Steve Forbes Interviews Catherine Wood, CEO at ARK Invest

well Kathy thank you for joining us you're a little bit unusual in that uh right now you've got under management so to speak a mere 45 million but in your background you've managed billions upon billions uh can you first uh tell us uh a little bit about your background and why you would leave uh a comfortable big company and strike out on your own you've done it once now you're doing it again yes yes well I'm very happy to be here thank you very much Steve um so my background is traditional Financial Services I did manage $5 billion at Alliance Bernstein uh prior to launching Arc uh and we were very thematic in our orientation we were a bit of an odd duck within that organization describe what you mean by satellites uh satellite strategy so a satellite strategy means you know after 15 years where during which registered investment advisers have learned after two crashes diversify diversify diversify everyone is very well Diversified you know traditional growth traditional value uh Emerging Markets bonds and so forth diversify uh these core strategies are are acting very much the same in order to to differentiate themselves in terms of stockh Holdings and performance uh you would use a strategy like Arc which is focused on disruptive innovation very high active share meaning 94% of our stocks uh if you were to compare us against the the broad indices we'd have 94% active share we'd only have an overlap of maybe five or six percentage points with the broad indexes you want to slot that in and historically we did a study at Alliance Bernstein showing this if you slot a strategy in like that to a core portfolio folio what you will do is increase returns and lower risk over time that sounds counterintuitive but it's true because the correlation of our relative returns to traditional growth is very low we're not in the indexes for the most part and our correlation of relative returns to traditional value is negative so you're like an espresso versus decaf yeah or legal steroids uh well I would the way I would phrase that is we're a high conviction uh asset manager question on index funds you know the the arguments why stock picking versus just riding the wave well um so indexes are where they are because of what has happened historically so over the last 30 years years you know we've had some very big companies Grow Up evolve and grow into the biggest companies in in these indexes um the world we're going into is much different we think than the world that we've just left and that's because and this gets into disruptive innovation and why we formed Arc uh there are four general purpose technology platforms evolving right now and and some people would say five and and we're beginning to agree with the fifth one so the four are and what we mean by general purpose technology platforms are these are all causing disruptive innovation changing the way things are done much like the internet did okay so the cloud is still a big part of that that is evolving right and the and and it's evolving into the Enterprise and that's why companies have to adapt they haven't done it enough yet so uh Cloud DNA sequencing is bringing science into Healthcare and could potentially um help to solve our medical retirement liability problem uh so here this this this one is answering the question that Google answered for advertising it used to be people say I know that half of my advertising works I just don't know which half I think it's even worse in healthcare and I think we're we're starting to find that out in some of the the research that that we're seeing uh the third is robotics automation artificial intelligence um a lot of people are very scared of that one the implications that it has for jobs we're very excited about it we think it's going to create a lot of jobs as technology usually does uh the fourth one is energy storage on your front on the front cover of your last uh issue you had Elon Musk we think he is the Mover and Shaker in this space so Battery Technology and how we're going to shift the world from the internal combustion engine uh to batteries and electricity still using obviously energy but much cleaner energy much better cars that's the key and the fifth platform is Bitcoin Bitcoin is both a technology capital B and potentially a currency a a small B so it's really a payment system yes it's a payment system it's a payment system but it it could be used for much more than just payment just records of transfers well it in fact cuts out all credit cards yes yes cuts out a lot of middlemen in the financial services industry um so uh you've talked about inefficiencies in both portfolio management and research uh can you elaborate a little bit on that yes um what has happened in the last 30 35 years is um we've become much more specialized and Sil Lo certainly on the research side so when I started in the business maybe one analyst did all of Industrials now you'll have five to 10 analysts picking apart the various spaces within Industrials that's what they focus on and they focus very deeply into these companies and industries and and they're very focused on this quarter and next quarter um we we are focused on disruptive innovation that cuts across economic sectors because there's so much of a siloing activity that's taken place because of how our industry has evolved if a disruptive innovation is cutting across sectors the odds are we are going to find it before these analysts do we are looking for it so we think that the inefficiencies in the business are disruptive innovation is is not priced correctly because people don't understand how big the ultimate opportunities are going to be they're not sizing the opportunity they're not analyzing the disruption so 100 PE frightens them 100 PE they would wouldn't touch it and of course we will have we will have 100 PE stocks uh we were talking about Athena Athena is in um both our genomic Revolution theme and in our web x.o theme uh and that is on how you the problem of trying to analyze a some of these companies yes they fall through the cracks is this a Technology stock or is it a health care stock it's both Health Care analysts don't want to follow uh technology stocks th those are two um high octane for them right the the healthcare analysts are used to a highly regulated industry and Technology analysts don't want to follow a healthcare stock because it's too regulated the government's too much in the way so you get these combinations like this and people don't know how to price them right so uh Athena is at 100 times earnings uh and the reason is it the opportunity it has in front of it being the uh electronic health care record company and revenue uh life cycle management company and connector of patients hospitals insurance companies and doctors it is a huge opportunity that could be Winner Takes most and he that's one of the points you make is that if you're a leader on the Leading Edge and leading the charge unlike the old adage Pioneers take the arrows yes you say they become the Lions they eat it all yes they can if they're the Visionary I mean that was true of Intel it was true of micro Microsoft Google Facebook I think it could be true of Athena Tesla everybody uh looks at Tes Tesla and says that's not possible the R&D that these large auto companies are spending in the electric vehicle space swamps anything that Tesla could possibly do well that misses the point that those R&D departments didn't get it right they are still working with Prismatic batteries Tesla is is riding down the cost curve of the consumer electronics Industry small batteries uh it was interesting the CEO of do you think they'll be the ones to finally break uh the constraints of batteries people keep thinking the huge breakthroughs are coming and yet it never well it's interesting this is the slowest moving of our Technologies right and the cost curve is so the way they're they're doing this they're doing this in a few ways their battery pack so you know hundreds of small cell batteries packaged together you know making up the the bottom of a Tesla car uh the engineering around the the battery pack system is changing so that's helping to bring cost down and very recently they did something and very few people have have made mention of this but they actually introduced some silicon into their battery and so I have a feeling and and elon's been hinting that there are some chemistry changes that that they are thinking about and that they are making which uh which is going to bring batteries more into what our understanding is of of the technology age you know declining cost curves at a pretty rapid rate so um yeah I think I think he's going to be one of the reasons that uh that that that we're going to flip from the internal combustion engine to to Battery Technology now uh let's go over quickly your uh three funds and then you have a holding one uh genome yes for a while that was like many things overhyped yes why why is it real this time okay what's really interesting so interesting that the Tekken Telecom bubble and the first genomics bubble happened at the same time right it was around Y2K and you remember what the Fed was doing back then so there was the market went crazy before it crashed uh so why is it is it prime time today well we are down to being able to sequence a whole Human Genome to to get your genetic profile for $1,000 in a few hours uh now we have to you have to do some analysis and there are all kinds of companies popping up to do that but during the tech and Telecom bubble the first human genome had been sequenced it took 13 years of computing power at that time and $3.7 billion to sequence that first first human genome and now I've just that was government and that was government right even in you know 10 years ago it still took $200 million so this if we thought Moore's law was fast this people are starting to call flatley's law because of alumina he's the CEO Jay Flatley is the CEO of alumina and the cost curve for uh the genomic Revolution is three to F five times as fast as as Mo's law that's why we're down to $1,000 already and what's happening now is companies are springing up molecular diagnostic companies uh and we're really understanding what is uh what are the causes of disease where the predispositions to diseases uh we're able to identify what genes are implicated into each person's cancer uh Foundation medicine a company up in Boston is doing this so what are the stocks you love on that area well alumina is the Cornerstone stock and the reason here's where perspective comes in so according to our research and now our analysts have done this research the compounded annual rate of growth uh of uh uh Human Genome sequences uh during the next five years is going to be 200% unit growth and so far so good so we can say in all the years up to 201 14 there had only been this is either 13 or 14 40,000 Human Genome sequenced ever uh I think uh this year we're going to be up to close to 700,000 and we're going to uh we're going to continue at a 200% annualized rate again in accordance with flatley's law so 200% unit growth you can have tremendous cost declines and tremendous businesses building up because of it and so you're getting a whole ecosystem of companies uh growing up around this theme so the growth rate alone it this is prime time the tech and Telecom bubble not ready this is prime time so alumina is the Cornerstone stock it has 90% share of all the base pairs of DNA sequenced in the world today it is leading the charge we won't tell the justice department but uh no well no everybody there are a lot of comp is trying and and and that's in our world we have to look out for those disruptors we have to we have to make sure we understand what's going on out there that's why this this um world of Twitter has been great for us because everybody's lobbing over the next uh disruptor and and we get to do more research around it maybe the CIA should just go to Twitter yes um so what other stocks do you like in that area in that area foundation medicine we like it's uh what's interesting is um Ro took a position in this stock uh at $50 a share a 56% position $50 earlier this year uh we owned it when Ro uh uh took the position I think the stock went from roughly $25 to $50 a share roughly it's back down to $25 a share um Ro thinks it's worth 50 what one of the reasons it's down there is because uh there have been questions about um reimbursement for for tests cancer tests uh and anytime a healthcare analyst uh hears about questions about uh reimbursement you know they run and then ask questions later right now Foundation medicine is changing the world of cancer therapy the way we know it so very very important stock uh molecular diagnostic company is sepid uh it got its Big Break uh when hospitals were having uh epidemics of MRSA staff infections right and so it developed a test a molecular diagnostic test uh that got sample to answer in 2 hours instead of having to do a culture and wait two weeks so these are the sorts of things that this theme is bring and I always say you know our themes tend to change the world and make it a better place this is a great example um web what do you call this X point0 or yes if we had if we had done better market research that would not be the WebEx is we should have just left it but it's uh so this this is along the lines of we're in the early stages of where the cloud is going to take us and um we're into something people are beginning to understand more and more uh about the sharing economy um we think that uh the that WebEx we're in Web 2.0 3.0 all we're saying is this has a long way to go um so we've done a simple exercise on what the sharing economy uh which could only happen because of mobile local social Cloud so Uber could not have happened without it Airbnb couldn't happen without it a zip car couldn't happen without it so what we're learning is in the Auto space if only 5% of the people who would typically buy a car after a life-changing event like say a marriage or a move to the suburbs or baby or what have you if only 5% decide not to do that and and to and and to use Uber or zip car or any of these Services s of the auto version of a plane sharing you yes ownership of aircraft yes absolutely uh Within if we were in a very good economy within five years Auto Sales would be cut in half and I can see I can see for my own children they're not going to want to own a car it's amazing they're not going well and it's it's I can see why they think that way I mean we didn't think this way because we couldn't we we didn't have this way of thinking until just now but they are looking at this kind of stranded asset you use it 4% of the day and it's stranded for 96% of the day feel aircraft there you go there you go but now this is autos and it's bedrooms and it's I mean we even have uh an article going up I'm not sure if it's up there yet on washing machines you know just this is how they're beginning to think hey can can I I know you're like what Amazon does you don't have to have the software or the hardware right you collapse your fixed costs into a verial gos base that's a perfect analogy that is absolutely what's going on this is the digital world entering the physical world yes what stocks do you like there well I guess uh we like anything enabling um this world we would stay away from traditional auto companies uh we we think the the the Trad the auto world is going to move into luxury like Tesla certainly electric and um shared autonomous vehicles so that that ecosystem I mentioned Nvidia that will be part of the brains of the system zyink which is you know sounds like a really it's an fbga uh field programmable logic uh company it's a Semiconductor Company it helps to accelerate data so you'll have sensors on the road the that information has to get into the car Nvidia has to do some of the processing of it so we're very interested in that ecosystem because shared autonomous vehicles are uh are taking the sharing economy another to another level uh I might own a what will become a shared Economist vehicle I'll say Okay shared vehicle take me to work 9 well I get into work at 7:30 or whatever take me at 6 7:30 then go out and give other people rides and it's a way for me to earn money off of this what otherwise would be a stranded asset don't own parking lots don't own parking lots right right well don't own parking lots unless you uh uh you might want to own them the municipalities will maybe lose the parking Revenue but if they turn it into uh Office Buildings you actually could do something maybe more productive with these uh parking lots we've turning Farmland into suburbs there you go that's right so we also have um you know the the the kinds of uh problems that we're solving um you know you can take the genomics revolution we need technology and you find this in web x.o we need storage computing power and analytics uh the likes of which we've never seen much more powerful than anything we've ever seen so you see a lot of analytics companies and we need security too cyber security is a big one we have a number of plays there so you you you may or may not know these names Horton works in the haduk world uh is analytics and storage Splunk is analytics machine to machine it's also security about 30 to 40% of it is you know it's whether it's Palo Alto networks or fire eye they use Splunk so that's an ecosystem that's very important um uh salesforce.com has analytics salesforce.com is a software as a service and very creative very powerful company I I think uh you know I think Oracle is very surprised at what's happened uh or what Salesforce has has been able to do uh and uh I mentioned cyber security cyber Arc is another name we have in this uh in this theme industrial Innovation so industrial Innovation uh incorporates uh two of our general purpose technology platforms whereas the other two incorporate right now one WebEx will incorporate Bitcoin soon stay tuned uh uh so the uh industrial Innovation incorporates uh the Robotics and automation plays uh and it also incorporates energy storage so Tesla and this idea that we're going where do you fit 3D 3D printing is in here as well we some people call that a general purpose technology platform so 3D printing is in this one as well and space exploration so this is you know the industrial world hasn't had as much Innovation um or hasn't happened upon as much innovation in years now the Innovation and and it is people like uh Elon Musk like Amazon I mean in the robotics space Amazon buys Kaa and goes from a thousand robots in it warehouses at the beginning of last year to 15,000 at the end of last year that rang the bell for us Amazon leads the charge all the other retailers are going to have to go there uh so we think the robotics age is with us and um you know Oxford University did a study last year that uh scared 47% of the workforce is going to be we so their conclusion was more like hair on fire you know that caused a lot of concern we took that study and it's up on our website and we took the 700 uh job classifications and analyzed how much of each one would likely go what percentage would go uh to Robotics and what we what we did is we said okay because of this here's the productivity the efficiency you know uh that's going to come out of this we're going to end up getting $12 trillion more more in GDP than we otherwise would have gotten by the year 2035 hard to explain politically hard to explain politically but it's our job as portfolio managers and analysts to figure out where that 12 trillion is going to be and to figure out the ways to retrain we're we're spending a lot of time in the industrial Innovation portfolio thinking about retraining so LinkedIn just bought linda.com linda.com is all about retraining LinkedIn is going to be able to go to people on its site saying hey you know you're another person with exactly your qualifications took these courses on linda.com have this capability they're now earning 20% more than you are you should do that so I think and Cornerstone On Demand is another retraining company except it's teaching companies to retrain so we think there's a lot of opportunity in the retraining space as well um why don't you do pre-ipo stocks oh why don't we well we think that's a very crowded space the traditional asset managers have all moved into there trying to get closer to private Equity so um what's interesting about that is we think a lot of the inefficiencies have been squeezed out there those stocks go public they fall you you'll notice whether it's Facebook or LinkedIn or Twitter they all come out they all fall to Earth Lending Club all fall to to Earth we get to do more time to do more research and Analysis knowing they've been hyped uh and we're able to pick our spots right uh what what I think people are also missing talk about inefficiencies the opportunities that are being created today are trillion doll opportunities I often say I think that Amazon is a trillion dollar stock it's $240 billion doll right now PE Jeff Bezos has said that Amazon web services will be bigger than the retail uh Services uh at some point in the future so right now it's at a $7.5 billion run rate Amazon web services the retail is nearly a 100 billion that's a long way to go what he doesn't tell you is this is going to be four to five times as profitable so we're talking about a 240 billion dollar cap company I really believe he owns he uh Amazon owns own infrastructure as a service uh others are trying to compete open source is trying to compete with open stack they're probably going to be two players but Amazon owns that space this is a trillion dollar idea I think people are missing that and what they will and and you can you can talk about 100 PE this is probably 200 PE uh they've made very little money over the years because they've reinvested against these fantastic opportunities and those companies who have not invested Ed are not going to be the winners the companies that have been invested that have these enormous multiples seemingly right now are going to be the winners couple of quick final questions uh 3D printing yes uh first uh 3D printing Vis of organs yes and 3D printing in terms of finely fitting things like Prosthetics yes uh dentures and the like in ways we can't imagine quickly hit that very very exciting well 3D 3D printing stock went through a big hype phase uh and have fallen to Earth statuses has gone from 130 to $29 in not much more than a year so we are in what we call the saddle of the scurve now there people don't neglect disgust but what you're talking about is absolutely right 90% of all hearing aids today are made via 3D printing anything that has to be customized any medical de any medical device anything that is going to go into our bodies is going to be customized right so Dentures yes increasingly 3D printed yes Prosthetics um you know it's you can let your imagination take you there organs are going to take time but there's a huge amount of research going into it and um and we're seeing breakthroughs so we think 3D printing is going to be big in two places healthc care huge high value ad in industrial in the industrial production world we think it's going to become part of industrial production that it's not going to be a separate kind of Silo that it's actually going to be integrated Stratus is is making a thousand performance working parts for Airbus uh right now Kathy thank you thank you Steve thank you very much

Channel: ARK Invest

Views: 61,422

Keywords: Catherine Wood, Steve Forbes, ARK invest, ark investment management, forbes interview, invest in innovation, advisor playbook, finance, investing, cathie wood, forbes

Id: -hnK2cEvbJg

Length: 30min 31sec (1831 seconds)

Published: Wed Jan 06 2016