As an investor and an economist, Catherine "Cathie" Wood, CEO and chief investment officer of New York-based ARK Investment Management LLC, observed the rush of assets into ETF-based passive strategies following the financial crisis and saw an opportunity.
"The move to passive and indexation was happening everywhere," Ms. Wood said. "And a huge void was opening up in the public markets to focus on innovation."
After serving as chief investment officer for thematic strategies at AllianceBernstein Holding LP, Ms. Wood launched ARK in 2014. Based on five pillars of industrial and technological innovation — blockchain, energy storage, DNA sequencing, robotics and artificial intelligence — ARK now has nearly $8.4 billion in assets under management, including $2.9 billion in U.S.-listed exchange-traded funds, according to the company. The company established distribution relationships with Resolute Investment Managers Inc. (July 2016) and Nikko Asset Management Americas Inc. (August 2017) where each company purchased a minority interest in ARK.
The 21-person firm, more than half of whom are dedicated to research, is built on the idea that innovative public companies are underpriced relative to the euphoria of private markets and, unlike most other active managers, ARK isn't afraid to publicize its beliefs. After all, the company's best ideas are on display every day in fully disclosed actively managed ETFs.
The company's flagship ETF, the $1.7 billion ARK Innovation ETF with an expense ratio of 0.75%, has returned 37.5% annualized over the three years ended June 30, according to Morningstar, compared with 23.9% for Morningstar's technology benchmark. Top holdings include Tesla Inc., 3D printing company Stratasys Ltd. and genetic testing company Invitae Corp.
In an interview, Ms. Wood reflected on the company's growth and how focusing on disruptive technology can provide an investment edge. The following conversation has been edited for space and clarity:
P&I: "You are five years into this journey. Why ETFs? What was most surprising or the hardest part about getting ARK Invest off the ground?''
Ms. Wood: "Following the financial crisis, there was a real changing of the guard to more transparent, more efficient and more tax-effective products. The move toward passive (and ETFs) was accelerating, so I began to ask why an active player couldn't be involved. Passive investing is very backward-looking, and I wanted to focus exclusively on disruptive innovation. As large public company investors like T. Rowe Price (Group Inc.) and Fidelity (Investments Inc.) were looking for innovative pre-IPO companies, I believe the public markets developed a huge void when it came to both research and valuation.
The hardest part in getting ARK off the ground as an ETF manager was that I was speaking a different language. Those in the industry then couldn't grasp the idea of putting an active portfolio in the ETF structure. We were index agnostic. I was only networked in the active world, so I had to start over to build these products.
P&I: "What is the greatest challenge to managing concentrated portfolios? What was/has been the greatest hurdle for you, particularly when reaching out to institutions such as pensions, foundations and endowments?"
Ms. Wood: "I don't see portfolio concentration as a challenge at all. ARK is focused on identifying disruptive innovation that is technologically enabled and leads to exponential growth. If we are right on the five major innovation platforms — and they all are experiencing that growth — then our capacity should rise exponentially as well."
"After '08-'09, extreme risk aversion brought about the move by institutions toward quantitative research and factor analysis against benchmarks. It was very hard to break in, but now those institutional portfolios all seem to look alike and know that they are missing something and that things are moving faster. We are hearing from institutions and sovereign wealth funds, or they are just purchasing our ETFs directly. They don't have to go through an RFP to get our products into their portfolios."
P&I: "What is your view on building a research discipline to guide your process?"
Ms. Wood: "To analyze disruptive innovation correctly, we believe that research departments serving institutional investors are going to have to restructure. They are set up by sector with huge specialization and a short-term focus, on both the buy side and the sell side. But technology is blurring the lines between and among sectors and silos prevent the conversation about converging technology. We've built ARK around innovation platforms that cut across sectors and are global in scope. We live in and communicate with the communities we research. It's a competitive advantage that we're willing to share our models and our research conclusions."