Cathie Wood: 'We are a deep value fund'

Taxi drivers giving share tips may well be the sign of a market bubble, but it's rare for things to work the other way around. In a bizarre twist, Cathie Wood, the Ark Invest chief executive and face of the Ark Innovation ETF (ARCK) tells Investors' Chronicle she often urges Uber drivers to embrace the artificial intelligence (AI) revolution by effectively outsourcing their jobs to a fleet of Tesla (US:TSLA) cars.

"When I'm in an Uber car I often say to drivers, 'you know, your job is going away and here's a good idea for you, you and all of your Uber friends or other friends should buy as many Teslas right now as you can. You will be able to leverage off Tesla's platform as it launches its autonomous taxi network and put your fleet, however many cars you buy, to send them out and do the work for you'," she says. Wood argues that such vehicles would be "cash cows" and help drivers to pay down any loans on such cars in a relatively short time.

Such a statement, as implausible as it may sound to any Uber driver struggling to get by, is far from the only comment from Wood that might come across as eyebrow-raising. She predicts that Tesla shares could achieve a "tenfold increase" to hit the $2,000 mark in 2027, and describes ARCK, with its punchy bets on tech companies, as a deep value fund. But her interview with the IC, which is available in podcast format, nonetheless offers insights into the thoughts of an investor who continues to divide opinion.

The fund's evolution

For those not yet up to speed with Wood's career, the first point of note is that she became a big name in the lockdown era, with positions in companies such as Tesla and Zoom Video Communications (US:ZM), making enormous returns for her flagship Innovation exchange-traded fund (ETF) over the course of 2020. Since then, the Ark Innovation ETF, which recently became available to European investors – and like Scottish Mortgage (SMT) seeks to capture future trends in investing – has seen extremely disparate returns.

It lost piles of money in 2021 and 2022, made rich gains last year but has faltered in recent months.

The portfolio is also not short of holdings that will prove controversial, from the names mentioned above to bitcoin exchange Coinbase (US:COIN) and trading platform Robinhood (US:HOOD). 

The fund has a growth bias more generally, albeit with less focus on the US big tech names that dominated 2023 than many of its peers. As the table below shows, the portfolio is highly concentrated, with Coinbase making up around 10 per cent of the fund, Tesla on 9 per cent, TV device maker Roku (US:ROKU) on around 8 per cent, and the top 10 holdings accounting for roughly 60 per cent of the portfolio. 

Tesla has had a rocky ride so far in 2024, with its shares down by around 30 per cent in the year to date. It could also be argued that the fund, despite its focus on future trends, has not moved with the times: Zoom is one holding that could be called into question now the world has emerged from lockdowns and the likes of Microsoft and Google's own video conferencing products hold more sway.

Wood argues that Zoom can still pick up corporate customers, especially among small and medium-sized companies ignored by Microsoft on this front.

Discussing her largest holding, Wood says that Tesla's prospects as a carmaker can hold up in the face of competitors such as China's BYD putting pressure on electric vehicle prices. She argues that the two companies are likely to take market share from traditional carmakers rather than each other.

"We think electric vehicles will increase their market share from 10 per cent to 75 per cent in the next five years," she says. "There's lots of room for Tesla and BYD to traverse and both will gain share from internal combustion engine cars."

She also downplays the continued risks of Tesla attempting to navigate tensions between the US and China, suggesting it may have had a breakthrough when it was recently invited to work with Baidu on Apollo, the latter's autonomous driving platform. "If anything, we think Chinese risk has gone down," she says.

But, as many an Uber driver may have heard, it's on the subject of AI where Wood grows really evangelical about Tesla. She describes the company as "the largest AI project in the world", claiming that it has 8mn "robots on the road" allowing it to collect data about driving behaviour. "Tesla will be able to produce human-driven cars and robo taxis and flex between the two depending on the demand," she says.

Beyond the Magnificent Seven

Some cultural differences may be at play here. Whether it's talking up future trends or her punchy share price forecasts, Wood may strike some investors as having a very American optimism about the power of markets and innovation. This optimism often proves a useful tool when it comes to investing and the world of business more generally. But it's notable that she is at odds with many of her compatriots in one important way: having little exposure to the 'Magnificent Seven' stocks outside of the fund's Tesla position.

Wood says that over 40 per cent of the Innovation ETF is exposed to the AI trend that still seems to be driving asset prices higher, but argues that this is "not just tech", giving Tesla as one example. She does make the case, however, that there is better value to be had beyond the other constituents of the Magnificent Seven cohort.

"We have been dialling down our exposure to the 'Magnificent Six' because the rest of our portfolio is brimming with bargains," she says. "There has been a crowding into a few stocks which is a flight to safety, a flight to cash."

Here, Wood adds her voice to those who are worried that crowded trades like these may go into reverse. On top of this, she warns that some of the US market's most prominent companies could also find themselves disrupted by AI. "Google (US:GOOG) is on red alert because chat bots don't need its search engine to find the best services for the best price," she says. With Amazon (US:AMZN) you can go directly to a site and don't have to go through them." She argues that Apple's (US:AAPL) app ecosystem could also prove vulnerable.

Wood also argues that more attractive AI plays can be found beyond Nvidia (US:NVDA), which the fund sold down ahead of the huge rally in its shares seen since late 2022 onwards. "We said that if [the Nvidia story] is going to continue to run, there must be plays out there in the software space that are going to benefit and are not appreciated," she notes. "We moved into [process automation business] Uipath (US:PATH) and [data analytics company] Palintir (US:PLTR) and other companies we thought would be able to harness AI tools and lead the charge in terms of enterprise AI," she says. "Nvidia is delivering, but for that to continue there have to be beneficiaries."

External pressure

Ark has had to withstand some significant critiques of its investment process in recent years: fund research provider Morningstar downgraded the flagship fund to a "negative" rating in 2022, with a scathing note to accompany its decision.

The ratings agency cautioned that Wood had "saddled the portfolio with greater risk" thanks to a focus on a smaller number of stocks that year and said that Ark was lacking on the risk management front, adding: "The firm has no risk-management personnel. Wood's reliance on her instincts to construct the portfolio is a liability."

Morningstar also warned that Ark tended to favour companies that were unprofitable and whose share prices were highly correlated, claiming that its "carelessness" on risk management could bring further problems. Anyone considering an Ark proposition in Europe may want to weigh up such concerns, as well as worries that the team has timed some of its investment decisions, such as the move to pare back their Nvidia holding in 2022, poorly.

In response, Wood suggests that Morningstar does not understand Ark's investment process, saying the team uses "a white sheet of paper and original research" rather than following a benchmark.

"We give our research away so people can understand the depth of it," she adds.

She also notes that Ark has a "six metric overlay", with a focus on details such as whether a company has a visionary leader and if it's investing enough in research and development.

Looking at other themes in the fund, Wood continues to back the likes of Coinbase and Robinhood, both names closely associated with the success or otherwise of bitcoin. However, she claims that both could make further headway in the digital wallet space thanks in part to problems in the sector.

"They have miles to go in the digital asset world and are gaining share because the competition is facing problems in many ways," she says. One [FTX] imploded, Binance has been under scrutiny and been fined. Coinbase has been gaining share, has 110mn users and is spreading rapidly starting with its derivatives product. They're moving into other countries [outside the US] with good success. It's the most regulatory compliant exchange in the world and getting share because more and more people trust it."

Wood has not abandoned her characteristic bullishness on bitcoin itself, predicting that the price could go to $1.5mn by 2030. "Our confidence has increased because the SEC greenlit a spot bitcoin ETF, which is the first sign of regulatory acceptance," she says. She also points to the influence of Donald Trump, who now accepts election campaign donations in cryptocurrency.

As all this indicates, it is undeniable that the Ark portfolio does take plenty of bets that distinguish it from rival funds. As it opens up to UK investors, they will now get to decide whether this, or something more conventional, is the option for them.