In Conversation with Cathie Wood

Sep 27, 2023

From being the toast to Wall Street to being severely criticised, Cathie Wood has been "pretty battle-tested on that score," as she said in an interview in 2022.

Here is an excerpt from an interesting interview Valerio Baselli, senior international editor at Morningstar, had with Cathie Wood, founder and CEO of ARK Invest.

You can watch the entire interaction here.

Your flagship strategy, the ARK Innovation Fund, performed extremely well between 2017 and 2020, then suffered for a couple of years. Now, in 2023, the year-to-date performance is very positive. But some might say that the strategy missed out on a big part of the artificial intelligence rally. The easiest example is Nvidia, a name that you owned since inception, which is no more in the portfolio and is up roughly 190% for the year-to-date.

Why did you decide to close out your stake in Nvidia? And do you regret this decision?

If you read our research going back to 2014, we've been very focused on the revolution called artificial intelligence. And we gained exposure to Nvidia when it was $5. Now, it's closer to $450. And we were pounding the table. So, we did very, very well with it. In fact, in the flagship strategy since inception, it is the fourth largest contributor to performance after Tesla, GBTC, Invitae, which is a genomics name, and then Nvidia.

What we've been doing with our research is trying to figure out who else is going to win in a very big way. This is called real original research as opposed to checking a box, artificial intelligence, Nvidia. And we have found that the characteristics of companies that will win in this new age – and this is going to impact every industry, every company – are companies with domain expertise, and when it comes to innovation, that's really important, especially in areas like multiomics sequencing in life sciences. So, they have domain expertise, they have AI expertise, so we look at their talent, and perhaps most importantly, they have proprietary pools of data so that they can evolve specialized AI models and integrate them into the open source models out there to develop very powerful solutions.

Almost every name in our flagship strategy is an exposure to artificial intelligence. Nvidia is much more expensive than most of the names in our portfolio, except for perhaps the multiomics names.

We think that Nvidia is a good stock over time, but we don't think it is going to outperform the other stocks in our portfolio over time as more and more people, analysts, investors, do research, real research, on what this AI revolution means. And so, we think our current positions are misunderstood exposures to artificial intelligence. We do not regret selling Nvidia in the flagship, which has to incorporate all of our innovation platforms, so robotics, energy storage, artificial intelligence, blockchain technology, and multiomics sequencing. The other portfolios, which are more specialized, do own Nvidia. We've just taken the position down quite significantly.

Speaking of artificial intelligence, of course, you've been investing in it for years. Do you have a preferred way of gaining exposure to the theme? For instance, what do you prefer among solution providers, hardware providers, or maybe companies who will leverage AI into their own businesses, such as biotech firms?

As I mentioned, practically every stock in our portfolios we view through an AI lens in the way I described, especially focused on proprietary data. But for every dollar of hardware invested in the AI space – and Nvidia is primarily hardware, evolving more software solutions, but primarily hardware- for every dollar of hardware, we expect 8 to 20 times the amount of software. And so, we have a lot of software-oriented names in our portfolios.

To give you an example, UiPath is a robotics process automation company. It is helping companies automate the most mundane administrative tasks in their companies. And it has proprietary data associated with many companies around the world and the solutions they are evolving to automate these mundane processes, including AI. So, it has all of that proprietary data. Other names that are not familiar, and that's what we offer is diversification in the disruptive innovation space. Other names include Twilio, Exact Sciences, even Zoom. I think many people are surprised to see Zoom in our portfolios. But I think many people will be surprised to see how many AI applications Zoom is evolving here.

Your investment process follows a clear philosophy. It concentrates the portfolio on high-conviction, high-growth names. So, an economic environment with rising interest rates is far from being ideal for this kind of strategy. How do you manage this? And what's your outlook on rates and economic growth?

Yes. In 2021 and 2022 that this was a real problem.

First, the fear of rising interest rates hurt our strategy, and then the actuality, or the reality of rising rates last year really hurt our strategy. This year we've started outperforming, and I think it is because investors are looking over the top of these interest rate increases and anticipating the end of them, and then ultimately the decline. If we're right, disruptive innovation is going to cause a lot of deflation. That's a good thing. Deflation caused by disruptive innovation will cause an explosion in the growth rates of units in the disruptive innovation space. So, we think we've been through the worst of it.

I will also point to another period where interest rates were rising in 2017, for example. Our response back then is, wait a minute, the Fed is now sure that we're over the 2008-09 crisis, and it is going to allow the markets to work. Our portfolios, the flagship, was up 87% that year, even though interest rates were going up. Now, if interest rates have plateaued or are going down, that will be an extra good environment for our strategies, especially given what happened in '21 and '22. This will be the flip side of that.

You have been one of the early adopters of Bitcoin. Now markets await the Securities and Exchange Commission decision on the first Bitcoin spot ETF. But Europe is probably a bit ahead of the game. There are dozens of crypto ETPs listed in Europe -- you have a partnership with 21Shares, the biggest crypto ETPs provider in Europe. So, what is your outlook for Bitcoin at this stage?

We are very optimistic on Bitcoin. One of the markers or milestones this year that I think surprised everyone was in the United States, we had a regional bank crisis in March. As regional bank stocks were plummeting, and some went bankrupt, Bitcoin increased from 19,000 to 30,000. What was that? That was a flight to safety. One of the reasons regional banks and most banks get into trouble is counterparty risk and depositors fleeing them. If you think about crypto assets and Bitcoin especially, it is completely decentralized. There's no counterparty risk. And it is completely transparent. You can see the movements by IP address and see where there might be trouble brewing. It's a giant neighbourhood watch with a lot of people involved. This involves their livelihood. So, we think it's very robust.

When institutions get the green light, and I think they're waiting for the SEC, I think that we're going to see significant participation in this new asset class by institutions.

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