ARK’s Cathie Wood Disrupted Investment Management. She’s Not Done Yet

Andrew Michel, a 65-year-old product-marketing engineer, made a strong—numerous would state a careless—relocation last June. The longtime, normally conservative financier offered two-thirds of his retirement cost savings, which had actually been purchased broad-market index funds, and put the cash into 2 red-hot ARK exchange-traded funds. Within a couple of months, he made enough for a deposit on a 2nd house, in warm Tampa, Fla. “I looked her up, and it all sounded really good,” he informs Barron’s. “I started investing with ARK just three days later.”

The “her” is Cathie Wood, who established ARK Financial investment Management 7 years back, and joins our list of the 100 The Majority Of Prominent Ladies in U.S. Financing this year. Michel’s is the sort of financier fanaticism that has actually made ARK a family name and Wood a not likely celeb. Her success appears really of-the-moment, however she has actually been preparing for several years. She was early on numerous styles—she accepted active management when investing appeared inexorably connected to indexing; she executed her stock-picking in active ETFs while the biggest possession supervisors stated it couldn’t be done; and she purchased business that others believed were overpriced, a joke, or both.

It isn’t simply that ARK’s actively handled funds have actually succeeded, although they have—extremely so: In 2015, 5 of its 7 ETFs returned approximately 141%; 3 were the leading entertainers amongst all U.S. funds. Wood’s increase to star-manager status is reflective these days’s zeitgeist. A few of the greatest investing stories just recently—

Tesla

(ticker: TSLA), Robinhood, Reddit,

GameStop

(GME), and Bitcoin—have to do with outsiders disturbing the status quo.

“ARK is an outsider, too,” states John Rekenthaler, vice president of research study for Morningstar. “Cathie Wood has been around, but this is a new company. There is a sense of outsmarting Wall Street, outsmarting convention.” Wood has a following on social networks, which has actually cultivated a sense of neighborhood and fandom comparable to the Bogleheads or Buffett mania. The company even gave in to require for ARK product (all sale continues go to a Covid-relief charity).

ARK has actually taken in $37 billion in brand-new cash considering that the start of 2020, the third-highest inflow amongst cash supervisors, behind just Lead Group and

BlackRock’s

iShares, each of which has numerous funds. The company’s flagship ETF,

ARK Development

(ARKK), has actually grown more than significantly within a year; it now has $22 billion in properties. ARK has $47 billion in all of its ETFs integrated.

Wood’s concentrate on ingenious business with innovation to interrupt the method we live implies that her portfolios are filled with stocks that have actually escalated—Tesla is a huge holding in 3 of her funds. Other ARK holdings consist of

Square

(SQ),

Teladoc Health

(TDOC),

Roku

(ROKU), and

Shopify

(STORE). Numerous have actually compared Wood to the star supervisors of the 1990s, who rode high as the tech-stock bubble pumped up, and disappeared after it burst.

When stocks skyrocket, there’s constantly the threat of them flying too near to the sun, and ARK Development is getting singed: It has actually dropped 23% in the previous 2 weeks. “ARK funds are bull-market stories; they’re obviously going to do bad in a bear market. There’s nothing controversial about that,” states Rekenthaler. “These are highly aggressive, high-beta stocks.”


I felt that the approach benchmark investing had actually gone too far, and there was a space progressing in the market needing to do with development.


— Cathie Wood

Wood isn’t concentrated on short-term changes. She takes a long, and vibrant, view—a year back, she stated that Tesla might reach a split-adjusted $1,400 a share in 5 years—and states we aren’t in a bubble today. The huge concepts progressing now were planted thirty years back, she states: “We are ready for prime time now.”

Wood, 65, bears none of Icarus’ hubris. Her moms and dads immigrated to the U.S. from Ireland and settled in Los Angeles. Like numerous immigrant households, Wood matured with education and profession at the leading edge. “I was raised as a firstborn son,” states Wood. “I was going to blaze the trail for my family.”

Wood’s daddy served in the Irish army and the U.S. Flying Force, and ended up being an effective radar system engineer, who, according to Wood, was very detail-oriented and constantly looked for to “peel the onion” in his work. He pressed Wood to find connections in between things. Wood’s mom, she states, was “very supportive” and “full of laughter and life.”

Wood finished from the University of Southern California with a degree in economics and financing. She landed her very first job at Capital Group through her coach, commemorated supply-side financial expert Arthur Laffer. She invested 3 years there as an assistant financial expert. In 1980, development store Jennison Associates was trying to find somebody to crunch financial information; Wood transferred to New york city and became its primary financial expert—at age 25.

It was those days that genuinely formed her ability for argument, Wood states. In the early 1980s, rates of interest and inflation remained in the double digits, and efficiency and development were collapsing. While the majority of the best-known financial experts of the time—consisting of Henry Kaufman, called “Dr. Doom,” and Milton Friedman—thought that inflation was embedded in the system, Wood believed rates of interest had actually peaked.

Spiros “Sig” Segalas, co-founder of Jennison and Wood’s manager and coach, frequently generated these financial stars to share their projections, and challenged Wood to dispute them. “For four years, nobody believed us,” she remembers. “I would have to go up against Henry Kaufman one-on-one. I knew my numbers; I knew what I was talking about, but I had to convince them I did because of my youth.”

Segalas calls her a “lady with unbelievable, unwavering conviction.” He set up Wood in a neighboring workplace so he might select her brain and entrusted her with composing the company’s quarterly letter. “She was by far the sharpest,” Segalas states. “She always made me look good.”

Wood invested 18 years at Jennison, while raising 3 kids. Rates of interest started to decrease in the 1980s, permitting tech business more runway for development, and setting the phase for a brand-new period of development—including desktop computers, semiconductors, and cordless ability. Wood chose that she wished to end up being an equity expert and portfolio supervisor.

Wood took a look at locations that other experts were disregarding. “I was like a little dog looking for scraps under the table,” she states. She discovered stocks that sat at the crossway of numerous markets, and weren’t followed by experts from any side. This, she recognized, is where development takes place. Reuters, for instance, was this mystifying “database publishing” business that gathered information from monetary business and after that offered it back to them in aggregate. No one comprehended this company design, so Wood took it up: “I just felt it was something big, and, of course, it was the precursor of the internet.”

Note: Information since March 3

Sources: Morningstar; Ark Financial Investment Management

After leaving Jennison in 1998, Wood co-founded Tupelo Capital, a hedge fund; she signed up with AllianceBernstein as a portfolio supervisor and thematic research study strategist in 2001, handling more than $5 billion. She continued to invest with strong conviction in high-growth, high-risk, smaller-cap stocks.

Wood investigated stocks with the very same dogged decision she used to economics. “Cathie is insatiably curious; she was a voracious consumer of research from all over the Street. She read everything from everyone,” states Lisa Shalett, Wood’s manager at the time, now primary financial investment officer for Morgan Stanley Wealth Management. “She was tireless; she works 24/7 to make sure the team has the most thorough research and differentiated view.”

Wood’s portfolios carried out effectively in the booming market of the early 2000s, however they fell more difficult than the marketplace throughout the 2008-09 monetary crisis. “It goes without saying that Cathie’s strategies are vulnerable to going out of favor,” states Shalett. “When you have a liquidity crisis in the market or big changes in interest rates, all the holdings could move together. That doesn’t provide a lot of diversification for your clients.”

Certainly, Wood’s high-octane design was postponing some organizations, and AllianceBernstein desired guardrails on the funds. Her portfolios were frequently considered too unpredictable, states Wood, and she was asked to make changes by owning indexes like the S&P 500. She disagreed: “I felt that the move toward benchmark investing had gone too far, and there was a void evolving in the marketplace having to do with innovation.” She saw that financiers in personal business wanted to designate greater evaluations to business than stock financiers who watched out for volatility. “We saw companies in the public market sometimes selling for just 10% of what private markets were willing to pay [for similar companies],” she states. “I thought there was a huge opportunity there.”

Then came another sort of awakening. Wood was raised Catholic and considers herself an individual of faith. She checks out devotional literature and goes to church. In 2006, when the real estate bubble was not yet at its peak, Wood believed it will burst. She drastically lowered the threat in her portfolios, and dragged the marketplace. “A thousand basis points of underperformance was embarrassing,” she remembers.

When she talked to her spiritual advisors, nevertheless, it pertained to her: “You cannot worship any idol, and the benchmark has become an idol.” The next year, she made back much of the loss. However in prayer and meditation, she had the following discovery: “Benchmarks are all about successes in the past. God doesn’t want us to be stuck in the past. He wants us to move into the new creation.” That’s when she understood she needed to begin her own business: “I felt that a start-up could go out there and spread that message very loudly,” she states, “We were putting all our chips on the table.” In 2014, Wood left Alliance Bernstein and introduced her company.

Wood named it for the Ark of the Covenant, a chest that in Jewish and Christian tradition holds the tablets bearing the Ten Commandments, although she told clients later that it was an acronym for Active Research Knowledge. She was on a mission to allocate capital to its best use—transformative technologies.

For the first three years, ARK had no outside investors, so Wood personally supported the entire firm, paying for operating costs such as salaries and product-registration expenses. The firm had no office; everyone worked out of a public working space on their own computer. “There were a lot of people who doubted her, and a lot of friends were concerned, yet her confidence never wavered,” says Tom Staudt, one of the first employees of ARK and now its chief operating officer. “Cathie risked her personal wealth because she had that degree of conviction. I joined ARK purely because of Cathie; I was blown away by her vision.”

ARK has remained lean. It has about 30 employees, and most are millennials. Wood wants to make sure that the staff has one foot in the new world, Staudt says. She also hired people with less experience in finance: Most employees on ARK’s investing side don’t have a Wall Street background or an M.B.A. Instead, they are experts in different industries, who are encouraged to “think differently, think long term, and think exponentially in a world that often falls hostage to short-term and linear thinking,” says Staudt.

Before the pandemic, Wood would sit at her desk in the center of ARK’s Manhattan office, an open-floor space located on East 28th street. There are no cubicles, and Wood doesn’t have an office. Her desk has a tall chair—like those you’d see in a bar—and all other desks are arranged in a circle, so she could see and talk to anybody by simply turning her head. “She wants to create an investment process and culture where ideas can come from any and all people within the firm,” says Staudt.

Wood’s belief in transparency is another reason she decided to begin her own business. Most financial firms don’t allow portfolio managers and analysts to use social media to share their research or even gather information. At ARK, Wood created an open-source ecosystem, where the team can share research and collaborate with scientists, engineers, doctors, and other experts. “Most compliance teams would not be comfortable with that,” Wood states. “From the beginning, we said we are going to actively share the knowledge we’re generating,” says Brett Winton, who has worked with Wood since 2007, when they were both at AllianceBernstein. Winton was a thematic research analyst then; now he is the director of research at ARK. “Information attracts information. By providing our research to the world, we’ll get this reflection back on areas of disagreement or misunderstandings. It will make us better at understanding what’s happened.”

Investors and peers like this open approach. “Most funds hide their investments; she doesn’t,” says Emma Vinarsky, a healthcare portfolio manager at Aleph Capital. “She’s very gutsy. She’s not afraid to take chances.”

Michel, an investor for more than 30 years, tells Barron’s that he opened a

Twitter

account for the first time last year because of Wood: “It has been very informative learning about ARK through the stocks tweets out there.” ARK’s weekly brainstorming sessions are open for anyone to join, including industry experts and rival investors. Angela Dalton, an outside advisor of ARK and CEO of Signum Growth Capital, has been attending those meetings every Friday—both in-office and online—for the past four years. “She is the only person I’ve ever met to open this up,” says Dalton.

Michel still has two-thirds of his retirement money in the two ARK funds, minus that down payment. He’s still working, owns some real estate, and will have a pension when he retires, so he’s ready to see where Wood’s vision takes his portfolio over the next two or three decades. But as interest rates creep higher and inflation concerns set in, investors begin to discount future value of these highflying stocks a bit more, which has caused share prices to fall. That, in turn, can prompt more selling.

Wood isn’t concerned about ARK Innovation’s sharp pullback. Investors yanked nearly $700 million out from Feb. 24 to March 1; it recouped most of those flows in the next two days before turning negative again. Other ARK ETFs are seeing outflows, as well. ARK’s Winton says he suspects that most outflows are attributable to options strategies based on the funds. “Equities are more predictable over longer periods,” says Winton. “I don’t think it’s wise to try to anticipate what our strategies are going to do over the next two weeks, but a lot of people are placing implicit bets on exactly that.”

Critics warn that the company could end up a victim of its own success—it has attracted a lot of “hot” money that Wood must invest, potentially in areas she’s less excited about. Wood says capacity isn’t a challenge; ARK owns companies that Wood expects to return at least 15% annually, which means their shares will double in five years. “If we’re right, if these techs are truly on exponential trajectories, then our capacity should grow exponentially, as well,” says Wood. She notes that the explosion of newly public companies over the past year—especially those listed through special-purpose acquisition companies, or SPACs—have also provided ample new opportunities for innovation stock-picking.

Michel, for one, firmly believes what Wood advocates—taking a long-term view and sticking with it through the downturns. “It’s the best time to buy when it dips,” he says. “Though the market goes down, it almost always comes back up. You just have to be patient.”

Wood is still an unswerving debater and formidable thinker, says a former colleague who asked not to be called because of his company’s constraints on speaking with journalism. “She can remember more facts and figures than anyone I’ve ever met. She has a tremendous head start in any debate because of the pure horsepower of her brain. Does that create overconviction? Yes, but it does for everybody.”

Compose to Evie Liu at evie.liu@barrons.com

Jobber Wiki author Frank Long contributed to this report.