Six Bold Ideas From One Of 2020’s Best Investors

Six Bold Ideas From One Of 2020’s Best Investors
Milou Beunk

about 3 years ago4 mins

Mentioned in story

What’s going on here?

ARK Investment Management has had a good year. The amount of money it looks after in its “thematic” exchange-traded funds (ETFs) increased tenfold in 2020 – and with inflows last month beating those at rivals BlackRock and State Street put together, that figure now stands at $47 billion. But investors attracted by the 150% gain of ARK’s flagship ETF last year, and hopeful of a similar performance in 2021, may want to start by checking out the rockstar investment manager’s latest annual research report, containing its biggest ideas for the months and years ahead.

Money invested in ARK ETFs across 2019-2020.
Money invested in ARK ETFs across 2019-2020. Source: Morningstar

What does this mean?

Rather than passively tracking the performance of an index, ARK’s ETFs are actively managed – and the investment manager’s particular focus is on selecting stocks that it thinks will benefit from (or indeed occasion) disruptive innovation. Here are six entirely new additions to its themes watchlist – many of which are among ARK’s boldest calls yet.

The inclusion of virtual entertainment is perhaps unsurprising. The sector’s popularity has accelerated during the pandemic – but ARK believes that the per-hour cost of playing video games will also increase in the future alongside the number of hours played. While gaming will remain relatively cheap compared to other forms of entertainment (movies, anyone?), ARK reckons the sector’s revenue (from things like in-game purchases) could increase 21% in each of the next five years.

What’s more, the investment manager thinks that the long-awaited advent of widespread virtual reality technology could finally be at hand. VR headsets will become cheaper – and once they cost around the same as an average laptop, they may begin to become as common as smartphones. With companies like Snapchat, Facebook, and Apple similarly keen on augmented reality, ARK estimates the two markets will collectively grow 59% per year over the next half-decade.

Looking slightly further afield than your front room, ARK’s also into space. The firm made headlines recently with plans for an ETF dedicated to the, er, space – and while the launch date is still to be confirmed, ARK’s eyes are already turned skywards.

With technological advances bringing down rocket and satellite costs, the commercial race for space is on. ARK expects that to lead to everything from better internet connectivity, dramatically shorter long-haul travel times – which should both boost global economic growth – and perhaps even tentative extraterrestrial colonies within the next ten years. The firm’s figures suggest annual sectoral revenue could soon amount to more than $370 billion.

Declining costs should also spur development in cancer screening tech, with new innovations in cell and gene therapy likely to lead to much more treatment too. These two healthcare themes are to some extent captured in the ARK Genomic Revolution ETF (for North American investors only).

ARK further believes that accelerators, especially graphics processing units, will come to play an increasingly dominant role in the most demanding computing tasks – things like artificial intelligence (AI), drug discovery, and cloud gaming. This is partly reflected in its ARK Next Generation Internet ETF (also North America only). And finally – what else – the firm thinks growing bitcoin adoption among institutional investors could shortly drive the cryptocurrency’s price up to a staggering $200,000-$500,000.

Why should I care?

ARK’s track record is nothing short of stellar: its flagship ARK Innovation ETF (available to investors in both North America and Europe), which offers broad exposure to several disruptive areas (and has long held Tesla as its biggest single stock), has risen an impressive annual average of 46% over the past five years. But past performance isn’t indicative of future success – and we wouldn’t be Finimize if we didn’t also point out some of the risks.

For one, ARK’s newfound popularity could prove to be a double-edged sword. Its holdings are now so hefty that the sheer amount of money it needs to invest in an individual stock in order to significantly shift a fund’s weighting may prevent ARK from buying into smaller stocks with greater growth potential. In short, the firm may be unable to put its biggest convictions into practice. While it’s true that other investment managers have run into this issue before, the solution has typically been to close the affected fund to new investors – something not possible with an ETF.

What’s more, thematic funds in general have the odds stacked against them. Research firm Morningstar has found that just 45% of all thematic funds launched prior to 2010 survived until 2020. And only 25% managed to both survive and do better than global stock markets over that 10-year period. Three quarters of the time, you’d have been better off simply investing in an index-tracking ETF.

Thematic fund performance.
Thematic fund performance. Source: Morningstar

Taking on board some or all of ARK’s big investment ideas could turn out to be excellent for your portfolio – whether you buy one of their ETFs or do some research yourself into these disruptive industries. But hardcore skeptics might say that the launch of a range of merchandise dedicated to the investment firm suggests we’re at the height of a stock-bloated bubble…

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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