The first time I spoke to Cathie Wood, she’d just had one of the best months in her 40-year investment career.
She had been called “the best investor you’ve never heard of” in a glowing profile on Bloomberg. Her long-held conviction in Tesla — once the subject of derision on Twitter — was suddenly being taken seriously after the electric-car maker’s stock surged 155 percent over the span of three months. And ARK Investment Management — the asset management firm Wood launched in 2014 — was reaping the rewards.
“When hedge funds were pummeling Tesla, thinking it was going to go bankrupt in May 2019, we were buying aggressively,” Wood said. That May, the stock was trading around $200. By the time we spoke in late February, Tesla was hovering above $800.
“That’s within one year,” she added. “We’re getting better returns than a lot of venture-capital and private-equity firms.”
That was February 25. We didn’t know it then, but U.S. stock markets had already started what would turn into a more than 30 percent decline over the next few weeks as the novel coronavirus spread to almost every country in the world, infecting hundreds of thousands of people and shutting down businesses in the U.S. and elsewhere.
Tesla, when Wood and I spoke that morning, had already started a significant fall from its 2020 end-of-day peak of $917 a share.
Twenty-two days later, the electric-car company’s stock was down 55 percent.
She and the rest of the ARK team normally operate out of a modern office in New York City — the U.S. city worst hit by the coronavirus, accounting for nearly a fifth of the country’s recorded cases. According to Wood, the ARK team has been working remotely since March 10, holding their usual team meetings over video chat instead of in person. Wood, for her part, says she left her house in Connecticut so her daughter, who lives in Brooklyn, could stay there with her friends.
“They were living near an enclave with a big coronavirus outbreak,” she says. “I wanted them to come out to Connecticut, but we thought my daughter might’ve had [the virus]. So I let her and her friends take over my house, and I went to South Carolina.”
There, Wood says she spends most of her days in communication with her team and their clients. (“Overcommunication,” as she describes it.) With most of the country practicing social distancing, client communication takes place mostly online, in the form of social media posts, video conferencing, white papers, and the like. ARK recently held a planned conference over a live stream, and Wood has started delivering end-of-week market updates in a live video series the firm is calling Stay at Home with Cathie Wood.
“We’ve delivered more research content in this period to our clients and to the world at large than we ever have,” Wood says. “We want to make sure that our clients understand as much as we do about what’s going on.”
It’s a disaster strategy that was shaped by Wood’s experience working as a portfolio manager during the 2008 financial crisis.
At the time, she was serving as chief investment officer of AllianceBernstein’s thematic research strategies. “On the second week after Lehman went under, traders weren’t picking up the phone; portfolio managers didn’t want to give interviews,” Wood says. “I was out there talking — and I believe that it helped asset retention.”
That belief is being borne out at ARK, where the firm’s suite of actively managed funds continued to attract new client money throughout March, while stocks were in freefall. “With the exception of one or two days, we have seen net inflows every day,” Wood says.
ARK’s exchange-traded funds, for instance, had net inflows of $511.4 million for the month, according to chief operating officer Tom Staudt. For context, the firm’s flagship ARK Innovation ETF — which in March attracted $408 million in net inflows — had $1.86 billion in net assets at the end of December.
Preliminary numbers indicate that those positive flows will continue through April. Coming out of this crisis, Gene Needles, president and CEO of ARK’s minority stakeholder Resolute Investment Managers, feels confident that ARK will continue to attract new investors.
“There’s been net inflows so far in April, net inflows for the year, net inflows for the last year,” he says. “I don’t see any reason why that wouldn’t accelerate.”
That’s not to say fundraising hasn’t been impacted by the coronavirus pandemic. Back in February, Wood told me that ARK — with its retail-investor-oriented ETFs — was “starting to do a full-court press” on institutional clients. At the time, she said ARK had about $1 billion in institutional accounts, including “a large state employee retirement system that gave us $200 million in March of 2016, when we only had $40 million.” That investor — which public pension documents identify as the State of Michigan Retirement Systems — had $483 million invested with ARK as of the end of December.
(A spokesperson for the state pension system declined to comment for this story, adding that “this isn’t meant to be an indication of non-support for ARK as a manager — we are just simply too busy managing the portfolio assets during this difficult time.”)
Originally, Wood was scheduled to meet with potential institutional clients this spring, including some investors in Asia. Those trips were, unsurprisingly, canceled.
With social-distancing practices expected to stay in place in the U.S. through at least the end of April, there is substantial uncertainty surrounding the manager selection process at institutions, which typically require in-person meetings with portfolio managers as part of their due diligence. Andrew McCollum, who leads the investment management business at advisory firm Greenwich Associates, says there will likely be a “pause” in manager hiring, as many institutional investors postpone or extend their search processes.
“For a small asset manager, or any manager for that matter, it’s going to be difficult to continue the growth pattern in the near term, as there just won’t be that much money in motion,” he says.
Still, McCollum says he has seen some institutional investors following through on existing manager searches during this period. ARK, for its part, has found success with a sovereign wealth fund it was courting. “We are now on the fast track with them,” Wood says. “They’ve been watching our strategy — I think they wanted to see as we’re going through this crisis if we would behave the same way that we said we would. And we have.”
At ARK, that means sticking to the firm’s core investment philosophy: identifying and investing in “disruptive innovation” in the public markets — especially now, when companies are under pressure. As Wood argued in a March blog post on ARK’s website, “Innovation gains traction during tumultuous times.”
“During the worst financial crisis of our lifetimes, innovation gained more traction than most investors had anticipated,” she wrote. “Companies offering faster, cheaper, more cost-effective, and creative products/services gained significant share.”
After March’s coronavirus-fueled selloff, Wood loaded up on shares of the companies she and her team think will come out of this crisis better than ever. The firm’s flagship fund is now more concentrated into these highest-conviction stocks, including 2U, a technology firm that helps colleges and universities offer online classes, and Zillow Group, an online real estate marketplace that gives virtual home tours.
“These are companies that are solutions to the problems we’re having now, and [trading] algorithms took those stocks and tore them apart,” Wood says. “We bought into them aggressively, and they’re all big winners in recent days.” 2U, when we spoke on April 6, was up 59 percent from its March low of $12.51 a share. Zillow was up 55 percent.
But the short-term results matter little to Wood, who — true to form — thinks the biggest gains are still to come.
It was Wood’s focus on the future that first attracted Needles to ARK. He recalls the first time he visited the ARK office in Manhattan, back when Resolute — operating then as American Beacon Advisors — was looking to make its first investment in another asset management firm. It was a hot summer day in midtown, and ARK, a startup, had a small office without working air conditioning.
“All I remember being told was that this was an ETF company,” Needles says. “So I go to this meeting, and I’m perspiring at the table, and Cathie Wood starts to talk about her vision. And I have this ‘aha’ moment: This is not an ETF company. This is an investment company.”
Part of what made ARK stand out, according to Needles, was the structure of its research department. Wood, who spent time working as an equity analyst in the 1980s, felt that the traditional model of equity research would be an ineffective way to study the impact of emerging trends like robotics and blockchain.
“She went about setting up her research differently than anybody else,” Needles says. “She created this ecosystem to capture these disruptive trends across sectors, across industries, rather than pigeon-hole an analyst into a specific industry sector.”
An analyst focused solely on the gaming industry, for instance, may have had modest expectations for a company like Nvidia Corp., which revolutionized PC gaming with its graphics processing units. “A gaming analyst would say, ‘All right, that’s great, but there’s only so much demand for gaming consoles worldwide,’” Needles says.
It turns out, however, that the technology Nvidia used to improve computer graphics could also be leveraged to make chips that power artificial intelligence and machine learning processes — chips that could be used for autonomous driving. “A gaming analyst wouldn’t capture that,” Needles adds. “They wouldn’t see that application.”
The other thing ARK did differently, as Wood explains, was to make its research free and easy to access. “I was always frustrated that there was a sense of secrecy in research,” she says. “I do not believe that domain expertise resides with any one firm.”
So at ARK, research is distributed far and wide, pushed out onto the social media platforms that many traditional stock analysts are banned from using. “Medium, Telegram — any social media network our analysts think will help them engage with our audience,” Wood says. “I hired an attorney who had been at the SEC for four years, when they were evolving the guidelines for social media — that’s a very important competitive advantage we have.”
In the last year, ARK has even started making its valuation models public on a platform called GitHub, where users can adjust ARK’s projections for companies like Tesla based on their own expectations for variables such as demand for electric vehicles.
Speaking in February, Wood compared ARK’s method of research distribution to the advent of open-source software, which offers up its source code for anyone to inspect or modify.
“We’re the first sharing-economy company in the asset management space when it comes to research,” she said.
According to Wood, ARK’s most important venue for sharing research is Twitter. This is, perhaps, not a surprise when one remembers that ARK’s largest stock position is in Tesla.
While short sellers and analysts scoffed at Tesla’s ability to find a buyer willing to pay that kind of premium for the company — Tesla’s stock having opened at less than $344 a share on the morning of Musk’s tweet — ARK was forming a very different argument against the hypothetical take-private deal.
In August 2018, ARK’s analysts were projecting that Tesla’s stock value could reach as high as $4,000 per share by 2023 — nearly ten times the $420 price tag Musk had touted. In a public letter addressed to Musk and Tesla’s board, Wood argued that taking the company private at that share price “would undervalue it greatly, depriving many investors of the opportunity to participate in its success.”
Recounting the story in February, Wood said the decision to write the letter was borne out of the frustration of having just watched two of ARK’s portfolio companies — Juno Therapeutics and Kite Pharma — get taken private at prices that Wood and her team considered bargains.
“Our five-year targets for those companies were around $100 billion,” the ARK chief said. “We felt like we left $90 billion on the table. We thought, ‘We are not going to lose another one of our companies like that.’”
So on August 22, ARK published the letter, which Wood shared on Twitter under her personal handle. Her Twitter was immediately flooded with criticism — including a number of comments too rude to repeat. Even the more polite Twitter users were deeply skeptical of ARK’s projections, with one suggesting that “$200k price targets for Bitcoin in 2019 made more sense.” One self-proclaimed Tesla bear responded simply with a laughing cat emoji.
“What was gratifying about that is Elon did tell us that the letter did have an influence,” Wood says. “Was it the deciding factor? I can’t tell you. But it was nice to be heard.”
Tesla remained public, and Wood earned a reputation as the company’s biggest bull, proselytizing about the profit potentials of autonomous vehicles with cheap manufacturing costs.
“If you took a look at my Twitter handle, you would probably see that any time I’ve said anything about Tesla I get very little support and a lot of anger,” Wood said in February. “It’s okay — I don’t mind it. I don’t even read it. But if we’re right, then all of these people who have been bad-mouthing us and deriding our research are going to have to do a double-take.”
At the beginning of 2020, when Tesla was speeding toward a four-figure stock price, ARK started seeing “a lot of double-takes,” Wood added. On January 31, ARK published a report with its updated projections for the electric-car company’s share value. This time, Wood’s team was predicting that Tesla would reach $7,000 per share by 2024 — and that wasn’t even their bull-case scenario.
“We’ve gotten much less reaction now than we did the first time around, when we put out $4,000 with that letter,” Wood said in February. “And the reason is that the stock price has more than quadrupled. If there’s one thing that investors respect, it’s the market — and the market is saying we’re right about something.”
Then March happened.
Yet even though Tesla’s stock has fallen from its February heights, ARK remains extremely bullish. The firm’s new projection — factoring in the economic downturn and the closure of Tesla’s factories due to the coronavirus pandemic — is a 2024 share price of $6,800.
The reason for this optimism, according to Wood, is the ARK team’s belief that Tesla will introduce an “Uber-like” service with real drivers before it launches its autonomous car service.
“That would be so much more profitable than their base business, and it will enable them to collect so much more data, with people spending a lot more time driving in their cars,” Wood says. “That means their artificial intelligence engines are going to become more accurate more quickly, and we think it will accelerate the timeline for autonomous — regulators permitting.”
The reactions to these new projections, when Wood and her colleagues shared them on social media, were skeptical at best. Hedge fund manager Jim Chanos — a Tesla short seller who operates on Twitter under the pseudonym @WallStCynic — responded to ARK analyst Tasha Keeney’s tweet with only a hashtag: “#FacePalm.”
But at the time of publishing, Tesla’s stock was trading at $710 per share — close to where it was in early February.
“I’ve always said to analysts, wherever I’ve been a portfolio manager, that the truth wins out,” Wood says. “If we’re right, we’re going to be rewarded.”
