On this episode of The Switch, host Ren Leggi, Client Portfolio Manager for ARK Invest, and ETF Trends CEO Tom Lydon and CIO Dave Nadig discuss the siloization on Wall Street.
Siloization in this case refers to the parsing of information and personnel into separate units with little communication between them. Lydon explains that the traditional fund model was to put MBAs and CFAs together in a room, provide them with stocks and let them formulate their models from there. ARK views this as suboptimal. There is a better way to approach fund building and structuring.
“We see that technology is impacting all sectors and industries, and this notion of having a sector analyst, or in some cases we even see market cap analyst, that is going away,” said Leggi.
ARK believes that analysts should be restructured and divided by technology. In doing so, it prevents them from being taken by surprise when a new technology starts to make its way into an industry, particularly ones that can be disruptive and innovating. By aligning with the technologies, the analysts already hold the expertise on their respective disruptive tech.
Nadig discussed the issue of an “embedded bias.” Analysts who are grouped by sector might be much more reluctant to be honest about the underperformance or lack of what they view to be good options within their sector. ARK avoids this altogether using its technology-based approach built on a collaborative effort.
“We always have our primary analyst that has that expertise in the technology that they’re researching assigned to the stock that’s associated with that technology. But then we could have a secondary or maybe even a third analyst covering it from a different perspective, or a different technology,” said Leggi. This type of collaborative effort isn’t one that is seen in the siloed approach of dividing into industries and sectors.
In addition, ARK conducts weekly meetings that give analysts a chance to share any breakthroughs in their research or with their technology. The analysts are then able to take back this awareness of what is going on in other areas of industry back to their own sectors.
ARK’s Approach to Tesla
Leggi explains that the majority of analysts that are covering Tesla are automotive and value-oriented, with roughly 90% comprised of automotive analysts. Their primary focus has historically been entirely on internal combustion engine vehicles in the last century. Tesla doesn’t fit this mold.
As an electric vehicle company, Tesla (TSLA) is inherently different, from the ground up. It’s a “totally different skillset, mechanical engineering versus electrical engineering,” Leggie said, explaining that ARK’s approach is vastly different.
“We have a battery technology energy storage analyst, Sam Korus, who’s covering it from the Lithium ion battery side,” Leggi explained. He went on to describe Tesla’s other innovations, including the autonomous mobility aspect and AI chip technology.
By utilizing three different analysts on one singular asset, “it’s no surprise to us that we’re coming to a much different conclusion than the broader market when you have automotive analysts covering that stock,” Leggie said.
A Technology-Based Approach Allows for Overlap
ARK’s approach is best seen in the ARK Space Exploration and Innovation ETF (ARKX), which contains 3D printing investments, something that may seem arbitrary at first glance. By digging into the research, however, Nadig was able to discover that most supersonic creations now are done using 3D printing by aerospace engineers.
ARK recognizes and invests in the enablers for the technology they research. In the case of ARKX, the firm has recognized the value and part that 3D printing plays, even though it is still in its early stages. While it’s still a fragmented market, ARK anticipates growth and consolidation in the future.
“We want to have broad exposure to that enabling technology, so that’s what we’re seeing as an opportunity,” said Leggie. He described that a thematic approach allows for exposure that other funds would miss on because they are siloized.
Leggie explained that ARK only invests in technology where there is a “huge market inefficiency,” and not because of the tech’s inherent popularity. “At the end of the day, that’s our job, to provide exposure to these exponential growth opportunities.”
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