Cathie Wood, the founder and CEO of Ark Investment Management, said that innovation stocks are in “deep value territory” as Friday trading saw continued declines, with the S&P 500 falling 1%.“After correcting for nearly 11 months, innovation stocks seem to have entered deep value territory,” she wrote in a blog post she said was intended to share ARK’s thought process. “We take advantage of volatility during corrections and concentrate our portfolios toward our highest conviction stocks.”
Despite recent volatility and headline risk, Wood said that Ark continues to focus on its five-year investment time horizon and added that year-to-date inflows have outweighed outflows significantly.
“According to our current estimates, our more concentrated flagship strategy today could deliver a 40% compound annual rate of return during the next five years,” Wood said. “Only one other time in ARK’s history, at the end of 2018, has the five-year return projection been that high.”
Wood said that quants and algorithms have dominated trading activity amid surging inflation and favored low-multiple stocks in energy and financial services, sectors she said would be disrupted by autonomous electric transportation, digital wallets and decentralized finance.
“These Pavlovian responses will prove just as wrong as those in the early days of the coronavirus crisis,” she wrote. “They are backward-looking and do not recognize that companies investing aggressively today are sacrificing short term profitability for an important reason: to capitalize on an innovation age the likes of which the world has never witnessed.”
Other Key Quotes:
- “On balance, investors understand our active management investment process and long-term investment time horizon.”
- “Companies myopically focused on short term profitability have not invested enough to capitalize on the explosive growth opportunities associated with the five innovation platforms that have been germinating since their seeds were planted in the 20 years that ended in the tech and telecom bubble.”
- “The wall of worry built on the back of high multiple stocks bodes well for equities in the innovation space.”
- “My conviction is growing that the bigger surprise to the markets will be price deflation – both cyclical and secular – and that, after collapsing this year, higher multiple stocks could turn around dramatically during the next year.”
- “Consumption growth is likely to slow significantly during the next three to six months, just as supply chain bottlenecks are clearing, potentially saddling businesses with excess inventories.”
- “During the next three to six months, the market is likely to focus more on the risk of recession in the US, the serious slowdown in the Chinese and emerging market economies, and potentially a surprising drop in inflation.”
- “Instead of surfacing and researching exciting investment opportunities in the burgeoning innovation space, investors seem to be hugging their benchmarks and looking to the past for future success.”
- “We will not let benchmarks and tracking errors hold our strategies hostage to the existing world order. The coronavirus crisis permanently changed the way the world works, catapulting consumers and businesses into the digital age much faster and deeper than otherwise would have been the case.”