Cathie Wood pulled no punches in her talk to a packed audience at the Exchange conference in Miami Beach, Florida. Responding to a question about those who are betting against her success, including the nearly $400 million Tuttle Capital Short Innovation ETF (SARK), Wood calmly, but forcefully, defended her firm and its strategies.
“I found [the short ETF] really interesting. For hedging purposes, I can see it,” she said. “But betting against American innovation is going to be a very bad bet. If we’re right, then they’re going to have to cover their shorts, [leading to] more demand for our stocks; it’s great.”
Wood’s confidence in the face of a brutal year for her ETFs was no doubt reassuring for her investors, many of whom were in the audience, cheering her on and chuckling every time she hit back at her critics. Even Wood’s interviewer, CNBC’s Bob Pisani called her a brilliant innovator in the ETF space.
The interview encapsulated how, even after a terrible year of performance, Wood remains the closest thing to a rock star in the ETF and broader asset management space.
During her talk, Wood emphasized how her conviction in her investment strategy hasn’t wavered despite the yearlong slump in the price of her ETFs.
ARK’s flagship fund, the nearly $11 billion ARK Innovation ETF (ARKK), has dropped 36% so far this year and a whopping 60% since its peak in February 2021. But despite the slump, Wood told the audience that nothing about her stocks has changed fundamentally.
“As our stocks have come [down], the fundamentals for the most part have not deteriorated. If anything, our conviction has increased,” she said.
Wood pointed toward the more resilient valuations of private market companies as evidence that the underlying value of her holdings continues to be strong.
“In the private markets, we are seeing innovation treated very differently. I think the private markets understand that over the next eight to 10 years, truly disruptive innovative is going to move up in the public markets from $10 trillion in market cap today to $210 trillion in 2030,” she explained.
Wood noted that crypto platform Blockchain.com’s valuation nearly tripled over the past year, from $5.2 billion to $14 billion, and yet the market value of Coinbase—one of ARK’s top holdings—declined 40% in the same period.
“It makes no sense,” exclaimed Wood.
Disruptive Innovation Thesis
Though out of favor today in an environment of high inflation, rising interest rates and compressing multiples for growth stocks, Wood opined that it was inevitable that the companies she invests in would change the world, rewarding her patient investors.
In turn, the broad indices, like the S&P 500—which have been much more resilient than her funds in recent months—would eventually underperform.
“’Tried and true’ has worked because we haven’t had five major innovation platforms evolving at the same time. The world didn’t change that much; you have to go back to the early 1900s to see three platforms evolving at the same time—the telephone, the automobile and electricity. We have five evolving now. What this is going to mean is that the tried-and-true strategy which favored the indexes is going to be tested,” Wood warned.
But Wood also said she doesn’t directly compare her funds’ performance to the S&P 500 or any other index. She said that ARK is “benchmark agnostic,” with a minimum target of 15% annual return over five years.
That target return is much higher today, Wood said, because the prices of her stocks are down so much: “A year ago, we thought our portfolio would deliver a 15% compound annual rate of return; now we think 50%.”
Wood claimed that eventually her stocks would go up, even assuming more multiple compression, and that she wasn’t worried about the short-term profitability of the companies she invests in.
“Companies are sacrificing short-term profitability in order to gain [market share],” Wood said.
Pushing Back On Her Critics
Only time will tell whether Wood’s massively bullish thesis on her portfolio companies is correct. At ARK’s peak last February, it looked like she was spot on, but her ETFs have fallen so far and so fast that cracks have begun to form around the ARK fortress.
The flagship ARKK has delivered gains of 177% over the past five years, still more than the S&P 500’s 106% return in the same period, but the gap has shrunk significantly over the past year.
The aforementioned SARK, which bets against her flagship fund, has picked up $400 million in only a few months on the market. The success of that fund may lead to even more ETFs being launched that bet against ARK.
Meanwhile, a widely read Morningstar analysis of ARKK panned the fund and highlighted its numerous risks, including its stock concentration and dependence on Wood as a manager.
ARK’s founder sharply criticized the report, pushing back on all of the author’s points—as well as the author himself.
“I don’t think the author has ever managed money and has 45 years of experience, so I’ve been around the track,” Wood said, while hinting that the report might not have been objective.
“We don’t fit into a Morningstar style box. I think there might be other influences on him there … I believe there might be some rules or guidelines at Morningstar that suggest this, that or the other,” she added.
Wood also pushed back on the idea that her funds were too concentrated: “During risk-off periods, we always concentrate our portfolios towards our highest-conviction names. Most people assume that concentration increases risk; I don’t think that’s the case.”
Loyal Investor Base
Despite all the criticisms and poor performance over the past year, investors have hardly wavered in their confidence in Wood and her funds.
The flagship ARKK has actually seen inflows of $583 million so far in 2022. Over the past year, it’s had outflows of $2.4 billion, though that’s quite modest considering the magnitude of the ETF’s decline.
Wood commented on the loyalty of her investors:
“The reason we have had such great loyalty and retention of assets is because we give our research away, we share our ideas, we answer questions. We want to be out there even more when times are tough.”
“Radical transparency—disclosing our holdings at the end of every day—our shareholders are grateful for that. They want to be brought along; they want to see what we’re buying.”
She added that she has no intention of creating a hedge fund and that the ETF wrapper was the perfect vehicle for her investment strategies.
“I decided against a hedge fund because I want the average investor out there to enjoy a much better retirement or a much better life than he or she ever expected,” Wood noted.
Additionally, ETFs provide “transparency, liquidity, cost effectiveness and tax effectiveness,” she concluded.
Follow Sumit Roy on Twitter @sumitroy2