Ark’s Cathie Wood sees ‘opportunity’ where others fret over bubbles

Cathie Wood says “nothing has gone wrong” with her Tesla Model S since she bought it in 2018, and she has never required a service call. She is just as pleased with her investment in Tesla shares.

The fortunes of Wood’s Ark Investment Management and Elon Musk’s electric carmaker have been indelibly linked for some time, and Wood says she remains decidedly bullish about its prospects — even after its shares touched a record high of $900 and remain up 14 per cent since the start of the year.

Tesla has been the biggest single holding in Ark’s suite of actively managed exchange traded funds, which promise to invest around several loose themes of technological disruption. Their popularity has catapulted Wood to fame and turned Ark into an investment phenom with $50bn under management in its ETFs, from less than one-tenth that at the start of last year.

Tesla has a 10.1 per cent weighting in Ark’s Autonomous Tech ETF, remains the largest holding in the Ark Innovation ETF with a weighting of 9.1 per cent and tops the bill in Ark’s Next Generation Internet ETF at 8.8 per cent, according to the asset manager’s website. 

That degree of concentration has raised questions about the sustainability of Ark’s growth, but Wood says not to worry.

“Any trend that generates a lot of excitement encounters scepticism due to the bad experiences — internet and housing crashes — of the past 20 years. That’s why the opportunity is so big. Most portfolios don’t have this exposure and they own companies that are being disrupted,” she said.

Tesla retains significant competitive advantages in the development of electric vehicles, a market segment for which Ark estimates compound annual growth of 80 per cent in the next five years, Wood said. “Their battery technology is at least three years ahead of other auto manufacturers” and thanks to developing their own AI chip, they have collected vast amounts of real world data and far more than their competitors.

But those advantages are trumped by the promise of autonomous driving. “There is a more than 30 per cent chance in our view that Tesla is the autonomous taxi network of the US.”

Two of Ark’s investment themes collided this week, when Tesla said it bought $1.5bn of Bitcoin. The Grayscale Bitcoin Trust is the ETF’s second-largest holding at 4.5 per cent after Tesla, and the subsequent rise in the price of the digital currency (and in Tesla shares) propelled Ark’s Next Generation Internet ETF to a new record high on Tuesday. It is now showing a gain of 25 per cent this year, while the broader US stock market is up 4 per cent.

Wood, who founded Ark in 2014 after 12 years as an investment officer at AllianceBernstein, said she expected more such convergence. “It doesn’t surprise us that innovative companies are looking at other kinds of innovation,” she said.

Peter Garnry, head of equity strategy at Saxo Bank, estimated that Tesla shares held across Ark’s ETFs represents 6.7 per cent of their total assets under management. Other large holdings include Teladoc Health, Roku, and Square.

The hefty concentration has enabled Ark to outperform, but it leaves its funds vulnerable to a pullback by hot stocks, should the market take fright at soaring valuations. Outflows from its funds could exacerbate the pullback.

“There is a high degree of overlap between investors and speculators in Tesla shares, bitcoin and other cryptocurrencies, Ark Invest funds and related stocks such as the biotechnology stocks,” said Garnry. “This risk concentration is important to understand if you have positions in your portfolio that are part of this network structure of positions.”

Rejecting talk of an equity market bubble led by many of their high profile holdings, Wood said she expects innovative companies will grow into their high equity valuations as demand for their products and services expands exponentially over the next decade. Aside from Tesla, Wood reckons the broad adoption of digital wallets will benefit the payments groups Square and PayPal, for example.

Wood said a stock market correction will provide Ark with an opportunity to buy more “high conviction names” and companies it believes will be “winner-take-all” in a fast-expanding new industry.

“A correction is a great time to determine what are our high conviction names,” she said.