Tesla, Telehealth, and the Genomics Revolution Power ARK Funds

Barron’s interviewed Wood in early August of last year, when unemployment was at historic lows and the stock market was on a tear. Now, as the Covid-19 pandemic has disrupted many aspects of our lives and possibly ushered in permanent social and economic changes, Wood chatted with Barron’s again—about innovation and destruction in a post-Covid world, a new golden age for health care, her favorite stocks for the digital workspace,

Tesla

(ticker: TSLA),

Nikola

(NKLA), and more. Our conversation has been edited and condensed for clarity.

Barron’s: You’re a student of disruption. What does Covid mean for the global economy?

Cathie Wood: Covid-19 is accelerating all the disruptive innovations. Many companies that serve the digital workplace say they didn’t expect this many customers for at least three to five years. There’s been a rush into the new world. The other side of disruptive innovation is creative destruction. Many companies are being disintermediated by these new platforms—not surprisingly, in financials, energy, and industrials tied to the internal combustion engine. There are a lot of companies in harm’s way.

You describe innovation as a sub-asset class, similar to emerging markets in the 1980s. How is innovation as an investment style different from growth investing?

Innovation is early-stage growth, and it is typically exponential growth. Companies developing these platforms can generate revenue growth of more than 20% [annually] for years and years. Most growth companies have a decay rate, which means the bigger a company gets, the harder it is to grow. Exponential growth often includes network effects and virality, which means the more people joining the network, the more valuable it becomes, and the faster it grows.

ARK runs concentrated portfolios, typically with fewer than 50 stocks. How do you choose?

Our ideas start with our research, not any index. For example, we take a blank sheet of paper and just say, “What is an autonomous vehicle? What’s the right way to build one? What are the critical variables?” We inevitably run into the companies that not only have good answers, but are leading the charge.

It’s not like we don’t make mistakes. In the early days, we thought Lidar [a technology that measures distance for autonomous vehicles] was going to become a really important part of the autonomous taxi network. That wasn’t correct. But we probably are pushing the envelope further and faster than most people, and we have a much longer time horizon, at least seven years. That’s the biggest secret to our strategy—the willingness to step in when others are selling a stock for very short-term reasons. We get great opportunities like that.

What areas of the market are you most intrigued by these days?

The most inefficiently priced and underappreciated part of the market is genomics, and the most misunderstood is health care. Health care is the largest part of our portfolio—it’s about 37% of the flagship

ARK Innovation

[ARKK]. Technology is an important part of every sector, and is blurring the lines between and among sectors. Health care [will see] the convergence of DNA sequencing, artificial intelligence, and CRISPR gene editing—all new technologies that have fallen enough in cost and price and are ready for prime time now.

We learned from the coronavirus that there were weak links in the supply chain in terms of tests and vaccines. But what we have this year—very unusual—is cover for the health-care space. No one in Congress wants to vote against budgets to help get us all back to work.

We think we’re headed into another golden age for health care. Genentech launched the biotech revolution in the ’80s, and we had 20 years of rising returns on investments in health care. They became super stocks. That’s about to happen again.

Does ARK own any companies working on a Covid-19 vaccine?

We own various parts of the ecosystem leading up to the vaccine.
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