ARK Invest founder Cathie Wood offered the latest defense of the once-highflying, disruptive innovation strategies that had made her suite of exchange-traded funds among the most popular, and best-performing, on Wall Street in 2020.
In a Friday evening blog post, Wood said that despite a brutal stretch that has compelled the operators of the ARK Invest ETFs, including the flagship Ark Innovation ARKK, +5.80% fund, to do some soul-searching, the fund manager is sticking to her game plan.
“‘With a five-year investment time horizon, our forecasts for these platforms suggest that our strategies today could deliver a 30-40% compound annual rate of return during the next five years.’”
— Cathie Wood, ARK Invest founder and CEO, in a Friday blog post
“We won’t let benchmarks and tracking errors hold our strategies hostage to the existing world order,” Wood wrote. She described the success of the ARK ETFs as one not solely bolstered by fervor for “stay at home” investment opportunities, amid the COVID pandemic, but rooted in identifying paradigm-shifting innovation, from blockchain and bitcoin BTCUSD, +0.83% to electric vehicles.
“Critical to investment success will be moving to the right side of change, avoiding industries and companies caught in the crosshairs of ‘creative destruction’ and embracing those on the leading edge of ‘disruptive innovation,’” Wood wrote.
On Friday, ARK Innovation ended the session up nearly 6% and produced its second straight sharp weekly gain, up 1.1%, following a 1.8% advance in the prior week. The advance for ARK Innovation still leaves the actively managed fund down nearly 22% in the year to date, as the broader S&P 500 SPX, -1.03%, the Dow Jones Industrial Average DJIA, -1.48% and the technology Nasdaq Composite Index COMP, -0.07% have faced whipsawing volatility derived primarily from concerns about more transmissible strains of COVID, surging inflation and global monetary policy’s reaction to those pricing pressures. Year-to-date the S&P 500 index is up 864.57 points or 23.02%.
ARK’s seven ETFs returned an average of 141% in 2020, on the back of gains from companies such as Tesla Inc. TSLA, +0.61%, and Teladoc Health Inc. TDOC, +11.83%, making Wood the toast of Wall Street. But those funds, focused primarily on companies that aren’t yet profitable, have been limping lower since hitting a peak back in February, and their woeful performance has raised questions about the prospects for the ETFs in the months and years to come.
Wood urged investors to maintain their support of the ARK complex and said that maintaining a long-term, five-year time horizon would be the best way to judge the fund manager’s true performance.
“With a five-year investment time horizon, our forecasts for these platforms suggest that our strategies today could deliver a 30-40% compound annual rate of return during the next five years,” the ARK CEO wrote.
“In other words, if our research is correct—and I believe that our research on innovation is the best in the financial world—then our strategies will triple to quintuple in value over the next five years,” Wood added.
The ARK founder also made the case that the Nasdaq and S&P 500 could be the bigger disappointment to return-eager investors in the longer-term because they are more overvalued than the disruptive investments that comprise her funds.
“Unlike many innovation-related stocks, equity benchmarks are selling at record high prices and near record high valuations, 26x for the S&P 500 and 127x for the Nasdaq on a trailing twelve-month basis,” Wood wrote.
She said that the “five major innovation platforms which involve 14 technologies are likely to transform the existing world order and that so-called tried and true investment strategies “will disappoint during the next five to ten years as DNA sequencing, robotics, energy storage, artificial intelligence, and blockchain technology scale and converge.”
Wood also made the case that the so-called wall of worry, with inflation fears representing perhaps the biggest concern, provided an ideal backdrop for further advances in innovation stocks in the longer run because the dot-com markets of the late-1990s weren’t properly buffeted by investor concerns. The thinking is that “walls of worry” tend to limit market euphoria.
“In our view, the wall of worry built on the back of high multiple stocks bodes well for equities in the innovation space,” she wrote. “No wall of worry existed or tested the equity market in 1999. This time around, the wall of worry has scaled to enormous heights,” Wood said.
On the macroeconomic front, Wood said that deflation, rather than inflation, could be a bigger problem for markets in the coming months.
“That said, my conviction is growing that the bigger surprise to the markets will be price deflation – both cyclical and secular – and that, after collapsing this year, higher multiple stocks could turn around dramatically during the next year,” she wrote.