The huge influx of capital into manager-of-the-moment Ark Invest over the last 12 months has brought pros and cons, according to the firm’s head of research, Brett Winton.
Winton told a Nikko Asset Management NZ online investor update last week that the massive inflows racked up by the ‘disruptive innovation’ boutique of late has “benefits and drawbacks”.
As reported previously, Ark has seen assets under management in its flagship Innovation Fund rise from just over US$3.1 billion at the end of 2019 to more than US$43 billion in January this year (including at least one day of $1 billion plus net flows during the month).
Bolstered by a one-year performance of about 150 per cent in the Innovation exchange-traded fund (ETF), Ark has achieved a cult-like status centred around founder, Cathie Wood, especially among younger investors. (Ark has possibly pioneered a fund manager ‘merch’ trend with Wood t-shirts now a popular retail item.)
With a much-bigger war-chest at its disposal, Ark now demands more attention in the upper echelons of capitalism, Winton said.
“For example, we can now get in on IPOs,” he said, that would not have been open to a smaller boutique firm.
“We also have access to more information flows,” Winton said. “We can more easily talk to company heads and product leads in the public and private spaces [Ark is interested in].”
On the downside, he said the manager’s increased heft makes it more difficult entering opportunities in small-cap companies “at the price you want”.
“But our performance hasn’t come from small cap companies,” Winton said.
Indeed, Ark has been a notable holder of market darling, Tesla, which was a large component of the manager’s 2020 result.
And while Ark has stacked on weight over the last 12 months, Winton said in relative terms the manager remains appropriately sized.
“At the end of 2020 we managed about US$58 billion [across all Ark products and strategies],” he said. “But we think our investment universe is valued about US$14 trillion.”
Winton told the Nikko audience that the manager “has not changed its research process” as a result of its growth in assets under management.
For 2021, he said the “most exciting space” for Ark remains the “robo-taxi” opportunity, which underpins much of the enthusiasm for Tesla.
Robo-taxis could transport people at cost of “25 cents per mile” compared to 75 cents for the current traditional methods, Winton said.
Based on the Ark rationale, he said robo-taxis could generate annual income of US$1 trillion by the 2030s, suggesting a dominant player in the sector could hit a reasonable market cap of US$20 trillion at the same time.
However, after a smooth ride upwards over the previous 12 months, markets have rocked the Ark boat a little in the last week or so. Tesla, for instance, is down over 25 per cent year-to-date (although Ark was buying the dips).
The market volatility has also seen Ark flows fluctuate in the last couple of weeks (including a one-day exit from the ETF of US$465 million).
In a note last week, research house, Benzinga, said: “Funds like ARKK that invest aggressively in high-beta stocks tend to outperform the market significantly during periods of market strength and underperform significantly during periods of market weakness, such as the last two weeks.
“If ARKK investors are patient enough to ride out the market volatility and stick with Wood in the long-term, the fund won’t have any problem navigating the market volatility. But if ARKK newcomers lack the patience to stick with the fund, the feedback loop… could make things ugly, fast.”
Even so, Ark has accrued US$20 billion of net flows in 2021 to date, of which a tiny proportion has come via investors in the Nikko NZ version of the main Ark fund. For example, since adding the Ark fund as a stand-alone option in its KiwiSaver product, Nikko has seen funds under management rise from about $15 million at the end of last year to about $50 million.
The global Nikko entity owns 15 per cent of Ark.