In 2011, pioneering venture capitalist Marc Andreessen wrote an op-ed called “Why software is eating the world,” introducing his thesis that what we now know as Internet 2.0, an industry of platforms like Facebook and Twitter, would replace the old world of desktop computer hardware.
Nearly a decade later, if there’s any one investor best poised to pen an update, it might be Catherine Wood. Wood, 64, founded her company, ARK Invest, in 2014, to harness the opportunity created by cutting-edge technologies like genomics, autonomous vehicles, and more. But rather than deploying private markets, like venture capitalists do, Wood makes her bets in the most public approach possible: in exchange-traded funds, utilizing what she calls an “open-source research ecosystem” of two-way communication with other investors, scientists, users, and many others.
Wood is known in investment circles for her bullish calls on Tesla Inc. TSLA, -0.36%, including a recent appearance in which she said her “bear case” was for the stock price to more than double from its current level of more than $340. But she thinks about many different companies within the universe of what ARK calls five key “innovation platforms”: artificial intelligence, energy storage, robotics, genome sequencing and blockchain technology.
ARK’s biggest fund, the Innovation ETF ARKK, -0.61% , has $1.58 billion in assets under management, out of a total $11.1 billion in the firm as a whole. It has returned 32.6% in the year to date.
In a conversation with MarketWatch—edited for clarity—Wood also explained why asset management needs just as much disruption as the old-guard technologies her portfolio is helping to upend.
MarketWatch: Why are you so passionate about disruptive technology?
Catherine Wood: I think because of how I grew in the business. I started in economics at [money manager] Jennison Associates in the early 80s and realized I wanted to manage money. Well, the root to managing money was not through economics, it was through equity research, but the analysts at Jennison were lifers and they weren’t going to give up their spaces, their stocks. So I had to create my own universe.
I learned quickly that when there are special situations, stocks fall through the cracks, like Reuters did. Reuters was the first dual-listed company in London and New York and it was considered a database publishing company back in the 80s. Well, it wasn’t tech, and it wasn’t publishing. It wasn’t either. So the tech and the publishing analysts didn’t want it. I got it. And what was it? It was the precursor to the internet. So I got a lot of those stocks and my appetite for them was very high because I understood how this model was going to work.
Same with wireless. Vodafone, nobody wanted it, partly because it was foreign, partly big bricks [holds a pretend phone up to her ear]. [They thought] maybe a million of those would be sold; now we’re up to 5 billion. I learned very quickly that when there’s a combination of some technology and another sector —a fusion — the traditional research world is not set up to follow it and there are huge opportunities.
That’s how we’ve set up this firm. We have not set up our research by sector and specialization, we’ve set it up by innovation platform, each of which cuts across sectors. All of them include technology. The reason I started the firm and focused on disruptive innovation was I watched, after the tech and telecom bust and 2008-2009 meltdown, the accelerated shift to passive and benchmarks, which I think is the same as passive. So there evolved a void in the public markets when it came to innovation. Benchmarks are where they are because of what has happened historically. Our focus is on what’s going to happen in the future.
The second reason is because there are five innovation platforms evolving at the same time now. This has never happened before. You have to go back to the late 1800s, and early 1900s, to see three innovation platforms evolving at the same time: telephone, electricity, and internal combustion engine. They transformed the world. Not only is technology seeping into every sector, blurring the lines among and between sectors, but these five innovation platforms are converging also.
Autonomous-taxi networks (draw on robotics, energy storage, and artificial intelligence.) So when it comes to a stock like Tesla, who should be following that? An auto analyst should not be following Tesla. A combination of analysts like we have here, expert in robotics, energy storage, artificial intelligence, and transportation systems, should be following it.
‘If you have a five-year time horizon, like us, I can tell you with a straight face that I believe we’re a deep value manager because of these opportunities.’
MarketWatch: You once said that back in the early 1990s “we couldn’t imagine what the internet was going to do with us.” With all these great disruptive technologies that we’re in the middle of right now, how do you think about what we don’t know about the future?
Wood: We have actually done an analysis on the amount of productivity that automation alone is going to provide for the economy. By 2035, if we didn’t have automation and artificial intelligence, the economy would probably grow to $28 trillion from about $20 today. Instead, because of automation and AI, we think that number will be $40 trillion. A $12 trillion gap in GDP relative to what otherwise would be the case. Our job is to find out where that’s going to be. We think that more than half of the market cap that will be added to major market indices during the next 10-15 years will come from innovation.
MarketWatch: I hear your enthusiasm for this disruption and the way traditional Wall Street analysts are very siloed and have a very specific way of looking at things. And that’s great. But the stock market is correlated to what other people think about stocks.
Wood: Oh, absolutely.
MarketWatch: So how do you square that circle?
Wood: In the case of a Tesla, most auto analysts do not believe in or incorporate into their models autonomous taxi networks. As a result, it’s going to be a big surprise if we’re right. But if we’re not right, we’re not going to get killed. It actually is a luxury to be able to think the way we do. We own stocks for reasons that if we’re right, it will be, as our director of research says, it’s much better to be uniquely right on something that nobody expects than to be wrong with everybody else.
See: Why buying and selling a house could soon be as simple as trading stocks
MarketWatch: That’s sort of a venture capital way of thinking.
Wood: We are the closest to a venture capital firm you will find in the public equity markets. Yet if you’re thinking VC, you’re thinking, oh my gosh, are 80% of your companies going to go out of business? And the answer is no, because of an incredible vetting process called an IPO. You have regulators, you have bankers, buy side, sell side, everybody kicking the tires. So we are not going to find ourselves in a situation like we saw with Theranos.
It is rare for there to be fraud in the public markets and by the time companies get to the public markets, especially because they’re staying private longer, and therefore are losing strategic direction and the scaling opportunities that the public markets provide. If Uber and Lyft had been in the public markets instead of getting ready for their [IPO], they would have been thinking about autonomous in a much more aggressive way than they were. They’re not going to win in the market because they haven’t collected the data you need to collect to win.
We want our companies to invest aggressively. That’s why a lot of public-market investors stay away from our stocks and think they’re way too expensive. But if you have a five-year time horizon, like us, I can tell you with a straight face that I believe we’re a deep value manager because of these opportunities.
MarketWatch: Are you thinking of something like Amazon AMZN, +0.03% , for example, where investors had to be patient for a long time?
Wood: You nailed it. And that was the last time I felt as much distaste for what we do was right after the tech and telecom crash. We bought (Amazon) in 2002 when I was at Alliance Bernstein and no one could believe it. It was in a big trading range for about four years before the breakout. Same thing has just happened to Tesla, and I feel more distaste for what we do this time around because so many teams have really become benchmark-sensitive. Tesla’s not even in the broad benchmarks because it hasn’t been profitable for a four-quarter moving average. So according to the way they do things, they can afford to dismiss Tesla.
MarketWatch: What would cause you to turn bearish on Tesla?
Wood: I would have said a couple of years ago, if we lost Elon [Musk, the CEO]. But because I think now they’re far enough along on the autonomous road that it would hurt to lose him in terms of thinking big and really having his genius, but I think he’s put in place a company that knows where it’s going. One of the clues was, believe it or not, when JB Straubel, his chief technology officer, left. He’d been working with Elon for, I think, 15 years. I think he left because he said, my job is done. We’re on our way. Now they need to block and tackle on the manufacturing side, and get autonomous right. They’re pouring their resources into that now, which is exactly what we want them to do.
See: Here’s where you’ll live when self-driving cars rule the roads
MarketWatch: Whenever you talk about the research you do, you say “we,” and sometimes when you’re on stage, you name your analysts by name. That’s obviously very conscious. Why?
Wood: I have found that the excitement and the loyalty we get from these young analysts who have one foot in the new world… one of them said to me, you empower us to be individuals, to take risks in our thinking, and the rewards are, when we do that, we can share some of that with the outside world. Unlike in many other organizations, which try to control the message, I don’t feel like we need to control our message. The message is in the research and they are doing the research. I can be the spokesperson in a general sense, but if you really want to take a deep dive into this research, you really want to talk to them. And I want the world to know that.
MarketWatch: And you share research and your thinking and even your trades.
Wood: Yes. In August 2012, I walked into my house, on a beautiful summer day, in the evening after work, and this idea came to me. I wasn’t even thinking about work! And the idea was, why don’t you take some of the technologies you’ve been investing in all these years that are disrupting other sectors and be a little disruptive in your own sector? So this idea of an open-source research ecosystem patterned after open-source software, where because of the contributions of many people, the research ecosystem is so much more robust than it ever could be otherwise. So we put all our research conclusions on our site, and that’s mostly because we want to serve a role to the community and the world at large.
Because guess what? Associated with these five platforms which are going to cause disruption is risk: in banking and energy and traditional health care, in rail, it’s continuing in media and retail. It’s going to hit every sector. You don’t want to be on the wrong side of change. That’s one of our first missions. And the second is to engage with the communities we’re researching. So we’re pushing our research out, into any social network that our analysts think will help them engage with the communities. This is not inside information at all. In fact, we’re not talking to the C-suite. We’re talking to those who have their shirtsleeves rolled up and are trying to make things happen. We’re sizing the opportunities for them and saying, here’s how big this is and here’s where the barriers to entry are and where the pain points and the superior economics will be. That’s really interesting information for them. Likewise, we want to know, what do you think of Amazon’s latest chip and Tesla’s latest chip? And we get answers.
Related: Time, money and effort… and then your great ETF idea gets ripped off
MarketWatch: You’ve touched on this a little earlier, but I’ve also heard you say there’s been a risk aversion that happened after the dot-com and the financial crisis that left people maybe a little bit more scarred than we realize. How will that change? What causes that to shift back, or does it not?
Wood: No, I think it will. Of course, consider the source when I’m saying this – but this year, for the first time, more than half of all U.S. equities are in passive strategies. That’s a ring-the-bell moment, I think. If we’re right and these innovation platforms are going to be as disruptive as we think they are, what are they going to disrupt? The indexes. The number of value traps that we see evolving in traditional benchmarks is going to be pretty remarkable, and at some point the light bulb will go on and investors or advisers will start looking for hedges against them. We’re already seeing that happen. It is ironic. Our strategy is considered so risky, so volatile, and yet it is actually a source of protection against the value traps in traditional benchmarks.
In my own IRA, I have only our funds and [Grayscale Bitcoin Trust, a cryptocurrency fund] GBTC, +0.23%. That’s because I do not consider our strategies niche strategies. Most people do consider them satellites, and we’re happy to get any place in their strategies. But I believe this is where the world is going, so why wouldn’t I want to invest that way?
MarketWatch: Is there anything very personal in any of these disruptive technologies, like a disease that somebody may have that may be cured by some of the genomic technology, for example?
Wood: Oh well, in terms of personal?
MarketWatch: Personal to you, personal to the firm…
Wood: I remember when I was seven years old, my father told me, I can do anything. Anything! The world was wide open! My parents are from Ireland so they were immigrants to this country, so he had that immigrant, think-big, can-do, attitude. I told him that I wanted to be either a ballerina or I wanted to cure cancer. (laughs). It was because I had learned of one of my parents’ friends had died of cancer. It was just such a mind-blowing experience to learn that. Of course I didn’t go into medicine but allocating capital to its highest and best use is one of the ways we’re going to cure cancer.
Related: Is it time for ETFs to get active?