2020 may have been a challenging year for active investors everywhere, but for ARK Funds, it has been the best year yet for the ETF issuer. The firm, led by founder and portfolio manager Cathie Wood, has stirred up quite the frenzy over disruptive innovation investing through its actively managed ETFs, taking in almost $10 billion in net creations year to date, led by the $5.2 billion asset haul of ARK Innovation ETF (ARKK), now the biggest active equity ETF in the market, with $9.9 billion. Wood shares here what she’s taking away from this roller coaster year, and why solar stocks or nontransparent wrappers are not in her sights.
ETF.com: In 2020, Ark ETFs hit their stride. You’ve become this “overnight” success six-or-so years in the making. Even in a month like October, when tech and growth stocks corrected, Ark picked up more than $2 billion in assets—a significant amount. To what do you attribute this breakout year?
Cathie Wood: A couple of things have happened this year. First, innovation takes off during tough times. That’s when consumers and businesses are willing to think about doing things differently. They're scared. They're looking for answers, solutions to their problems. And we have a lot of problems.
Because innovation in products and services is usually cheaper, faster, more productive and more creative, people turn to it much more quickly than would otherwise be the case. Some of the companies we invest in are telling us that they didn't expect to see these sorts of customers or clients for at least three to five years, but they're all coming to them now.
The other reason that ARK has seen inflows, even when the market's been unsettled, is because of our communication with clients. We have webinars once a month, and anyone can join. All of our analysts are on it.
In late March, early April, when we saw there was panic, I started doing YouTube videos every Friday: “Stay at Home With Cathie.” I really do think we helped people a lot during that time. I'm not saying we're the reason they did anything differently, but at least they had data to back up some of the decisions they were making.
ETF.com: Active management in the ETF space has been a slow-go from the beginning. You stand out on three fronts: great storytelling; full transparency, which is unheard of among active managers; and die-hard conviction. Is that the winning recipe for ETF active managers?
Wood: The ETF world is so fond of transparency, it's almost become a part of the ETF industry's identity. That’s why we wanted to do it, so I agree on the importance of transparency. We publish our trades every day—anyone who signs up for our newsletter can get it. The fact that we disclose not only our holdings at the end of every day, but our trades every day, and our research has been key.
Our research is the starting point for the storytelling. As a portfolio manager, I need to be able to communicate our research, but some of it is so deep in the weeds, I have to pull it out and just say, “OK, this is what’s important here; this is what will move people into thinking about this, even if they don't act on it.”
That's really what we want, to communicate to people how their lives are going to change. The storytelling is really important. And believe me, sometimes, especially in the genomics space, we have to take a number of cuts at it, because it's very, very tough stuff!
Out of our research comes the conviction you're talking about. In fact, it helps me, as I'm digging deeply into the research and pulling out what we can share with people, to increase my own conviction as a portfolio manager. It's a virtuous cycle.
ETF.com: One of the most important metrics for an active manager is performance. Do you worry that the stellar run ARK ETFs have had this year may come to an end, and folks will hold you to it?
Wood: We’re going to go through a period of underperformance here and there, and we'll have critics dismissing our strategies—as they already are—as nothing but a bubble strategy. I'll be fine with it. I’m convinced that our strategy, which will go through periods of underperformance, will get back on the relative outperformance track. The platforms and technologies around which we base all of our research are ready for prime time. Many are already in prime time.
We got a glimpse from the tech and telecom bubble—Amazon, in particular—that companies, if they have invested aggressively in the short term, and sacrificed short-term profitability, will capture the lion's share of some massive markets. People made fun of Amazon for years because Jeff wasn't letting any topline growth drop to the bottom line. Look at who's laughing now. The traditional retail space is in shambles. And we're at only 16% penetration online to total retail. That destruction is only going to intensify.
ETF.com: Any stock picks that didn’t pan out over the years?
Wood: I remember in the semiconductor world, we thought Ambarella was making great strides in a security-oriented chip that could be used in drones and other mobile devices. As it turned out, the Chinese were onto this technology. Chinese are very good with surveillance technology, and they just stole the market.
We've seen a lot of examples. The solar industry is rife with them. We have never owned any solar stocks, except we indirectly do through Tesla and the solar roofs, but that's not their main story. Solar has not been economic over the years; it's depended entirely on subsidies, and we just never buy businesses like that. But sometimes we’ll buy into a technology; we thought Ambarella had that. But when we find out China's involved and that they want to take the market, we don’t wait around for very long.
Our biggest risks are two: One, if China decides it wants to try to go for No. 1 in a space, it’s going to use price and it’ll try and commoditize whatever the technology is. We’re very quick to run away from those. Solar and security chips were good examples. Two, as a strategy, is that if our companies will be bought, we get out. We don't like that because we look for them to have long runways. It has happened a number of times—Red Hat/IBM for example. Once we sell them, I'm done. That’s a risk because we lose a long-duration, pure-play growth company.
ETF.com: Where else do you see opportunity for product development or for new access areas?
Wood: We just hired an Asian innovation analyst. One of the requirements is that this analyst speaks three languages—English, Mandarin and Japanese. We believe that China is incentivizing innovation in a strong way, but because of all of the conflicts with the U.S. and the intellectual property fights with the developed world generally, China is going to become more intent on innovating and rising to No. 1 status. We're going to go to wherever the innovation is and where it's burgeoning.
ETF.com: When you think of 2020, and the year it's been for ARK and for disruptive technologies, what will you take away from this year?
Wood: As you said, we are the “overnight” five-year success. In truth, we were able to go out there and help lend perspective to how these innovative companies were going to solve problems created by the coronavirus. We were able to hold investors' hands, saying, “OK, the odds of this turning into a V-shaped recovery are very high, and here are the reasons.”
To the extent that we helped people build wealth and make their futures more secure, frankly I'm thrilled. It has been a very humbling year, too. I've been working a lifetime, and I feel like I've been working to make this sort of thing happen as I saw the investing world move away from innovation. In the public markets, as the indexes were outperforming active for so long, there was almost a defection from innovation to the point where, when I said I was going to start this company, people were saying, “Well, you're crazy. Active is going away.”
In October 2013, I remember sitting in Chicago at the Morningstar Conference—I had never been to an ETF conference—and Eugene Fama, the keynote, says, “We know that active is dead and that it's a losing proposition. And we know the ETF industry is set up for years and years and years of growth.”
When he said that, the whole room erupted, clapping, and I'm thinking to myself, “Wow, I think I'm the only active investor in this room.” My first thought was, goodness! But my second thought was, because I am a contrarian investor, “If everybody here believes this that strongly, maybe I am on to something in starting ARK.”
I learned very early in my career that if everyone is moving in one direction under a given set of assumptions, and an investor moves in the opposite direction, and, against all expectations, is correct, the rewards are enormous.
The ETF industry is much more entrepreneurial than the traditional asset management world. That's why we’ve fit in. We've been willing to push the envelope a bit.
My only surprise is that active isn't happening faster—just because I know that the ETF world believes that active is viable, it could be very interesting, and the community's very entrepreneurial. I don't know about nontransparent ETFs, though, because I see how much transparency means to the ETF community. That’s another hurdle for them. But I do believe in active management.
Contact Cinthia Murphy at [email protected]