What do Tesla, Square, bitcoin, and Shopify have in common? Yes, they are all red hot and bubbly. But they have also been blessed by Cathie Wood, the star stock picker and bespectacled founder of ARK Investment Management. Wood’s “disruptive innovation” fund has posted a 140% gain over the past year, blowing away the 21% gain of the broader US stock market.
Wood has made a name for herself by looking deep into the future to predict how things like battery storage and genome sequencing will reshape the economy. Her company’s eye-popping returns sparked a cult following, and tens of billions of investment dollars are flowing into ARK’s coffers. The question is whether she’s lucky—propelled by a financial bubble that will someday pop—or if Wood truly has the magic touch.
Raiders of the ARK
ARK’s most surprising forecast is of its own backlash: “I think it’s likely that at some point, people will think that ARK was a scam, and that we don’t know our left from our right,” research director Brett Winton told Bloomberg this month.
Winton seemed to be acknowledging that the Covid-era enthusiasm for tech stocks won’t last forever. Booms tend to bust, and ARK has been among the biggest winners of the latest one. The company’s ARK Innovation ETF has left in its dust everything from the S&P 500 index of large US stocks to Berkshire Hathaway, the conglomerate run by Warren Buffett, a legendary stock picker who famously used to avoid the kinds of companies Wood seeks out—ultra-hyped tech companies that are difficult to value.
Winton says ARK (which stands for Active Research Knowledge) is looking beyond the market’s short-term to- and fro-ing and trying to anticipate what will happen in five years or beyond; this is also part of its pitch to investors. On Wall Street “there’s a lot of incentive to get things right over the short term and weak incentive to get things wrong or get things right over the long term,” Winton tells Quartz. “And so we take an intentionally longer term point of view than most investors.”
The looming bear market, when investor confidence evaporates and is replaced with fear, will be ARK’s biggest test yet.
Goddess of investing
Cathie Wood became a stock picking legend at a time when stock picking was supposed to be dead. Investors have gradually glommed onto the advice that few if any money managers are capable of beating the broader stock market. Better, then, to invest in low-cost index funds, the thinking goes. So-called passive funds accounted for about half of the assets in equity funds in March 2020, up from around 5% in 1995. Active money management—trying to pick winners and losers in the stock market—seemed to be roadkill.
Then came Wood, a bitcoin evangelist who was previously the chief investment officer of global thematic strategies at AllianceBernstein. Her company’s actively managed exchange-traded funds, which can be bought and sold just like a stock, are redefining the $5.6 trillion ETF industry, which was mainly known as a cheap, nimble way to get broad exposure to large swaths of securities linked to an index.
Wood called for Tesla stock to climb to $4,000 when it was trading at $300 in 2018, a shockingly bold prediction to make on the big news networks. (Tesla shares are now trading around $3,600, after accounting for a five-to-one share split in August.) She beat all other stock pickers in 2020 by betting on companies focused on DNA development, according to Bloomberg. ARK was the seventh largest ETF issuer as of Feb. 19, according to ETF.com, with nearly $60 billion in assets.
“We thought the era of the rockstar manager was over,” says analyst Eric Balchunas, an exchange-traded funds expert at Bloomberg Intelligence. “I was wrong.”
If she keeps it up, Wood could join the league of investing masters of the universe like George Soros, famous for pocketing a billion dollars by breaking the Bank of England.
Wood had a long career in asset management before she started ARK in 2014 at age 57. She was chief economist at Jennison Associates and later co-founder of hedge fund Tupelo Capital Management. Wood was at AllianceBernstein when she had the idea of starting an actively managed ETF. But the suggestion didn’t go anywhere, so she bootstrapped ARK with $5 million of her own money. It took three years to break even, and by October 2020 her stake in the firm was worth about $250 million.
Part of the reason Wood waited until her 50s to strike out on her own is because earlier in her career she had three children at home. “By the time I started ARK, my children were quite capable of taking care of themselves,” she told Forbes. “ARK was my new baby.”
The secret sauce
Wood and her colleagues at ARK say there are several keys to their success:
🤖 Instead of analyzing the market through sectors, ARK says it looks across industries by focusing on five key technologies, or “platforms”: artificial intelligence, energy storage, robotics, DNA sequencing, and blockchain technology.
🚀 Wood says ARK is only looking for companies involved in “disruptive innovation,” rather than incumbent firms.
📊 ARK’s head of research says it builds all forecasts from the ground up, rather than piggybacking on third-party (such as a consulting company’s) projections.
📆 ARK says it models its forecasts for five years: “Because the cost of the technology is falling so severely, the size of the market can be dramatically different five years from now than it is this year,” Winton says.
🔎 ARK says its research ecosystem is open: The company publishes its investment ideas online and expects to see those themes debated and stress-tested by others on social media.
What could go wrong?
It remains to be seen whether Wood’s magic touch will persist through multiple upturns and downturns. Magic touches often don’t. John Paulson made billions of dollars by anticipating the subprime mortgage crisis, but his returns have been lackluster this decade. Meredith Whitney became a star analyst after correctly foreseeing in 2007 that Citigroup would face a shortfall in capital. Her later predictions about widespread municipal defaults fizzled.
Success can be fleeting: Investors yanked about half a billion dollars from ARK’s innovation fund on Feb. 22, according to Refinitiv data, when Tesla shares tumbled. And one surefire prediction is other money managers trying to figure out what makes ARK tick. If five-year time horizons, cross-sector analysis, and crowdsourcing ideas really are what give Wood and her team an advantage, competitors will copy it and blunt the company’s edge.