Breaking down ARK Invest: Is Disruptive Innovation where we’re headed?

First Phase Media
April 26, 2021




At ARK Invest, Cathie Woods understands the need to invest in companies that disrupt the industry. Like Facebook disrupted the way marketers and companies attracted clients, many companies will continue to drive change in their respective industries. But, you can’t possibly find them in the traditional ways. Thus ARK invest takes a unique approach to find these companies. In this blog, we will discuss:


  1. What is ARK Invest?
  2. Which industries does ARK Invest consider disruptive?
  3. What is ARK Invest philosophy?
  4. How does ARK Invest find companies that will disrupt the future?
  5. And is investing in disruptive innovation sustainable for the long term?


So, without wasting time, let’s dive into each question.


What is ARK Invest?


It is an investment management firm that believes in exclusively investing in companies set to disrupt the future. The CEO of the company is Catherine Woods, and she established the company in 2014. Catherine Woods was formerly the CIO at Alliance Bernstein and left the company to build ARK Invest when she realized that nobody is currently paying attention to disruptive innovators.


Which Industries are Revolutionary According to ARK Invest?


ARK Invest believes in thematic investment and thus has clearly defined their ETFs as the following:

  1. ARK Autonomous Tech. & Robotics ETF
  2. ARK Next Generation Internet ETF
  3. ARK Fintech Innovation ETF
  4. ARK Genomic Revolution ETF
  5. ARK Space Exploration & Innovation ETF


They also have two Index ETFs called The 3D Printing ETF and ARK Israel Innovative Technology ETF. Moreover, the data on their website has a breakdown of the performance of their ARKK ETF year-wise, and in 2020 they had returns of 152% (higher than NASDAQ’s).




However, it is not all roses and sunshine for ARK, as it saw a loss of its assets by 4.2% in September 2021 due to the increase in Treasury yield. Though Brian Price, head of investment management for Commonwealth Financial Network, said any dramatic yield in US Treasury ends up in some sell-off in the market. Thus, only time can tell if ARK’s strategy will work in the long term or not.



But why do they specifically invest in these industries? It is because, according to their research, the world’s economy is going through a drastic change. Just like in the 19th century, the invention of the telephone, electricity, and cars changed the world in terms of higher productivity and lower costs; the above five industries will have an explosive change to our current economy as we know it. Thus, they want to facilitate these companies and be a part of the change.

What is ARK Invest’s Philosophy?


ARK Invest is different from its competitors; people might even call them the disruptors in investment management. Thus, before examining and dissecting the research process of the ARK, it is crucial to first look at its philosophy. Like Simon Sinek says to start with the why of the company, here is why ARK investment is different from others.


ARK Invest believes in investing in the future today. They believe that rapid change will cause problems for many companies. However, due to the innovation, productivity will increase long-term, and the costs will reduce. But how do they define what is innovative and what is not? They use the following criteria to identify innovations:


It will dramatically reduce costs and increase the demand. They use Wright’s Law to understand the scope of the new product or service. An example is AI since AI can tailor experiences according to the user’s preference without much human intervention. Thus, it has reduced the cost while increasing the demand.


It will cross the borders of the industry and geography and find application in other fields. An example of this is the blockchain that has sought application in the cryptocurrency space and health, real estate, NFTs, etc. 


Serve as a foundation for more technologies. An example of this is Ethereum which has become the base for many other industries.  


How Does ARK Invest Find Companies That will Disrupt the Future?


They aim to look for innovations early on and therefore believe in top-down and bottom-up research.


Top-Down

Ideation: Cathie Wood believes in the power of the crowd and social media. It is visible from her active presence on social media and her initiative to sift through social media and find companies. 



Yes, in this step, she uses social media and people’s response to ARK’s public research to look for the companies Ark wants to fund. They also try to look for thought leaders and communities that can lead them to find a company worth investing in.


Sizing The Opportunity: But every company that they find is not fit. Thus they further look for market opportunities, determine the demand of the service or their product, whether it is genuinely innovative or not, and do they have the technology to disrupt their industries. When they are filtering companies, some tend to pass their criteria and are then examined in the bottom-up process of the research.


Bottom-Up


Stock Selection And Valuation: Unlike traditional investors, ARK does not begin with a benchmark. Instead, they start with evaluating the critical metrics of the companies like:


  • Valuation of the company, and they calculate the valuation on their own.
  • They also look at the revenue model of the business.


Both the valuation and revenue model is assessed for the next five years, and these models include:

  • Unit volume growth
  • Future multiples
  • Any cost declines
  • The adoption of the technology in the market and its penetration
  • Share count growth


In the end, Cathie Wood is responsible for the final accountability for any decision they make.



Portfolio and Risk Management: They do keep track of their portfolio and discuss it during their weekly meeting. They eventually study what’s been happening in the market and try to take advantage of it. They also provide fluidity to invest in businesses they trust more than others. They may change their portfolio if their thesis changes or further research does not support their prior beliefs about a company.

Is Investing in Disruptive Innovation Sustainable For the Long Term?


As far as their model goes, they are always on the lookout for companies here to stay. They stray away from the conventional ways of investing and instead take measured chances to benefit themselves and their clients in the future. Moreover, investing is time-sensitive, and sometimes, making one excellent prediction can offset the loss from your previous investments. Plus, they have 40 years of experience under their belt. Thus they know what they are doing. 


Moreover, their unconventional research process allows them to tap into resources that previously the investment funds were not tapping into and find companies trying to reach the future faster. 


Conclusion

To sum up everything, Ark Invest believes it invests in companies that will impact and be the big players of the future. Thus, only time can tell whether they are on the right path or not. Their philosophy, principles, and heart seem to be in the right place, and if they are right will bring about a revolution in their industry.







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