Cathie Wood Sees 20% Returns After 'Unbelievable' 2020

i'm eric schatzker and welcome to bloomberg's front row today i'm talking to kathy wood the ceo of arc investment management and active etf superstar you might know kathy for predicting back in 2018 that tesla would hit four thousand dollars a share she hung on amid a torrent of scorn on social media now that and many of her other bets on disruptive innovation are paying off massively kathy's biggest etf has returned well in excess of a hundred percent and arcs assets have swelled to 50 billion dollars we still think there's a lot of room or runway ahead because what what we think is not well understood is exponential growth kathy has confidence we talked about the genome stocks she thinks can outperform tesla how arc uses social media to such great effect an ownership dispute that threatened her firm the one thing every woman in finance should want here's my conversation with kathy wood you're having one of the best years in the history of professional money management what's it like oh it's been unbelievable i you know the coronavirus uh created tremendous number of problems and our portfolios are all about solving problems and our our investors have been rewarded for helping to solve some of the world's most profound problems what about on a personal level are you enjoying the celebrity you know i am am i enjoying the celebrity uh you know it's fun i love what i'm doing that's the first thing i love the team i'm working with i love our research i love bringing to life uh new ways of looking at the world helping people understand you know how the world's going to change and not only in their investment portfolios but also in their own lives their children's lives their grandchildren's lives helping them understand how to move everyone to the right side of change and really benefit from the exponential growth trajectories that are just taking off now it's okay to enjoy being a rock star even if it's just for a moment right you're you're enjoying potentially life-changing success um most certainly but i have been around the block a few times the track a few times and whenever things have gone this well for me uh usually there's a correction around the bend and i want to gird for it and protect it and also prepare our investors for the possibility and say just keep some powder dry because what we're looking at here are long-term again exponential growth trajectories that uh they're not going to be stopped you can't stop progress and today when the government tries to stock progress uh well it usually fails uh and so even if we go through a correction and i i ex i expect one uh we must all almost always expect corrections uh i i just have to keep my eye on the prize but i i do want to warn uh investors that you know in the investment world it's not just straight up and to the right you know we will have those corrections so again we just keep our eye on the prize we have a five-year time horizon we are fully invested at all times which is what we are supposed to be but that doesn't mean that investors shouldn't you know sometimes take a bit of money off the table and keep some powder dry i know you're aware kathy that the market doesn't give second chances to superstar managers who stumble ken heebner is one who comes to mind right he was never able to rebuild the asset base that he had before the financial crisis neither was bill miller for that example is that something that concerns you the consequences of having a bad year well one bad year does not uh would not worry us at all our our investment time horizon is five years and uh we have projections which uh which we develop from the top down trying to understand how technologies are going to scale and from the bottom up how companies are going to embrace these new technologies and ride their coattails and just looking at the portfolios today this is after the triple digit gain as you uh have said for the next five years we believe that our uh returns will compound at an annual rate of uh something in the low 20 percent range and this is in a market where uh traditional equity returns have been in the seven to eight percent range over time so we still think there's a a lot of room uh or runway ahead uh because what what we think is not well understood is exponential growth i think if we step back and look at amazon in the early 2000s i remember buying that stock and many people derided that decision because the thought process back then is in the tekken telecom bust which is you know the internet is a figment of wall street's imagination what makes you think amazon's ever going to make any money and uh if if uh if you did at that time assume that amazon's revenue growth would compound at a 20 to 30 percent rate for the next 20 years you would have you would have bought that stock all day long even if you were using a dividend discount model right i feel like our portfolios are filled with uh amazons uh because the seeds for what we were doing what we are doing now they were planted in the tech and telecom bubble and they have been gestating all this time and now they're breaking out to those growth trends just like amazon did so the portfolio may not be able to replicate the 500 plus percent gain it's had in the past five years but it should be based on what you just told me well over 100 percent it should double plus in this in the next five years yes we we expect more than a doubling in our portfolios over the next five years if i look backward as you well know tesla accounts for almost a fifth of the return that you have generated in that five year time span which of your current holdings kathy do you think will supply the biggest lift in the next five years tesla is still in the running but i would have to say the biggest upside surprises are going to come from the genomic space and that's because the convergence of dna sequencing artificial intelligence and gene therapies importantly crispr gene editing are going to cure disease that convergence is going to cure disease now we have real science and technology surfacing the mutations in our genomic profile and and as they surface those mutations what do we see we see the earliest manifestations of disease and now with the combination of artificial intelligence and gene editing we're able to both anticipate diseases and cure them potentially beta thalassemia we're seeing it sickle cell disease we even think it will work in uh diabetes which is where most uh the the if you look at the largest category of spending uh year-to-year and healthcare it's diabetes kathy another surprise for me in your portfolio attribution is that almost none of your performance just 20 points out of 600 points is from apple microsoft amazon and facebook the four biggest contributors to the s p 500 over the same period what about them does it make the grade for kathy wood and for arc well we're not saying they'll be bad stocks at all in fact they've been very good stocks and they were a part of our portfolios in the early days uh but as they were scaling into the trillion dollar category uh we believed that our uh that that our research would be focused better on the next set of fangs and i don't mean fangs meaning in the internet age uh we actually think the next fangs are in the genomic age uh and if you'll notice our flagship portfolio the largest exposure is healthcare for that reason what would make you reconsider investing in those stocks what would uh encourage us to move back into that ilk of stock is um is a you know a continuation of what we're seeing now so that some of our valuations become stretched beyond uh our minimum hurdle rate of return so our minimum hurdle rate of return for any stock entering our portfolio is 15 at a compound annual rate over the next five years so that's the doubling over five years we're not there yet but if we were in the low 20s which is much more than a doubling over five years but if we started seeing more and more of our stocks lose uh that uh return expectation and drop below 15 we would move back towards some of the fangs and microsoft uh because we would be treating them essentially as cash-like instruments for for our strategy so what we do is uh as a bull market extends we do move into more cash-like uh equities uh you know they would be the less volatile stocks and certainly the fangs and microsoft uh fit that and we would do that increasingly bitcoin historically was a huge contributor to your returns and i know you're still bullish on it because arc recently published two very favorable white papers on bitcoin but so far as i can tell there has been no bitcoin in the ark innovation etf for more than a year and a half how come yes well we uh put it in at a one percent position in 2015 when bitcoin was 250 and uh and we scaled with it we didn't sell it at all so it hit uh uh 10 of the portfolio at which point we were forced to sell and we and at the same time there were there was some forking taking place so we were getting distributions uh and what we learned is that that bitcoin threw off what's called unqualified income which is not illegal but from an irs point of view if our portfolios generate more than 10 percent of gross profits in unqualified income which is usually commodity-like income uh the irs allows that 10 percent and then we'll confiscate the rest of it so if we moved into a black swan event where the equity markets imploded and bitcoin took off uh our our uh clients uh would uh would uh be able to keep only 10 of that gain and we just thought this was uh this was too much of a risk from the fiduciary point of view uh to subject our uh investors to so what we did is we moved out of it in early 18 better lucky than smart because of course we went from 20 000 down to at the end of 17 down to below 4 000 earlier this year in our fully discretionary portfolios where we are not subjected to the 40 act rules of the sec uh our bitcoin position is about uh seven percent right now uh so that is how optimistic we are on it and it's once again flirting with twenty thousand dollars can you put a price on your level of bullishness we are extremely bullish uh our confidence in it has gone up since 2017 because what we saw as as it dropped from 20 000 to below 4 000 it actually got in well into the threes i think in 2019 uh was that bitcoin's share of the crypto asset ecosystem moved from the low 30 range in terms of value network values into the low 70 range and what did that tell us that confirmed in our mind that bitcoin is the reserve currency of the the crypto asset ecosystem uh so it is the reserve cryptocurrency which is a very important role it's the flight to safety currency uh it is bitcoin's technology uh or bitcoin's blockchain is the most secure of any other blockchain and so it makes sense that bitcoin would be the reserve currency of the crypto asset ecosystem kathy in august of 2018 uh you tweeted a letter to elon musk in which you effectively effectively put a price target on tesla four thousand dollars and that call arguably made you famous but it also exposed you to a world of hate on twitter any regrets oh no not at all i i didn't read the the twitter world of hate notes to me um our marketing department uh used to send me anything that i needed to respond to but no uh we were we were standing up for what we thought was right and um and we also were astonished that at the backlash and and i think part of it was elon's personality and and the way and the things he was saying on twitter he was he's a provocative soul you know and uh you know i i i i he's brilliant he's our renaissance man and all we did uh which is what we should have done uh in in terms of our research is keep our eye on the prize and the prize had to do with uh the autonomous taxi network that we believe tesla uh will be in the poll position to dominate uh mostly because of its advantages in artificial intelligence and the amount of data it has collected and the ai expertise that it has and and we couldn't believe that no one wanted to listen to this that they really just made fun of it and it made me feel even more strongly about tesla because what we saw happen over time as the naysayers were growing uh was their barriers to entry or tesla's barriers to entry were increasing their battery technology was already three years now it's maybe four years ahead of the competition especially now that they're going to build the battery into the structure of the car uh they're they have the first ai chip no other auto manufacturer has an artificial intelligence chip for autonomous they're the they now have 15 billion miles of real world driving collected google the next closest has about 25 million 25 million 15 billion the winner in autonomous is going to have the most data and the highest quality data that company right now is tesla so way back then our our confidence was high that they were heading in the right direction and as the naysayers grew uh it was after 2018 um through into 219 as the stock was cratering uh as many out there were saying it was going to tesla was going to run out of money we thought that was a ridiculous concept the only time a company like tesla will run out of money is if the market shut down there were companies that ran out of money in 0-809 because the markets were closed the markets were open we were going to support tesla if they did an offering so were many others so i mean they were creating stories that were just ridiculous on the face of them so you know i no no regrets whatsoever tesla is a great example of how you and your colleagues have harnessed social media as a tool a tool for marketing a tool to disseminate your ideas where do you figure arc would be today without social media uh i don't think we would be as far as we are i know we've been very gratified to see how beautifully we're scaling and getting our message out which has helped our distributors because we have a distributor here in the united states one one in japan uh who has uh who distributes for us to asia pac we are known throughout the world we are punching so far above our weight because of social media and what's been fascinating about it is it has given us a competitive advantage because the compliance departments in other organizations will not let their portfolio managers or analysts talk about their research we can't really talk about our stocks too much but we can talk about our research and uh that is giving us a competitive advantage in two ways the reach that i just described but also we're becoming a part of the communities we're researching our analysts as they put out their research not when it is finished but as it is evolving they are engaging with the communities who are actually making these innovations happen and and and it's a a beautiful dynamic because what we're doing is we are educating those innovators about how big their markets are going to be how quickly they will scale where the barriers to entry are likely to be what the competition looks like and they are are battle testing our assumptions they're telling us if we've made an incorrect assumption or they're telling us if we've got the technology right so it's an incredible give and take and i always thought that open source research much like open source software would be a very powerful dynamic in the marketplace and it has been so hazard a guess for me you've got 30 plus billion in aun today how much where would it be without this this this community that you've created and and the the velocity that that being on twitter has provided well to be honest we're up to 50 billion now if you add all the separately managed accounts and the institutional money now it's all the uh all the different strategies um i think we'd be a lot smaller than we are now and and i i think that you know what comes around or what goes around comes around we have really uh with outreach as one of our ark's missions and values we have wanted to educate people the average investor about how their lives were going to change and how they might capitalize on these changes uh in their portfolios and so i i think there's a virtuous cycle at work here and there's also a bit of a viral network effect taking place which i think many in the financial world did not think uh could could be a part of the financial world just because of our regulatory regime and so forth uh but i do think it's happening and um and i'm thrilled to be a part of it you believe there are five technology platforms that are changing the world artificial intelligence robotics energy storage dna sequencing and the blockchain but of course technology isn't static if there's a sixth what would it be well we're looking closely at quantum computing because we're you know i've been in the business a long time more than 40 years but for the last 20 years of those we've been examining quantum computing you know i'd be at the world economic forum technology conference in china and you know professors from around the world focused on you know the the next big thing quantum computing it was always 10 years out always 10 years out and it probably still is from a commercialization point of view 10 years out but now we have the first little baby rudimentary quantum computers there's actually something physical out there working active etfs were pretty common back in 2014 but mostly in fixed income there were very few in equities why did you choose the actively managed etf as the rapper for your strategy and not something else yeah it's interesting uh we were looking after 0809 uh ed lyons bernstein the the the research on strategic change team so the thematic team was saying okay we have had a major disruption and now technology will come in and uh and take care of some of the problems caused by that disruption and so what we saw happening in the financial services industry was a share shift towards etfs and just from a research point of view we were asking ourselves why is that happening we didn't know anything about etfs and so we looked at what an etf is and understood that there were four reasons that etfs were starting to take share they were more transparent and after 0.809 investors wanted more transparency investors wanted more liquidity unlike mutual funds they trade all like all day long they are lower cost than mutual funds because they didn't have any hidden fees the fees what you see is what you get and they were more tax effective and so for those four reasons i just asked the question why aren't we doing any why don't we put our fund into an etf this sounds like a good deal for the for the end investor and um and that's what got me questioning hey lion springsteen what are we doing what are you doing about etfs are you thinking about active and so forth and that's how we fell into that conversation uh but it was from a research point of view i've wondered to myself why you didn't start a hedge fund because from a purely self-interested standpoint you'd be a lot richer at 2 and 20 than you are at 75 basis points i felt that the right thing to do was go where no one was and uh and and and i've had good success over the years doing that you know if you see some if you see everyone moving in one direction and sure hedge funds have been so lucrative for asset managers but if you see everyone moving into hedge funds and private and you look at a a new rapper that's actually a good deal for the end investor and you go with low cost and public using the private market valuations as an umbrella maybe just maybe you'll be on to something big and so i think that's what happened here etfs are by definition public market vehicles i'm i've wondered this as well why not extend your investment thesis to private markets and raise money to invest in venture capital and in growth equity because so many of the things that you're interested in get their start there absolutely well one of the reasons was the low-hanging fruit in the public equity markets innovation had been neglected in the public markets it had become overvalued in the private markets my stomping ground was the public market so it made sense for me to start there now that the valuation discrepancies are narrowing to some extent not completely and because we must know private companies and in fact part of our uh research ecosystem with the social networks getting involved with companies uh as they're innovating a lot of them are private uh and we're talking to them regularly in social media on social media platforms so yes we are evolving some strategies we hope uh that next year we'll be able to launch something what i would love and it would be true to our stripes our current stripes i would love because i know the sec is opening up the up to this i would love to be able to offer a public private option that would be available for all retail investors right now uh we have to the private world uh has to deal with accredited investors so there's a screen i'd i believe that screen is going to start coming down over time and i'd love us to move into a world where we could offer what we do across both public and private companies in the form of an etf uh i don't think it can be done no and probably not just because of the way market makers and authorized sure the creation redemption mechanism would be very difficult but uh but i'm sure that we could find some other rapper uh maybe a separately managed account wrapper in which to make this happen right now kathy your etfs alone are generating an annualized run rate of 220 million dollars in revenue and that doesn't include the other assets under management um how profitable is the business well it has our business is uh very profitable now but believe me the blood sweat and tears that we left in the early days it's a scalable model so we had to pay for the infrastructure in the early days and we were quite the loss making company and i felt it acutely since i funded uh most of it for the first three years and so but in those early days we were investing aggressively which is what we tell our companies to do because we thought we would be able to scale and when we were and when we were able to scale we'd have the right talent in place uh to scale and so we've done that and and i'm very happy to say that we are able to reward uh those who are making us happen the team that's making this happen um and rightfully so so uh in a way the the hedge fund model you have uh maybe fewer people and uh less in the way of assets uh and the same kind of profits uh so we've done it a different way uh and now we've shown it's possible and uh and and we think it's a really healthy way to go as well kathy in the midst of the incredible year arc is having you're in a legal battle for control of your firm how on earth did that happen well i i will say that has quieted down and we are in negotiations i think all we wanted were negotiations uh and uh we wanted to be fair and square uh with our partner and i think that i think things will work out i think we're we're well on our way from your perspective does working things out leave control of the firm either in your hands or the hands of you and your partners your colleagues at arc yes it does and if things were to go pear-shaped and for your sake i i hope they don't do you have a nuclear option could you just take the team pack up walk out start a new firm uh and create new etfs uh i could not i could not you have a non-compete and a contractual obligation okay yeah so both sides then have an interest in coming to the table yes kathy arc manages five active etfs all of which have more than a billion dollars in assets are there any others that you have wanted to create thought of creating or in the process of creating yes uh and we uh one of our partners uh a distribution partner in uh asia pac nico asset management the japanese market is a very interesting market the the the the clients the investors uh basically tell uh the the distributors what they would like to see and we've learned from them so our fintech portfolio came out of japan it started in japan in 2016 and in the us in 2019 they have a space exploration fund uh we're looking at that one at some point in the next year or so hopefully and also an sdg fund we are likely to launch there and sdg's sustainable development goals the un 17 goals our technologies our 17 technologies map or i should say five platforms and 14 technologies so that'd be 19 map beautifully against those 17 goals so it's a natural if you had to build ark all over again what would you do differently oh um probably well we had to pivot because we sat in year two and a half as i told you i funded it for the first three almost four years two and a half were there at 40 million dollars uh we built it they did not come and uh i would not have built a captive distribution at the time but i would have been more aggressive about finding a distribution partner sooner i felt that we would be able to i had a big network out there and yet what i didn't know was the etf world and the active world were a universe apart that my network had no relevance to the world i had entered which was a bit of a shock to me so i might have been a little more humble about that number one and done a little bit more homework and maybe uh gotten a distribution partner a bit sooner um but we did try we were trying it's just we didn't think anyone really understood active management in the etf world and it and it did take um two and a half years to to find that partner any advice to women in asset management or in finance more generally well i think asset management and finance generally is a great place for women especially if you a woman or anyone it's a man or a woman can develop a track record no one can take my track record from me better for better or worse you know some years have not been so great but no one can take it away from me and and if you build one over a long enough period of time uh and uh and are uh are successful um it's usually a a ticket to more success so uh i i always say try and figure out a way to measure your success in a way that you know no one can take it away from you and that does not mean not being a team player being a part of a team that develops a great track record is really important so many people say wow your industry seems to be quite lacking when it comes to women in portfolio management positions and and that is true and i do think it's an unfortunate case of last in first out in two periods tekken telecom bust 0809 and uh uh so that's unfortunate uh but i have the highest regard for the industry it is a heck of a lot of fun uh it's extremely challenging the world is our oyster uh as long as you're not playing the old game which is benchmark sensitivity as long as you really are investing in the future uh i think allocating allocating capital to its highest and best use in terms of what we described earlier increasing access uh solving the world's problems um there can't be anything more satisfying your point of view thank you so very much it's been great talking to you

Channel: Bloomberg Markets and Finance

Views: 2,230,836

Rating: 4.879005 out of 5

Keywords: Bloomberg

Id: kfhgbZBWgBE

Length: 34min 53sec (2093 seconds)

Published: Fri Dec 18 2020

Reddit Comments

[u/FinancialBanalist]

Credit to Cathy, she has been harping out these trends and the companies involved in them for a long time now, even when it was an unpopular/mockable opinion. She made the Tesla $4,000 call in summer 2018. Its currently trading at $3,250 (adjusted for 5-1 share split.)

[u/Wizofsorts]

All I heard was CRSP

[u/KnowledgeNate]

A Cathie Wood bubble is forming.

[u/IceBearLikesToCook]

Is this why the CRISPR stocks are up >20% from their already crazy high valuations today?

[u/goldmans-sach]

You know the clock is getting closer to midnight when you have the Cathie Wood's of the world describing FAANG as "cash-like securities" 😂 Smfh

[u/MakeoverBelly]

"What is not understood is exponential growth."
Cathie Wood, December 2020

Which is literally the first thing you learn in finance. Pretty clear what's the education level of the target audience (quick test: have you ever seen a 10-K ?)

[u/[deleted]]

You know this subreddit is completely fucked when Cathie Wood vids get 100+ likes from would be analysts. Goodnight sweet prince

[u/tsarkoba]

To me, the most important takeaway from the interview was her warning of a correction. I'm long on the ark funds but it might be time to take profits and diversify.

[u/[deleted]]

I feel like someone is trying to manipulate these subreddits. People won’t stop posting about this chick.