“It’s been a fascinating time to be an active manager,” Cathie Wood told MarketWatch in early June.
Left unsaid: It’s been a fascinating time to be an active manager whose long-held strategy aligned perfectly with a once-in-a-lifetime crisis-driven upheaval of technology.
Wood, the founder and CEO of ARK Invest, has grabbed attention, some of it skeptical, for that unwavering belief in deeply disruptive technology companies, and for her insistence that big bets on outside-the-box investments are akin to value plays. “If you have a five-year time horizon, like us, I can tell you with a straight face that I believe we’re a deep value manager because of these opportunities,” Wood said in an extended interview with MarketWatch in December.
The company’s flagship fund, the ARK Innovation ETF /zigman2/quotes/204808965/composite ARKK +1.90% , is up 26% in the year to date, compared to just a 7.4% gain for the Nasdaq /zigman2/quotes/210598365/realtime COMP +0.74% . It’s pulled in over $1.3 billion in assets in that time period, according to FactSet data.
Wood is known for her transparency: ARK researchers communicate regularly with people in the industries they’re investing in, the company publishes its trades, and it sends out weekly commentary on big movers in its portfolios.
In an update since the COVID-19 pandemic locked down much of the country, Wood newly shared what her ideas have meant in practice: how the coronavirus crisis has helped accelerate innovation, more details on the trades she made during the March madness, and why the intuition of active managers beats algorithms.
MarketWatch: At an online event last month, you said, speaking of the pandemic and the lockdowns, that “innovation gains traction during tumultuous times.” You listed working from home, being educated from home, calling doctors from home and online retail as activities that have gained more traction during this period, and said, “I believe we have compressed three years of progress in terms of these new innovative platforms into three months. I don’t believe the economy is going back.”
Could you talk a little bit more about that idea, and also how ARK thinks about finding investment opportunity in that backdrop?
Cathie Wood: Companies make plans to adopt new technologies, but sort of take their time. They will take a three- to five-year look at the investment cycle. What has happened is, well-established companies were not well set up for a digital workplace. We heard about a lot of struggles taking place out there and a determination to say, finally, we have got to get onto the newest platforms. We have heard a lot of our companies saying, we have seen more interest in the past few months than we expected in the next few years. It’s an accelerated shift toward the technologies that are faster, less expensive, more productive [and] allow for more creativity.
Share gains absolutely have taken place in all kinds of innovation. We have learned the hard way that credit cards and debit cards are the most vicious virus spreaders out there. They’re worse than cash. The move toward digital wallets has taken off and this will be very disruptive for banks. Square Inc. /zigman2/quotes/205989440/composite SQ +5.29% has network effects. Banks, to attract a customer, have been willing to pay hundreds of dollars. Square spends about $20... these new services, providing peer-to-peer transactions, small business and consumer loans, the reason Square especially can do this is that it sees every single transaction these small businesses have.
‘In this season of despair for all kinds of reasons, we’re seeing innovation be a great source of hope.’
Cathie Wood, founder and CEO of ARK Invest
Before coronavirus, online shopping was only 15% of total retail sales. We think it is going to be 60% by 2030 , especially as drones start evolving and rolling robots are approved to allow deliveries of groceries. When it reaches scale we think it will cost about 25 cents, certainly less than a dollar, to send a five-pound package 15 miles.
The other thing that’s been galvanized by this crisis is collaborative robots. Universal Robots, which is owned by Teradyne /zigman2/quotes/208321188/composite TER +2.73% , makes a product that look like the arms of a robot for picking and packing. They’re going to be working with humans, and increase human productivity. They will have sensors so they don’t harm people and are able to work beside people.
This will be accelerated because of social distancing. People on assembly lines can’t be working next to each other. The robots are dropping in price, they’re below $20,000 now. They’re getting to be competitive with human beings and are taking jobs that are quite menial. Hopefully we will retrain people so they get interesting jobs. In this season of despair for all kinds of reasons, we’re seeing innovation be a great source of hope.
It was very interesting to be managing our style of portfolio during the teeth of the crisis because what we saw was the quantitatively-oriented managers just sent algorithms out there to look for any company with a small cash cushion and negative cash burn and kill it. One was 2U Inc. /zigman2/quotes/201921395/composite TWOU -0.76% , an online education company serving colleges and businesses and boot camps. Algorithms found 2U and took it, in the span of two weeks, from $30 to $11.50. We bought the heck out of it because we knew it was a solution to the problems out there.
I remember saying, in our portfolio, let’s look at those companies that are getting hit hard: Zillow /zigman2/quotes/204413973/composite Z +2.47% and Invitae /zigman2/quotes/203200150/composite NVTA +0.99% . They were trashed. Trading around disruption and the volatility associated with disruptive innovation can be profitable… Zillow was a fascinating one. Its peak was $66.68, it dropped in the span of three weeks to $20, and now is back up at roughly $60. These great buying opportunities were partially because of the automatic-pilot high frequency trading out there. We were a buyer of these companies that were absolutely solutions to the problems coronavirus handed us. I mean, Zillow saw a 500% increase in online virtual tours. It’s been a fascinating time to be an active manager.
MarketWatch: Funny, one of the themes that’s gotten the most attention recently as a result of the pandemic is working from home — and that’s one you didn’t mention.