The Market Doesn’t Understand This About The Next Cycle | Cathie Wood

22.04.2022

‘As far as the rate cycle, the interest rate cycle, if you look at history, and I actually had a value manager tell me this, who was cheering us on, as you know, a lot of people were not, shall I say. He wrote to his client and wrote an email saying I have looked into this and it is not your ilk of stock that gets hurt during interest rate hiking cycles. It is mature growth companies that experience most of the pain.’ – Cathie Wood

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So let’s go back to Cathie Wood. In a 30-minute interview with Yahoo Finance, she discussed numerous topics, including one of the most talked about topics of the late Elon Musk: Twitter.

Cathie Wood has been a staunch supporter of Tesla, making a small fortune riding the wave as one of the earlier investors. She was also an early investor in Twitter, albeit recently selling her position. Her view on both made for an interesting take, but the interview took a quick turn when Cathie was asked about her fund’s performance. With her fund down 50%, Cathie takes pride in knowing that her investors have full confidence in her. Ark’s inflows of capital are still exceeding the outflows. She is still very confident that her fund will outperform most fund managers and the market in the next five years, and she even went far enough to make some bold claims in the interview:

‘I think you’d be shocked to see how calm and focused everyone is. We’re focused on our research. Are we getting this right? We have a five-year investment time horizon, so if you look at the last five years, including the first quarter waterfall performance, In the last five years, we have handily outperformed the Nasdaq, the S&P.

The five-year time horizon is not just looking back but looking forward as well. Putting this recent performance into perspective, you’ll note that during COVID, from April whenever the market bottomed through February of 21, our flagship strategy was up almost 360%, down 60% from that at our worst, very tough. You know, I’m thinking about our clients and I’ve been extremely gratified that, for the most part, they’ve stuck with us last year our NET inflows were 17 billion. So they’ve felt the full force of the decline, but we inflowed last year and are inflowing this year. I think that has been shocking to a lot of our counterparts out there who have gone through periods like we’ve just experienced and have had massive outflows.

I think a few things are at work. Number one, our long-term time horizon is practically the first thing we say when we’re talking to prospective investors. Number two, if I had told you or talked to you in February 21, even at that point in time, we expected our flagship strategy to deliver a 15% compound annual rate of return based on our projections for the next five years. It’s about doubling the market over the course of time.

Today, after this decline, our projections have increased. If anything, they’ve increased because artificial intelligence breakthroughs are moving so much faster than we expected.Our expectations for future returns have gone up as the prices have come down, so today we expect to consider the source. This is our research, and these are our expectations. We could be wrong, but whereas it was 15% last February, today’s number is 50% of the compound annual rate. What we believe the market does not understand is that we have entered the sweet spot of exponential growth trajectories. Most of the market thinks in linear terms. Most of our careers, we’ve experienced primarily linear growth. Grow that slows down and decays to the nominal GDP growth rate over time.

We have a few experiences with exponential growth. Amazon is a very big one. When we were buying Amazon in 2003, what we were saying to investors was ‘if you believed Amazon could grow anywhere in the 20% to 30% range for the next 20 years, would you buy it?’ If you put that into a dividend discount model, you would buy that all day long, but that’s not how people were thinking about it. Well, of course, we’ve had a lot of pain for a lot of reasons, but we also have more problems with Russia and Ukraine, food and energy prices. Can we help that.

Our strategies are all about solving problems. Electric vehicles are going to help us move away from energy right Bitcoin mining as part of utility ecosystems is going to accelerate the shift towards renewables and the genomic revolution is going to help us grow food in areas, maybe away from Ukraine, as it’s in quite a bit of turmoil in other areas that are not as friendly environmentally to food production. Innovation solves problems. If that’s all we do, we’ve got a lot of problems. Inflation is another problem. If it’s going to be long-lasting and if one of the reasons is a labor shortage, automation, artificial intelligence, and robotics solve problems.

During risk-off periods, we cut the number of names in our portfolio, consolidate, and concentrate on our highest conviction names because we know there are mistakes in the portfolio. This particular strategy came out of making many mistakes in the past. Whenever you know, whenever we go into a risk-off period, I say to all our analysts and to Brett Winton, our director of research ‘Okay, now is the time we have doubts, and they’re reflected in our scoring, but are they reflected strongly enough in which names are we going to consolidate into, and the important part and other side of that is which names are we going to consolidate out.’ I think I am doing that aggressively, so we shall see. You know, if we concentrated on names that you know really aren’t disruptive at all. If we find that our research was faulty, then that would have been a big mistake.

In terms of the rest of our tenure, you know what happens when we sell stocks because, you know, we’ve made a mistake. We try and remember what “ok” is when we cut a score like that for management changes. Let’s have heightened sensitivity to the next management change because we should have sold the stock when there was that management change. I know that there are names that we did sell for that reason or that we did not sell for that reason, and those would have been some of the biggest mistakes. I’ve been in the business now for 45 years, and so I’ve tried to bring to an end all of the lessons learned, and I’ve learned a lot of lessons. I’ve made a lot of mistakes over time.’

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