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Disruptive innovation delivered a 90% return for ARK

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The Dr Cathie Wood-led ARK Investment Management is facing a different kind of pressure as 2020 draws to a close. According to Bloomberg, ARK’s ETF distributor, Resolute Investment Managers, is seeking to exercise an option acquired in 2016 to buy a controlling stake in the business.

The ARK Invest strategy has been a clear winner of the ‘growth versus value’ debate, sitting squarely on the growth side and benefitting from the huge wage of digitisation that accelerated throughout the pandemic. According to ARK ‘innovation is key to growth’ and is the core ingredient of delivering long-term outperformance and capital appreciation.

Founded in 2014 following 12 years as head of Global Thematic Strategies for Alliance Bernstein, 2020 has been a watershed year for the strategy. The results are clear to see with the flagship ARK Innovation ETF (NYSE: ARKK) soaring 180% from its March lows, and breaching US$11 billion ($15.3 billion) in assets under management, US$5.8 billion ($8 billion) of which was invested this year. The Australian version of the strategy, distributed by Nikko Asset Management and called the Nikko AM ARK Global Disruptive Innovation Fund, is up a similarly strong 93% for the 12 months to 31 October.

ARK Invest boasts what must be one of the most committed technology and innovation strategies, with years of outright focus and on-the-ground experience giving its analytical team an edge in looking beyond ‘robust valuations’ and seeing the real underlying growth opportunities. It seeks to invest in companies engaged in “disruptive innovation,” which it defines as “the introduction of a technologically enabled product or service that changes an industry landscape by creating simplicity and accessibility, while driving down costs.”

By no means is this a niche strategy: with over 40 years of experience, the team seeks to identify opportunities of global scale benefiting from themes including robotics, big data, machine learning, blockchain technology, cloud computing, energy storage and DNA sequencing. Importantly, ARK does not stray from its laser-like focus on innovation, or seek to find “value” where others are looking. The manager simply aims to understand the most important global themes better traditional investors.

ARK has an Australian flavour, with analyst James Wang having studied at the University of New South Wales and now specialising in the research of mobile devices, social media, machine learning, virtual reality and semi-conductor production, reflecting the cross-border, cross-sector freedom of the strategy. 

The portfolio is littered with high-growth sectors and companies ranging from space exploration to e-health and online payments, but by far the biggest highlight has been Tesla Inc. (NYSE: TSLA). The company is a lightning-rod for everything that is good and bad about the technology sector but similarly to ARK, 2020 has been a year to remember. Tesla has finally moved to profitability (for four consecutive quarters) and with post-pandemic fiscal stimulus increasingly focused on a more sustainable economy, the company is very well placed to benefit. Such has been the strength of its growth that Tesla will be added to the S&P 500 index on the 21st of December.

The TSLA holding currently represents about 10% of the ARKK strategy but without profit-taking it could have been as high as 20% of the portfolio; which Wood puts down to “sound portfolio management.” In a sign of its heavy focus on truly understanding the inner workings of these companies, ARK’s valuation model for TSLA has ten different scenarios, ranging from fully autonomous vehicles to struggling production and weaker margins. Earlier in 2020 it offered a bear case of US$1,500 per share, a bull case of US$15,000 per share and an expected value of US$7,000; all of which were before this year’s stock split.

Yet despite the group’s success it is now facing pressure from the very group it employed to assist in listing their ETF product in 2016, an event described as ‘”disappointing” by management. As is the case in many new product issues, the early supporters are offered the opportunity to benefit from the upside in the form of options. Yet few could have predicted the incredible short-term success.

The end of 2020 should be a time for celebration for management, but due to the “unwelcome notice that they intend to seize control of our business,” it is likely to be a busy winter for ARK. The message so far is clear from recent comments saying ‘”we do not believe that equity ownership by a party tangential to our business is in the best interest of ARK’s shareholders.” 

The first steps are underway with ARK Invest announcing its intention to “explore the potential replacement of Resolute Investment Management’” in late October, following a period in which it is in the top 1% of performers across most global equity sectors.

Whatever happens in the coming months, this is one to watch.

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