Listed markets rather than private equity offer the best avenue to capture the upside of disruptive technologies, according to Ark Invest founder Catherine Wood.
Wood, in NZ earlier this month on a Nikko Asset Management roadshow, said venture capital could not build the necessary scale the current wave of innovative technology firms needed to succeed.
She made the point recently in an open letter urging Elon Musk, founder of electric vehicle and battery firm Tesla to keep the firm on listed markets. In a controversial move, currently under regulatory investigation in the US, Musk threatened to take the business private earlier this year.
Wood says in the letter that Musk’s threat was understandable in light of “the short-term investment time horizon of investors in the public markets and inflated valuations in the private markets today”.
However, she says going private would leave Tesla unable to capitalise on “its competitive advantages as rapidly and dramatically as it would as a public company”.
Musk has since committed to remaining listed (although almost immediately triggering a further share price decline in a marijuana-related incident). But the letter highlights Wood’s further point that share markets currently undervalue innovative firms carving out the future in a wide range of technologies.
“As public equity markets continue to go passive, I believe we are witnessing a massive misallocation of capital, with innovation the most inefficiently priced part of the market,” she says in the letter.
Wood told the Nikko crowd that Ark, a firm she founded in 2014, had identified “more innovation platforms than ever before”.
For example, she said developments in biotechnology, automation, financial technology, blockchain and energy storage all opened up massive investment opportunities that would play out over the next 10 to 15 years.
Ark has bundled up those investment ideas into a range of exchange-traded funds (ETFs) and institutional mandates, including under a distribution deal with Nikko, which took a 15 per cent stake in the US-based manager last year.
Earlier in September Nikko Australia also launched the Ark Global Disruptive Innovation Fund.
Wood said Ark currently manages about US$7 billion with about US$3.5 billion sourced via Nikko (mainly from Japanese investors), US$2.5 billion in the ETFs and the remainder in separately managed accounts.
“We started by offering active equity ETFs but we’re wrapper agnostic,” she said.
The current Ark investment universe covers about 250 stocks that “we follow closely”, Wood said, under a process that includes both top-down and bottom-up analysis.
She said the research team includes various industry specialists who identify, critique and cross-pollinate ideas while applying rigorous analytical techniques before investing.
Ark uses a bespoke in-house scoring system to rate stocks as well as regularly adjusting portfolio holdings to adjust for “changes in conviction” or to “take advantage of portfolio volatility”.
Wood showcased a handful of the manager’s favoured innovations including the gene-altering technology CRISPR, ‘frictionless value transfer’ services such as bitcoin, and 3-D printing.
She said there were stocks that stood to benefit – either directly or as flow-on suppliers – across all those sectors.
For example, Wood said Ark was an early investor in bitcoin via the Bitcoin Investment Trust (GBTC) stock, which offers indirect exposure to the controversial cryptocurrency.
“We were the first fund investor into Bitcoin Investment Trust,” she said, before bailing out most of its holdings near to bitcoin’s US$20,000 peak last year due to internal portfolio rules and some bubble concerns.
While bitcoin has since dived considerably (just above US$6,000 at the time of writing), Wood said she was “actually more confident” about the cryptocurrency’s future.
Ark also has gained exposure to the crypto-craze by investing in derivative stocks such as manufacturers of central processing units (CPU) necessary to ‘mine’ bitcoin et al.
The manager’s disclaimer notes that its efforts to capitalise on “disruptive innovation and developing technologies to displace older technologies or create new markets may not in fact do so and/or may face political or legal attacks from competitors, industry groups, or local and national governments”.
But Wood said it was more likely that innovative firms would drive the next leg of the bull market as the technologies developed.
Furthermore, she also downplayed traditional risk indicators such as the current ‘inverted’ bond yield curve.
As an Ark research note puts it: “This explanation of the flattening yield curve seemingly suggests that ‘this time is different,’ but this time is not different in the context of disruptive innovation.
“During the 50 years ended 1929, the last time that three or more general purpose technology platforms were evolving simultaneously, the yield curve was inverted more than half of the time.”
Wood said Ark was targeting a 15 per cent compound annual return on its investments over the next five to 10 years.