Andrew Michel, a 65-year-old product-marketing engineer, made a bold—many would say an imprudent—move last June. The longtime, typically conservative investor sold two-thirds of his retirement savings, which had been invested in broad-market index funds, and put the money into two red-hot ARK exchange-traded funds. Within a few months, he made enough for a down payment on a second home, in sunny Tampa, Fla. “I looked her up, and it all sounded really good,” he tells Barron’s. “I started investing with ARK just three days later.”
The “her” is Cathie Wood, who founded ARK Investment Management seven years ago, and joins our list of the 100 Most Influential Women in U.S. Finance this year. Michel’s is the sort of investor fanaticism that has made ARK a household name and Wood an unlikely celebrity. Her success seems very of-the-moment, but she has been laying the groundwork for years. She was early on many themes—she embraced active management when investing seemed inexorably tied to indexing; she implemented her stock-picking in active ETFs while the largest asset managers said it couldn’t be done; and she bought companies that others thought were overpriced, a joke, or both.
It isn’t just that ARK’s actively managed funds have done well, although they have—phenomenally so: Last year, five of its seven ETFs returned an average of 141%; three were the top performers among all U.S. funds. Wood’s rise to star-manager status is reflective of today’s zeitgeist. Some of the biggest investing stories recently— Tesla (ticker: TSLA), Robinhood, Reddit, GameStop (GME), and Bitcoin—are about outsiders upsetting the status quo.
“ARK is an outsider, too,” says John Rekenthaler, vice president of research for Morningstar. “Cathie Wood has been around, but this is a new company. There is a sense of outsmarting Wall Street, outsmarting convention.” Wood has a following on social media, which has fostered a sense of community and fandom akin to the Bogleheads or Buffett mania. The firm even acquiesced to demand for ARK merchandise (all sale proceeds go to a Covid-relief charity).
ARK has taken in $37 billion in new money since the beginning of 2020, the third-highest inflow among money managers, behind only Vanguard Group and BlackRock’s iShares, each of which has hundreds of funds. The firm’s flagship ETF, ARK Innovation (ARKK), has grown more than tenfold within a year; it now has $22 billion in assets. ARK has $47 billion in all of its ETFs combined.
Wood’s focus on innovative companies with technology to disrupt the way we live means that her portfolios are loaded with stocks that have skyrocketed—Tesla is a big holding in three of her funds. Other ARK holdings include Square (SQ), Teladoc Health (TDOC), Roku (ROKU), and Shopify (SHOP). Many have compared Wood to the star managers of the 1990s, who rode high as the tech-stock bubble inflated, and vanished after it burst.
When stocks soar, there’s always the risk of them flying too close to the sun, and ARK Innovation is getting singed: It has dropped 23% in the past two weeks. “ARK funds are bull-market stories; they’re obviously going to do bad in a bear market. There’s nothing controversial about that,” says Rekenthaler. “These are highly aggressive, high-beta stocks.”
“I felt that the move toward benchmark investing had gone too far, and there was a void evolving in the marketplace having to do with innovation. ”
Wood isn’t focused on short-term fluctuations. She takes a long, and bold, view—a year ago, she said that Tesla could reach a split-adjusted $1,400 a share in five years—and says we aren’t in a bubble today. The big ideas blossoming now were planted 30 years ago, she says: “We are ready for prime time now.”
Wood, 65, bears none of Icarus’ hubris. Her parents immigrated to the U.S. from Ireland and settled in Los Angeles. Like many immigrant families, Wood grew up with education and career at the forefront. “I was raised as a firstborn son,” says Wood. “I was going to blaze the trail for my family.”
Wood’s father served in the Irish army and the U.S. Air Force, and became a successful radar system engineer, who, according to Wood, was extremely detail-oriented and always sought to “peel the onion” in his work. He pushed Wood to discover connections between things. Wood’s mother, she says, was “very supportive” and “full of laughter and life.”
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Wood graduated from the University of Southern California with a degree in economics and finance. She landed her first job at Capital Group through her mentor, celebrated supply-side economist Arthur Laffer. She spent three years there as an assistant economist. In 1980, growth shop Jennison Associates was looking for someone to crunch economic data; Wood moved to New York and became its chief economist—at age 25.
It was those days that truly shaped her skill for argument, Wood says. In the early 1980s, interest rates and inflation were in the double digits, and productivity and growth were collapsing. While most of the best-known economists of the time—including Henry Kaufman, known as “Dr. Doom,” and Milton Friedman—believed that inflation was embedded in the system, Wood thought interest rates had peaked.
Spiros “Sig” Segalas, co-founder of Jennison and Wood’s boss and mentor, often brought in these economic luminaries to share their forecasts, and challenged Wood to debate them. “For four years, nobody believed us,” she recalls. “I would have to go up against Henry Kaufman one-on-one. I knew my numbers; I knew what I was talking about, but I had to convince them I did because of my youth.”
Segalas calls her a “lady with unbelievable, unwavering conviction.” He installed Wood in a nearby office so he could pick her brain and tasked her with writing the firm’s quarterly letter. “She was by far the sharpest,” Segalas says. “She always made me look good.”
Wood spent 18 years at Jennison, while raising three children. Interest rates began to decline in the 1980s, allowing tech companies more runway for growth, and setting the stage for a new era of innovation—featuring personal computers, semiconductors, and wireless capability. Wood decided that she wanted to become an equity analyst and portfolio manager.
Wood looked at places that other analysts were ignoring. “I was like a little dog looking for scraps under the table,” she says. She found stocks that sat at the intersection of multiple industries, and weren’t followed by analysts from any side. This, she realized, is where innovation happens. Reuters, for example, was this mystifying “database publishing” company that collected data from financial companies and then sold it back to them in aggregate. Nobody understood this business model, so Wood took it up: “I just felt it was something big, and, of course, it was the precursor of the internet.”
Volatile Rides
ARK ETFs had phenomenal returns last year, but 2021 is presenting a tough start.
Note: Data as of March 3
Sources: Morningstar; Ark Investment Management
After leaving Jennison in 1998, Wood co-founded Tupelo Capital, a hedge fund; she joined AllianceBernstein as a portfolio manager and thematic research strategist in 2001, managing more than $5 billion. She continued to invest with strong conviction in high-growth, high-risk, smaller-cap stocks.
Wood researched stocks with the same dogged determination she applied to economics. “Cathie is insatiably curious; she was a voracious consumer of research from all over the Street. She read everything from everyone,” says Lisa Shalett, Wood’s boss at the time, now chief investment officer for Morgan Stanley Wealth Management. “She was tireless; she works 24/7 to make sure the team has the most thorough research and differentiated view.”
Wood’s portfolios performed very well in the bull market of the early 2000s, but they fell harder than the market during the 2008-09 financial crisis. “It goes without saying that Cathie’s strategies are vulnerable to going out of favor,” says Shalett. “When you have a liquidity crisis in the market or big changes in interest rates, all the holdings could move together. That doesn’t provide a lot of diversification for your clients.”
Indeed, Wood’s high-octane style was putting off some institutions, and AllianceBernstein wanted guardrails on the funds. Her portfolios were often deemed too volatile, says Wood, and she was asked to make adjustments by owning indexes like the S&P 500. She disagreed: “I felt that the move toward benchmark investing had gone too far, and there was a void evolving in the marketplace having to do with innovation.” She saw that investors in private companies were willing to assign higher valuations to companies than stock investors who were wary of volatility. “We saw companies in the public market sometimes selling for just 10% of what private markets were willing to pay [for similar companies],” she says. “I thought there was a huge opportunity there.”
Then came another sort of awakening. Wood was raised Catholic and considers herself a person of faith. She reads devotional literature and attends church. In 2006, when the housing bubble was not yet at its peak, Wood thought it was about to burst. She dramatically reduced the risk in her portfolios, and lagged behind the market. “A thousand basis points of underperformance was embarrassing,” she recalls.
When she spoke to her spiritual advisers, however, it came to her: “You cannot worship any idol, and the benchmark has become an idol.” The next year, she made back much of the loss. But in prayer and meditation, she had the following revelation: “Benchmarks are all about successes in the past. God doesn’t want us to be stuck in the past. He wants us to move into the new creation.” That’s when she knew she had to start her own company: “I felt that a start-up could go out there and spread that message very loudly,” she says, “We were putting all our chips on the table.” In 2014, Wood left Alliance Bernstein and launched her firm.
Wood named it for the Ark of the Covenant, a chest that in Jewish and Christian tradition holds the tablets bearing the Ten Commandments, although she told clients later that it was an acronym for Active Research Knowledge. She was on a mission to allocate capital to its best use—transformative technologies.
For the first three years, ARK had no outside investors, so Wood personally supported the entire firm, paying for operating costs such as salaries and product-registration expenses. The firm had no office; everyone worked out of a public working space on their own computer. “There were a lot of people who doubted her, and a lot of friends were concerned, yet her confidence never wavered,” says Tom Staudt, one of the first employees of ARK and now its chief operating officer. “Cathie risked her personal wealth because she had that degree of conviction. I joined ARK purely because of Cathie; I was blown away by her vision.”
ARK has remained lean. It has about 30 employees, and most are millennials. Wood wants to make sure that the staff has one foot in the new world, Staudt says. She also hired people with less experience in finance: Most employees on ARK’s investing side don’t have a Wall Street background or an M.B.A. Instead, they are experts in different industries, who are encouraged to “think differently, think long term, and think exponentially in a world that often falls hostage to short-term and linear thinking,” says Staudt.
Before the pandemic, Wood would sit at her desk in the center of ARK’s Manhattan office, an open-floor space located on East 28th street. There are no cubicles, and Wood doesn’t have an office. Her desk has a tall chair—like those you’d see in a bar—and all other desks are arranged in a circle, so she could see and talk to anybody by simply turning her head. “She wants to create an investment process and culture where ideas can come from any and all people within the firm,” says Staudt.
Wood’s belief in transparency is another reason she decided to start her own company. Most financial firms don’t allow portfolio managers and analysts to use social media to share their research or even gather information. At ARK, Wood created an open-source ecosystem, where the team can share research and collaborate with scientists, engineers, doctors, and other experts. “Most compliance teams would not be comfortable with that,” Wood says. “From the beginning, we said we are going to actively share the knowledge we’re generating,” says Brett Winton, who has worked with Wood since 2007, when they were both at AllianceBernstein. Winton was a thematic research analyst then; now he is the director of research at ARK. “Information attracts information. By providing our research to the world, we’ll get this reflection back on areas of disagreement or misunderstandings. It will make us better at understanding what’s happened.”
Investors and peers like this open approach. “Most funds hide their investments; she doesn’t,” says Emma Vinarsky, a healthcare portfolio manager at Aleph Capital. “She’s very gutsy. She’s not afraid to take chances.”
Michel, an investor for more than 30 years, tells Barron’s that he opened a Twitter account for the first time last year because of Wood: “It has been very informative learning about ARK through the stocks tweets out there.” ARK’s weekly brainstorming sessions are open for anyone to join, including industry experts and rival investors. Angela Dalton, an outside advisor of ARK and CEO of Signum Growth Capital, has been attending those meetings every Friday—both in-office and online—for the past four years. “She is the only person I’ve ever met to open this up,” says Dalton.
Michel still has two-thirds of his retirement money in the two ARK funds, minus that down payment. He’s still working, owns some real estate, and will have a pension when he retires, so he’s ready to see where Wood’s vision takes his portfolio over the next two or three decades. But as interest rates creep higher and inflation concerns set in, investors begin to discount future value of these highflying stocks a bit more, which has caused share prices to fall. That, in turn, can prompt more selling.
Wood isn’t concerned about ARK Innovation’s sharp pullback. Investors yanked nearly $700 million out from Feb. 24 to March 1; it recouped most of those flows in the next two days before turning negative again. Other ARK ETFs are seeing outflows, as well. ARK’s Winton says he suspects that most outflows are attributable to options strategies based on the funds. “Equities are more predictable over longer periods,” says Winton. “I don’t think it’s wise to try to anticipate what our strategies are going to do over the next two weeks, but a lot of people are placing implicit bets on exactly that.”
Critics warn that the firm could end up a victim of its own success—it has attracted a lot of “hot” money that Wood must invest, potentially in areas she’s less excited about. Wood says capacity isn’t a challenge; ARK owns companies that Wood expects to return at least 15% annually, which means their shares will double in five years. “If we’re right, if these techs are truly on exponential trajectories, then our capacity should grow exponentially, as well,” says Wood. She notes that the explosion of newly public companies over the past year—especially those listed through special-purpose acquisition companies, or SPACs—have also provided ample new opportunities for innovation stock-picking.
Michel, for one, firmly believes what Wood advocates—taking a long-term view and sticking with it through the downturns. “It’s the best time to buy when it dips,” he says. “Though the market goes down, it almost always comes back up. You just have to be patient.”
Wood is still an unswerving debater and formidable thinker, says a former colleague who asked not to be named because of his firm’s restrictions on speaking to the press. “She can remember more facts and figures than anyone I’ve ever met. She has a tremendous head start in any debate because of the pure horsepower of her brain. Does that create overconviction? Yes, but it does for everybody.”
Write to Evie Liu at evie.liu@barrons.com
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