Cathie Wood's Creative Disruption

Over the course of its history, certain visionaries have developed entirely new ways to play the stock market, garnering outsized returns and inspiring generations of both institutional and retail investors. Understanding the methods of such visionaries can help investors optimise their own approaches.

One of the most renowned figures in modern investing is Cathie Wood, Founder, CEO and Chief Investment Officer (CIO) of ARK Invest.

Wood’s radical take on disruptive technology epitomises a forward-looking approach to investing, empowered by a bold vision of the near future. In an exclusive conversation with OPTO Sessions, Wood unpacked how her growth-oriented investment philosophy shapes the firm’s strategy.

Proving Ground

Wood received her BSc, summa cum laude, in Finance and Economics from the University of Southern California in 1981. There, she was mentored by Dr Art Laffer, the economist who described the Laffer Curve and later became one of ARK Invest’s first advisors.

After graduating, Wood’s first position was as an Assistant Economist at the Capital Group in Los Angeles. She then spent 18 years with Jennison Associates, as Chief Economist, Equity Research Analyst, Portfolio Manager and Director, before co-founding the hedge fund Tupelo Capital Management.

Next, Wood spent 12 years at AllianceBernstein. As CIO of Global Thematic Strategies, she managed over $5bn.

Wood’s focus at AllianceBernstein was on high-risk, low-cap stocks. But her approach proved controversial, particularly when her portfolio suffered during the 2008 financial crisis.

However, she had a clear vision for her chosen stocks, and her tenure at AllianceBernstein was the perfect proving ground ahead of founding ARK Invest in 2014.

Domains and Expertise

Philosophy

ARK reflects Wood’s conviction that the modern era — starting after the dot-com boom of the 1990s — is building towards the convergence of several key technological trends.

ARK’s first four funds each focus on one of these trends: industrial innovation, which ARK aims to capture with its Autonomous Technology & Robotics ETF [ARKQ]; web X.0, with the Next Generation Internet ETF [ARKW]; the genomic revolution, with the Genomic Revolution ETF [ARKG]; and innovation, with the ARK Innovation ETF [ARKK].

ARK’s product range has diversified since it was founded; for example, it now includes funds dedicated to space exploration and 3D printing, while on the day of the US Securities and Exchange Commission’s watershed approval, ARK launched a spot bitcoin ETF, the ARK 21Shares Bitcoin ETF [ARKB].

Bitcoin — and blockchain technology in general — is another of the technological themes about which Wood is bullish. Blockchain “is the layer of the internet that developers forgot to put in in the early 90s,” she told OPTO Sessions.

Strategy

Several measures enable Wood’s investment philosophy to translate into ARK’s strategy.

Since ARK’s early days, industry specialists have been brought in to identify the best companies in their respective sectors. Many of the firm’s analysts have backgrounds in the world of technology rather than finance. “They’re tech specialists, sector generalists,” she said.

Additionally, stocks are picked according to four criteria which Wood believes equip them to harness the transformative potential of key trends: deep domain expertise; artificial intelligence (AI) expertise; global distribution; and, most importantly, “proprietary data that no one else has”.

“Almost every company in our portfolio has these four things,” she says.

These measures mean that ARK’s funds are substantially different from alternatives in public equity markets, especially the broad-based indices that predominate.

“We are the closest you’ll find to a venture fund in the public markets,” says Wood.

Subscribe to OPTO Sessions on YouTube to catch our podcast episode with Cathie Wood.

Dues Paid and Bright Prospects

Wood’s brand of innovation-driven investing is inherently high-risk, and her funds have been particularly exposed during periods of market turmoil.

ARK grabbed investors’ attention with its outsized returns during 2020, catapulting Wood into the limelight; BNN Bloomberg called her “the best investor you’ve never heard of”.

ARKK posted gains of 152.7% over the course of the year, with Tesla [TSLA] being one of Wood’s most talked-about picks: Elon Musk’s carmaker gained 743.4%.

Following this wave of success, however, ARK entered choppy waters.

The easing of Covid-19 restrictions in major economies proved a headwind for ARKK, which fell 23.4% in 2021, at the time its worst annual return since its inception.

Worse was to follow in 2022, as Russia’s invasion of Ukraine provoked a ripple effect of fuel shortages and inflation (which was already rising, thanks to loose monetary policies during the pandemic), and interest rate hikes hammered precisely the high-tech growth stocks that Wood embraced. ARKK’s decline of 67% in 2022 dwarfed the previous year’s losses.

But ARKK’s fortunes appear to have turned again in 2023. The AI-driven rally turned investor enthusiasm back to disruptive technology, even as interest rates increased towards their peak (or, at least, what many hope is their peak).

Returns of 69% during the year have vindicated Wood’s approach. As she told the Financial Times in January of this year, “I think we did pay our dues in 2021 and 2022, and now we’re on the other side of that”.

ARK Top Holdings

Through these ups and downs, Wood has maintained a bullish attitude on the stocks she backs.

None are more emblematic than Tesla.

ARK wrote in April 2023 that the stock could be worth $2,000 per share in 2027 (in other words, a 908.5% upside from its current share price on 26 February).

Wood believes that the automaker will be able to claim yet more market share as legacy automakers pull back from the electric vehicle space. She also sees Tesla as being well-placed to leverage the massive opportunity represented by autonomous vehicles, sometimes referred to as robotaxis.

Nevertheless, Tesla has made a rocky start to 2024, falling 19.6% so far this year. In a somewhat patchy earnings report in January it warned that increasing competition, weakening demand and elevated interest rates would dampen sales growth during the year.

ARKK has had a similarly slow start, falling 1.9% year-to-date.

Coinbase [COIN], the largest holding in both ARKK and ARKF, is up 16.3% year-to-date.

“The ETFs are a stepping stone for people who want to just get a toehold in crypto,” she told OPTO Sessions. “As they learn more and more about bitcoin, many will use this as a bridge into establishing their own wallets, which would be very helpful to Coinbase.”

As AI continues to catalyse further innovation by multiplying knowledge worker productivity, the interconnectivity between Wood’s transformational themes could have far-reaching impacts, touching on all aspects of investing, and life.