
Despite its potential, ARK believes the full magnitude of disruptive innovation and the investment opportunities it creates are often unrecognized or misunderstood by traditional investors. ARK researches across sectors, industries, and markets to gain a deeper understanding of the convergence and market potential of disruptive innovations.
The success of this world view can most clearly be seen in ARK’s Tesla call in 2018, the call that really put them on the map. They published a report on Tesla with a price target $4000 in 5 years. At the time Tesla was trading at $300. It seemed laughable for a business which, to that point, had never produced a profit.
Tesla had a 5 for 1 stock split in 2020, so $4,000 is the equivalent of $800 today. Tesla’s stock price hit $883 in January of this year, ARK were proven right, and 2 years earlier than forecast.
Interestingly ARK most recently published a price target for Tesla of $3,000 for 2025, so clearly they still see plenty of upside.
ARK is an acronym based on what Cathie Wood believes are the foundations for investing in disruptive, innovative companies:
- ACTIVE management to capitalize on the rapid change innovation creates.
- An open RESEARCH ecosystem that is freed from sectors, geographies, and market caps to capture the convergence of technology.
- The sharing of KNOWLEDGE to gain a deeper understanding of the areas we are researching and investing in.
In researching this piece, I found some suggestions that the ARK acronym may have been reverse engineered, and Cathie original choose the name for more biblical reasons. But whatever, the acronym works.
What are the funds ARK has?
Here are the 6 active ETF’s which are what ARK is known form
ARKK – ARK Innovation Fund. Inception October 2014
ARKG – ARK Genomics Revolution Fund. Inception October 2014
ARKW – ARK Next Generation Internet Fund. Has Bitcoin exposure. Inception September 2014
ARKF – ARK Fintech Innovation. Inception April 2019
ARKQ – ARK Autonomous Technology and Robotics. Inception September 2014
ARKX – ARK Space Exploration. Inception March 2021
As mentioned earlier, ARK do have some other funds, but the above are their core US listed ETF’s.
A common attribute of the ARK family of funds is that they tend to be quite concentrated at 30-50 stocks each. To some extent this is likely to a function of the narrow niches of each fund. How many potential listed companies are there in the Genomics space for instance?
Who is Cathie Wood?
Cathie Wood founded ARK Invest after successful stints at Capital Group, Jennison Group, Tupelo Capital Management, and AllianceBernstein. She is 66 years old, a fact that surprises some people given the innovation space is so frequently dominated by people in their 20’s and 30’s.
Whilst at AllianceBerstein where she was responsible for managing a $5billion portfolio, she was criticised for significantly underperforming during the GFC in 2007/8.
She pitched the idea of establishing a fund to invest in companies focused on disruptive innovation to the management at AllianceBerstein, but was rejected on the basis it was too risky. That rejection led to her resignation, and the founding of ARK.
Bloomberg named her the best stock picker in 2020. She was also listed in Forbes 50 most influential people over 50 years of age, this year.
Why does ARK get so much attention?
One word – performance. In 2020 three ARK ETF’s were in the top 10 best performing ETF’s in the United States.
Here are the most recent performance numbers. You can see what a bumper year they’ve had recently.
|1 year return
|5 year return
Figures as at 30 June 2021, based on market price.
Looking at their performance over time:
ARKK – In the early years the fund actually underperformed the NASDAQ. From 2018 to early 2020 it had been outperforming, but their phenomenal gains have come after the COVID rebound. They were heavily weighted to many of the stocks that benefited from the COVID bounce.
ARKG – best performer in 2020 but as with ARKK, prior to the COVID drop in March 2020 it had been underperforming its benchmark.
ARKW – struggled in the first few years, but solid performance since 2017 relative to benchmark and as with other funds, was a rocket ship after the COVID correction.
Tesla is a large exposure in several of the ARK funds and has been a big factor in performance. It is the largest holding in ARKK by a fair margin.
One thing that caught my attention was sector composition of their flagship Innovation Fund. Whilst Tesla is their largest single holding, it has been healthcare more so than technology stocks where the portfolio has its largest weighting. The ARK funds have tended to be underweight financial services and industrials.
What are the big risks for ARK?
The big stock specific one would be a large drop in the Tesla stock price given this is a major component of several of their portfolios.
A broader structural risk is that as an Active ETF, the money that they manage is not locked in. Investors can redeem at any time. As a result, if market conditions turned unfavourable and returns dipped, investors might head for the exists, forcing ARK to sell down holdings even if they remain convinced of their long-term prospects. Given the size that ARK is today, this selling would be likely to depress stock prices in those companies that they hold, creating a horrible downward spiral. There’s no “sticky capital” in ARK’s funds, ie. capital that is locked in to ensure investors ride out the inevitable bumps. This appears to be ARK’s greatest weakness.
Another concern is whether they have now become too big be able to jump on the small up and coming companies that might be the game changers of the future. If ARK wants to stick to 30-50 stocks per fund, and the funds grow in size to USD25billion, as is the case for ARKK, then even a small investment needs to be hundreds of millions of dollars. If ARK try to buy that much of a small company, they will almost certainly push up the price, which is against the interest of their investors. We may have even seen some evidence of that recently for the newly listed Robinhood, a company that is not especially small.
Their size presents another problem. When ARK announced plans to launch a Space ETF (ARKX), smart investors front ran them, bidding up the prices of the most likely inclusions in the fund, before the fund had begun investing.
More broadly, ARK say they expect to outperform during “risk-on” markets, i.e., bullish, perhaps aggressive markets when investors are more willing to look beyond the largest capitalisation stocks. Their performance in 2020 aligns with this expectation. But of course markets aren’t always in that mindset, and so we should expect to see performance come back down to earth in more conservative times.
What is ARK thinking about now?
To answer this question you want to be looking at their research. One unusual feature of the ARK business model is their Open Research approach. Via the Research Centre on their web site, they publish detailed articles, white papers, videos, podcasts and more. Traditionally fund managers kept their research tightly under wraps, considering it core intellectual property from which they hoped to profit. But ARK takes a very different approach, sharing their findings, keen to convince the investment world of the potential they see in the investment opportunities they have identified.
They also have a YouTube channel that explore themes the they are interested in.
Recent reports have looked at:
Their web site also offers the following insight into ARK’s thinking:
We believe that artificial intelligence, DNA sequencing, robotics, energy storage, and blockchain technology are the innovation platforms leading the global economy into what could be the most transformative period in history.
The future for ARK?
It will be fascinating to see if the success of ARK persists, or if they just got lucky off the back of a global pandemic. Will they be a victim of their own success? The risks highlighted earlier are definitely a real and present danger for the future of ARK – that they are now too big to move in and out of stocks at attractive prices without moving the market, and that in a less favourable market, they will experience redemptions, which will force them to sell, and again, because of their size, that selling will push the prices of their holdings down, damaging their performance.
There is precedent for a bad outcome. In the dotcom bubble of the late 1990’s and early 2000’s, there was one fund manager, Janus Capital Group, which just like ARK, was in the right place at the right time. At the peak of the bubble, nearly half of all the money that went into mutual funds in the United States, went into Janus funds. But when the bubble burst, their funds lost around 60% of investors capital. Janus still exists today, but it is a shadow of its former self.
Has ARK just gotten lucky? We’ll only know for sure 5 or 10 years from now, but their success to date is undeniable and Cathie Wood certainly deserves credit for the opportunity she saw which has been so vividly proven out this past year.
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