Cathie Wood, founder of Ark Investment Management. (Photo: Bloomberg)
Cathie Wood, head of Ark Investment Management, has been covered extensively as an ETF fund manager who seems to understand the market intrinsically. Her returns have bypassed those of other managers on the Street: Her ARK Innovation ETF was up 149% in 2020.
By early February this year, she had more than $50 billion in assets, up from $3 billion a year ago. Wood's ETF inflows are second only to Vanguard's thus far in 2021.
Her method includes good timing and a different kind of research. She defines her goal as identifying "large-scale investment opportunities by focusing on who we believe to be the leaders, enablers, and beneficiaries of disruptive innovation," as she writes in her Big Ideas 2021 report.
"While we believe innovation is the key to growth, the opportunities it creates can be missed or misunderstood by traditional investment managers who are more focused on sectors, indexes, short-term earnings, and price movement," she writes.
What's the key to Ark's success? To get a "deeper understanding of the convergence, market potential, and long-term impact of disruptive innovation by researching a global universe that spans sectors, industries and markets. Today, we are witnessing an acceleration in new technological breakthroughs."
Wood states that not every disruption will be successful, and there are "uncertainties that may impact our projections and research models." These risks include the rapid pace of change, exposure across sectors and market cap, regulatory hurdles, political or legal pressure, and the competitive landscape.
With that in mind, she and her team boldly provide 15 "big ideas" they've selected for 2021 and why they think they would make outstanding investments. Here are five of those innovations:
1. Deep Learning
Artificial intelligence isn't new, but Ark sees it adding $30 trillion to global equity market capitalization in the next 15 to 20 years, which is three times more capitalization than the internet created.
One reason is that "deep learning" or AI is moving from code written by humans to code written by data. Before picturing "The Terminator," think more in terms of software created by AI that has already developed self-driving cars or, say, Alexa. Wood notes that even the app TikTok already uses deep learning for video recommendations.
Yet the cost of AI training modes are "likely to increase 100-fold, from roughly $1 million today to more than $100 million by 2025," which means a need for AI chips and data center spending on AI processors (climbing from $5 billion today to $22 billion in 2025). Once deployed, Ark expects deep learning to be available to all industries, not just large internet companies.
2. Virtual Worlds
Gaming is hot, and another technology that isn't new but still in its infancy, "virtual worlds," will "compound 17% annually from roughly $180 billion today to $390 billion by 2025," Ark projects.
One reason is independent systems today will become "interoperable, culminating in what futurists have deemed 'The Metaverse.'"
The movement has already started, with "in-game" purchase revenues going from 20% of total global gaming revenue in 2010 to 75% in 2020 vs. premium games revenue. Ark defines in-game revenue as expansion or content packs, power-ups, playable characters, etc. — those products purchased while in the game.
Also, time spent playing video games is a factor: Now it is 1.1 hours per person a day, which Ark says will expand to 1.5 hours in the next five years. If the trend continues, in-game purchase revenue could compound 21% annually in the next five years to $350 billion by 2025.
