Say you want to invest in a breakthrough technology like flying cars, or you got a hot tip about a company working on personal jet packs. How do you know you're not throwing your money away?
Cathie Wood might be a good person to ask, and she'd probably warn you to spend your money elsewhere. The CEO and chief investment officer of Ark Invest, Wood and her researchers are on a remarkably successful run of finding companies that are participating in technological progress and seeing their stocks soar as a result.
According to Thomson Reuters Lipper, Ark runs three of the five best stock exchange-traded funds of the last three years. Its ARK Next Generation Internet ETF has surged 180% over that time, good for second in Lipper's rankings, while the third-ranked ARK Genomic Revolution ETF is up 152% and the fifth-place ARK Innovation ETFhas rocketed 142%.
Wood isn't necessarily looking to get in on the ground floor with every new technological development. Ark invests in companies that work in five sectors: DNA sequencing, robotics, energy storage, artificial intelligence, and blockchain technology.
But just being in a high-tech field isn't enough to get into its portfolios.Wood says she wants to find underpriced companies as they are entering a period of exceptional business growth.
"The biggest mistake that investors thematically make is they get in too early; they chase the dream," she said. "Our minimum hurdle rate of return for a stock to get into the portfolio is 15% at a compound annual rate over five years. And we feel that's conservative because the revenue growth in the portfolio is north of 25%."
She explains that these three characteristics set Ark's portfolio apart.
(1) Productivity
Lots of gadgets are intended to improve productivity. But Wood and her firm are looking for more: technologies that are getting more efficient themselves. That means items produced with such technologies will become less expensive over time, encouraging wider adoption,.
"We're looking for the reality of costs, getting down to a point where price elasticity of demand takes off," she said. "We're thinking about something big and growing exponentially."
She says that helps Ark focus on world-changing innovations over the long term, in contrast to the estimate- and metric-driven approach favored by much of Wall Street. In that respect, she says she's following the same approach that value investing legend Bill Miller took with Amazon in its early years, when many others were skeptical.
"We'd much prefer that our companies ... spend aggressively right now and forego short term earnings to capitalize on the exponential growth opportunities ahead," she said. "They look incredibly expensive, but I can tell you with a straight face that if you give us five years, these portfolios are deep value portfolios."
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(2) Bridging sectors
Based on Ark's big returns and its emphasis on innovation, it might sound like the company focuses almost exclusively on tech firms. Wood says that by standard measurements, most of her firm's money is in healthcare. But they're thinking big, and they want to invest in innovations that could remake multiple economic sectors.
"Technology is permeating every sector these days," she said. "It's blurring the lines between and among sectors, which is a real problem for passive strategies."
For example, she says genomic sequencing has huge potential for both disease treatment and agriculture, and autonomous taxi networks bridge robotics, energy storage, and artificial intelligence.
"All of those are cutting across economic sectors and they are converging themselves," she said.
That convergence explains Tesla's surprising position at the top of Ark's internet-related portfolio — a reflection of its involvement in artificial intelligence and over-the-air software fixes.
"Tesla is the only auto manufacturer today that is able to do over-the-air software updates and change the performance of a car," she said. "They fix problems before I even know they exist."
(3) A link in the chain
Lastly, she says, every technology has to lead to further developments. The computer leads to the internet, which leads to the smartphone, which leads to the internet of things. Gene sequencing leads to new drugs and to gene editing.
"Each of these platforms serves as a launching pad for new innovation," Wood said.
That also means Ark's funds have relatively little money invested in FAANG stocks or the other huge tech winners of recent years. The reason that those companies are the most likely to be upended by new developments.
"We want to be where the action is going to be, not where it has already been, even though the internet has been a launching pad for this next wave of innovation," she said.
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