ETF investors who want to diversify into new areas of potential growth should identify areas of innovation and look to technologies that are disrupting the markets.
On the recent webcast, Focusing on Disruptive Innovation for Changing Markets, Catherine Wood, Chief Investment Officer and CEO, ARK Invest, argued that the world may be heading toward an environment characterized by a deflationary boom, and investors should consider companies dabbling in innovative technologies as a way to capture further growth ahead.
Wood explained that in the past 100 years, an inverted yield curve has foreshadowed recessions within roughly a year. The yield on benchmark 10-year U.S. Treasury notes dipped below yields on 3-month T-bills, fueling fears of a pending recession. However, she also noted that during the 50 years that ended 1929, unit growth and productivity surprised on the high side of expectations as inflation surprised on the low side, creating a type of “deflationary boom” alongside an inverted yield curve, which may be happening again today.
Looking ahead, Renato Leggi, Client Portfolio Manager, ARK Invest, argued that investors should consider investable true innovation that causes rapid cost declines and demand growth, cuts across sectors and geographies, and spawns further innovation, stimulating growth over extended time horizons.
“ARK aims to identify large-scale investment opportunities by focusing on public companies that are the leaders, enablers, and beneficiaries of disruptive innovation,” Leggi said.
For example, ARK Invest has identified five major innovation platforms that enable long-term investment opportunities, including DNA sequencing, blockchain technology, artificial intelligence, robotics and energy storage.
The ARK Invest active management team also employ a top-down and bottom-up research methodology to identify innovative companies in the investment process. They would identify disruptive innovations from a potential universe and select the best positioned companies, along with adjusting for changes in conviction and taking advantage of market volatility along the way.
“As a result of extensive and iterative research steps, ARK anticipates and quantifies multi-year value-chain transformations and market opportunities,” Leggi said.
“ARK models cost curves and calculates elasticity of demand to identify entry points for tech-enabled disruption,” he added.
For instance, ARK believes that so-called Next-Generation DNA Sequencing (NGS) is following Wright’s Law, or calculating unit cost declines for every cumulative doubling in units produced. In 2009, projections of the cost in the early 2020’s to sequence a whole human genome was $1,000 based on Moore’s Law, or 10x higher than that predicted by Wright’s Law. The number of whole human genomes sequenced should increase 40-fold to 200 million in the early 2020’s from 5 million today as NGS expands into new clinical, diagnostic, and agricultural markets. Additionally, with the advances, revenues could scale to $20 billion in 2023 from $4 billion today, with a compound annual growth rate of 39%.
As a way to help investors gain targeted exposure to innovative companies, one can look to ARK Invest’s flagship ARK Innovation Fund (NYSEArca: ARKK) that covers cornerstone companies taken from healthcare, technology and industrial sectors. Such companies may include ones that benefit from big data, cloud computing, cryptocurrencies, the sharing economy, genomic sequencing, molecular medicine, agricultural biology, 3D printing, energy storage, and autonomous vehicles.
Alternatively, one can look to the more sector-specific ARK Genomic Revolution Multi-Sector Fund (NYSEArca: ARKG). The fund includes companies that merge healthcare with technology and capitalize on the revolution in genomic sequencing. These companies try to better understand how biological information is collected, processed, and applied by reducing guesswork and enhancing precision; restructuring health care, agriculture, pharmaceuticals and enhancing our quality of life.
“Thematic investing in disruptive innovation can offer a low correlation of relative returns to traditional growth strategies and negative correlation to value strategies,” Leggi said.
“A constant focus on secular changes and disruptive innovation can offer a portfolio hedge in a rapidly changing world and complement traditional strategies,” he added.
Financial advisors who are interested in learning more about disruptive innovations can watch the webcast here on demand.