By Kelvin Lee, Alonso Munoz
If you don’t know Cathie Wood, here’s a short summary: She’s a wall street veteran that in 2014 founded ARK Invest, an investment fund with over $16 billion in current assets across 9 different Exchange Traded Fund (ETF) offerings. ARK’s funds are known for their thematic investments in innovative technologies such as genomics and electric vehicles. Over the last two years, Cathie Wood and her funds have become a topic of debate on market imbalances, prospects of future innovation, and the evolution of modern financial markets.
Underneath Cathie Wood’s Magic Touch.
It was back in May at the Milken Institute Global Conference that I heard Apollo Investment CEO Marc Rowan joke that “You’ve worked for me for 10 years and I still don’t know if you are a good investor”. It’s a bit of banter, but there’s some truth there. We’ve been in a long bull market and nearly every equity sector has performed well since 2008. Even an efficient market hypothesis strategy of blindly picking positions from the S&P500 would have made money. Cathie Wood just picked a lot of tech positions, and unsurprisingly, they did well. Is it groundbreaking that technology stocks do well in an up market? Let’s grade Cathie’s flagship fund ARKK fairly. Its 157% appreciation and 1st percentile ranking in 2020 is the fund’s claim to fame. However, since its inception in 2014, ARKK has only outperformed peers in 2 of its 8 years, with it being down (65%) since 2021. That isn’t an illustration of investment prowess, in my opinion. I look for consistent and statistically significant outperformance, not a short-term high risk reward strategy that only needs to hit once. ARK’s bet on Zoom, for example, did extremely well during Covid but fell justly a year later as larger firms mimicked the same software and demand dropped. This is an issue with innovation stocks. They aren’t diversified, and they eventually lose market share as other companies implement the same idea. They usually perform well based on overly optimistic sentiment rather than fundamentals. Prices jump, investor returns jump, but earnings stay flat. Things just get more expensive until either (ironically) there’s another disruption, or the environment forces fairer valuations and pricing. That’s when the music ends and duly needed correction occurs. We’ve been here before. The father of disruptive innovation theory and Harvard economist Clayton Christensen launched his own fund to bet on disruptive positions two decades ago. Less than a year after its launch, the Disruptive Growth Fund lost more than 60% and was liquidated. A show of market dexterity would involve consistently picking and EXITING positions at the correct time, and neither ARKK nor Christensen has done so. While I’m confident that disruptive advancements such as automated driving, virtual augmentation and genome therapy will structure the future, I just don’t think it takes a genius to figure that out.
– Kelvin Lee, Portfolio Manager
A Story of Proficiency and Resolve
A bunch of luck, but mainly conviction and positioning: Just about anyone with an investment account or the internet has heard of Cathie Wood and her flagship ETFs. At the ETF Exchange conference in Miami this year, I purposefully stood out of place to watch her live interviews, almost as if I was taking a firsthand look at a unicorn. The ARK Invest ETFs and Ms. Wood have been sensationalized by the media, the reddit crowd, and the army of retail traders that entered the financial markets during the Covid crash. Armed with stimulus checks or “stimmys”, retail traders flaunted market crushing returns using Cathie Wood’s ETFs during the most exuberant market years in recent history. Heading into the fall of 2021, all the starts were aligning for one of the greatest busts since the dot com crash. So much so, that another investment manager launched an ETF that “bet” against the performance of Ms. Wood’s flagship ETF. That strategy has rewarded market bears and doomsayers handsomely in 2022. Aside from all the media buzz and “Monday morning quarterbacks”, the ARK Invest team has not deviated much from their story and conviction on positioning. So far this year, the battered ARK Invest team has continued to boast inflows of assets even as their funds notch losses for the year in excess of 40%. In the face of criticism, the ARK CEO has invited skeptics to “poke holes” in her firm’s models and stuck to her ideology during the painful selloffs this year. Looking back at prior years, Ms. Wood’s flagship ETF has frequently outperformed the S&P 500 on a total return basis. Aside from returns and performance, thematic and specialized investments should be used as a complementary element in a portfolio, and not necessarily a foundational block. This is especially true for retail investors, not “traders”, who typically would be severely impacted by the magnitude of percentage losses the ARK team has experienced in their funds. As with most things, time will tell if the ARK team’s success continues, but technological advancements and continued innovation could be a tailwind heading into the future. At least now investors have a way to target specific themes in disruptive innovation, and the investor demand for Cathie Wood’s strategies is unquestionable.
– Alonso Munoz, Chief Investment Officer
To contact the author of this story:
Kelvin Lee at kelvin@hamiltoncapllc.com
To contact the editor responsible for this story:
Alonso Munoz at alonso@hamiltoncapllc.com
