Cathie Wood is the chief executive and chief investing officer of ARK Invest, whose exchange-traded funds have notched some of the best and worst returns in the market in recent years.
The firm’s flagship fund, ARK Innovation (ARKK), was an early investor in hot technology companies such as Tesla, Nvidia and Salesforce. It returned a blistering 153% in 2020, putting it in the top 1% of similar funds. Investors poured money in, making the fund the nation’s largest actively managed ETF, with nearly $28 billion under management in early 2021. But rising interest rates are kryptonite to the high-growth stocks Wood favors, and Innovation lost 23% and 67% in 2021 and 2022, respectively. That put it at the very bottom of its category and sparked a mass exodus by investors.
ARK’s fortunes reversed again in 2023 as inflation and interest rates moderated. Now with assets of only about $8 billion, Innovation gained more than 35% in 2023 through November 30, and it is once again in the top 1% of its category. ARK also manages or subadvises 12 other ETFs, with exposure to themes including robotics, genetics, space exploration and financial technology. Five of the funds, launched in November with another firm, are based on cryptocurrency futures contracts or crypto-related stocks. And ARK is hoping for regulatory approval to launch an ETF that holds cryptocurrencies directly.
We caught up with Wood in November 2023 to see what is top of mind for her now.
KIPLINGER: What trends are you focusing on for 2024?
WOOD: We are probably going to focus on the convergence among the 14 technologies around which we have centered our investments. One of the most important convergences taking place in technology combines robotics, energy and artificial intelligence. That is going to create revenue opportunities that are going to scale so quickly that people won’t believe the numbers. Robo-taxis, we believe, will generate $8 trillion to $10 trillion in global annual revenue in 10 years. The biggest autonomous vehicle provider we believe in — and our conviction has only increased on this — is Tesla. I have two Teslas, a Model 3 and a Model Y. They are effectively robots collecting data for Tesla to help evolve their robo-taxi software. Tesla now has 5 million robots roaming around collecting proprietary data of real-world driving.
We think Tesla is involved in the most important and biggest artificial intelligence project in the world. Another convergence we think is going to transform healthcare is the convergence of AI and genetics. It is unlocking the code to life, health, disease and death. Companies like CRISPR Therapeutics AG are combining AI with gene-editing and therapy tools to diagnose and treat disease in its very early stages, or even before something evolves into a disease. The United Kingdom has approved CRISPR Therapeutics’ gene-editing therapy for sickle cell disease. The Food and Drug Administration (FDA) is scheduled to decide on whether doctors in the U.S. can use it.
KIPLINGER: Where do you see opportunities in the financial technology sector?
WOOD: We’re very focused on fintech. Which companies are going to be the winners in the digital wallet — which includes services that enable chat, sending money to one another, commerce, and crypto activity? We are looking for the winners in the developed world along the lines of WeChat in China.
One of the most important fintech developments is the rise of digital assets, which many people call crypto. Bitcoin is a digital asset. Its volatility has obscured its long-term returns. Despite five drawdowns greater than 75% since its inception in 2009, bitcoin has delivered positive annualized returns over three-, four and five-year time horizons.
KIPLINGER: Your biggest ETF holds about 33 stocks. How do you decide which technologically disruptive firms will make money for investors?
WOOD: We have a three-step process. We start with research to size the market. Then we do an analysis of each stock. The third step is to score each stock on six factors: the company’s people; its moat, or barriers to entry in its industry; market share; execution, which in our world is not whether managers meet quarterly profit numbers but whether they are spending enough on research and development and are spending on the right things; the stock’s valuation; and, finally, risks, such as the risk of increased regulation.
KIPLINGER: How do you decide on the right price to buy?
WOOD: We’re very focused on valuation, but not today’s — the valuation in five years. To put a stock in our portfolio, we need a minimum expectation of a 15% compound annual rate of return over the next five years. We look for stocks that will meet that target based on revenue growth and increases in profitability.
KIPLINGER: How do you decide if it is time to take profits?
WOOD: This was a decision we had to make with Nvidia (NVDA) as it was moving into the $400-pershare range. As the projected five-year return dropped below 15%, we reduced our holdings. We saw so many other opportunities. AI is not just a hardware play, it’s also software, and we want to make sure that our portfolios are exposed to that. Companies that harness AI in thoughtful ways will increase their productivity dramatically. UiPath is a company whose software harnesses AI to help other companies increase the efficiency of their workflows. We added to our position in 2023; it’s now one of the top five stocks in our innovation fund.
KIPLINGER: Your funds have steered away from many of the most popular tech firms. Why?
WOOD: Our strength is to bring other sources of innovation into a portfolio at a very early stage. We’re not going to add much value if we invest in stocks people already know about.
We have a small holding in Microsoft. It has a lot going for it, but everybody knows it and owns it already. Also, we have been reducing holdings in Alphabet, Google’s parent. We don’t think it is in a good place. Chatbots are going to eat into its advertising model. We have also sold some Amazon. Soon we’re going to be able to say to AI: Go around the world to any website and find me the cheapest whatever item.
KIPLINGER: Do you have any advice for individual investors? What would you say to them about your funds’ volatility?
WOOD: While interest rates were going up in 2021 and 2022, long-term-oriented investments of all kinds, including long-term bonds and our strategy, were clobbered. During that time, we concentrated our holdings in our highest-conviction names, based on our scoring system. Because the markets are beginning to believe that we’re near the top in long-term interest rates, our strategies have had a very good year.
We think investors should ask themselves whether they have sufficiently incorporated disruptive innovation into their portfolio construction. We believe innovation should be considered as a strategic allocation with a five-year or longer time horizon. What I suggest to my family members is that they dollar-cost average. Invest $20 every two weeks or $50 a month into various strategies. Over time, that should be a winning proposition.
Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make.
