Cathie Wood on Her Rize ETF Deal, AI, Nvidia and Bitcoin

Why does the ARK Invest founder not regret sitting out Nvidia's latest moon rally?

Valerio Baselli 25.09.2023
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Valerio Baselli: Hello, welcome to Morningstar. The big news within the ETFs space is that the American asset management firm ARK Invest, which specializes in disruptive innovation, has acquired Rize ETF, a London-based provider of thematic and sustainable trackers. To talk about the future of ARK Invest in Europe, among other things, today I'm joined by the well-known founder and CEO of ARK Invest, Cathie Wood.

So, Cathie, first of all, welcome and thanks for being here. Let's start with the basics. Why this takeover in Europe and why now?

 

Cathie Wood: Well, it's been very interesting at ARK practically since the beginning when we monitor who the subscribers are to our research, which we give away free. We have found that 25% of them are from Europe, but we didn't have anything, any strategies, to offer in Europe. And so, we have been looking for quite some time and we found this gem hidden inside of AssetCo, and the DNA was just right. They're thematic, they're futures-oriented, mega trend oriented, and it seemed like a great fit.

Baselli: So, as you know, thematic investment has enjoyed a booming rise in recent years in Europe, even though the pace of flows, for example, has slowed down compared to the explosion post COVID-19. What are your thoughts in investing thematically, especially here in Europe, where the average investor is probably different from the American one?

Wood: Well, judging from the responses to our research, I think the appetite is there. And I also do appreciate, certainly we're learning a lot from our new ARK Invest Europe team, that Europe is different. Different countries have different kinds of appetites for different strategies. I know, for example, Valerio, in your Italy, there's a huge appetite for thematic, perhaps in other areas not. So, we are going to leave it to them to direct us to the right places.

Baselli: That's interesting. What advice would you have for investors shopping for a thematic fund? And are there any themes in your view that don't really have investment merit, at least today?

Wood: Well, our focus at ARK Invest has been on actively managed ETFs and other wrappers, focused exclusively on disruptive innovation. And ARK Invest Europe is similarly minded. We don't think there are enough strategies out there that are focused on the future in the ways that we are, grounded in original research. We see a lot of strategies that are somehow flavours of broader-based benchmarks. And we think that the world of technology especially is moving so quickly that it will be very difficult for the benchmarks to keep up. And I'll just give one example. It took the S&P 500 in our country until Tesla (TSLA) reached $500 billion for the S&P to allow it into its index. $500 billion. There are not many companies bigger than that. And yet, in the case of Tesla, we think it has miles to go.

Baselli: And let's talk of your flagship strategy, the ARK Innovation (ARKK) fund. After having performed extremely well between 2017 and 2020, the fund 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 of course Nvidia (NVDA), a name that you owned since inception, I believe, which is no more in the portfolio and is up roughly 190% for the year-to-date. So, why did you decide to close out your stake in Nvidia? And do you regret this decision?

Wood: Well, 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 (GBTC), Invitae (NVTA), 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 multi-omics sequencing and 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 multi-omics names.

Baselli: Yeah, exactly, and I wanted to ask you: What do you think of the current Nvidia valuation? Do you think market's expectations of its growth or margins are overly optimistic?

Wood: We think that it's going to be 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 multi-omics sequencing. The other portfolios, which are more specialized, do own Nvidia. We've just taken the position down quite significantly.

Baselli: All right. 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?

Wood: Sure. 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 (PATH) 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 (TWLO), Exact Sciences (EXAS), even Zoom (ZTNO). 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. So, on October 4th, stay tuned to Zoomtopia and you'll learn more about it.

Baselli: Very interesting. 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?

Wood: Yes. During, it was 2021 and '22 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, but 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 '08-'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.

Baselli: And of course, if you think of disruptive innovation, you think of digital assets and cryptocurrencies. 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 from this point of view, we might say that Europe is probably a bit ahead of the game. There are dozens of crypto ETPs listed in Europe, as you know very well-- you have a partnership with 21Shares, the biggest crypto ETPs provider in Europe. So, what is your outlook for Bitcoin at this stage?

Wood: 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 neighborhood 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.

Baselli: Finally, going back to the start of the acquisition of Rize ETF, what will be your role for the European market and overall within the firm? Will you still manage the active ETFs?

Wood: Yes, the active equity ETFs ARK Invest in the U.S. will continue to manage. And ARK Invest Europe will manage the ARK indexed thematic strategies, and they also will distribute for us. So, we think it's a win-win.

Baselli: Thank you so much, Cathie, for your time and your insights. I appreciate that. For Morningstar, I'm Valerio Baselli. Thanks for watching.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Exact Sciences Corp48.17 USD2.89Rating
Invitae Corp0.00 USD-25.00
NVIDIA Corp123.54 USD4.76Rating
Tesla Inc251.51 USD5.15Rating
Twilio Inc Class A58.01 USD-1.09Rating
UiPath Inc Class A12.24 USD1.58
Zoom Video Communications Inc58.64 USD-0.39Rating

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Valerio Baselli

Valerio Baselli  è Giornalista di Morningstar.

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