ARK Invest’s Ren Leggi, Client Portfolio Manager for ARK, sat down with ETF Trends’ CEO Tom Lydon and CIO Dave Nadig to continue their conversation on the four market inefficiencies found within the public equity markets for innovative stocks. In this week’s episode of The Switch, they discuss passive public markets.
Nadig begins by explaining that his career started in passive investing with indexes, and while passive investing (indexing) still works for some, it has “changed the opportunity set” for some of ARK’s other investment products.
Leggi explains that over the last decade, investors have been surging back towards passive investing. “That’s created market inefficiency related to these innovative stocks. Indices, by definition, are backward-looking,” he says.
But market cap-weighted indices gauge a company’s past successes, not its current ones, Leggi says, and more importantly, they aren’t a measure of a company’s future success.
“When you’re taking a kind of more thematic approach, you’re looking forward and seeing what is the world going to look like,” Leggis explains. To invest innovatively, you must be able to focus on the future and look towards where you think companies are heading.
Lydon brings up the point that with fewer IPOs in the last decade, investors seeking innovation are largely doing so in the private space. ARK has taken note of the comparison to the private market valuations.
“When you compare it to some of these innovative stocks, the ones that we’re focused on, we’re seeing that valuations are maybe five or ten times higher in the private market,” Leggi says. It is an inefficiency that ARK seeks to take advantage of.
The Changing Nature of Research
The nature of the research and the confidence in IPOs has changed over time, Nadig believes. Whereas before, the analyst community and investment banks were responsible for helping to seed start-ups, built on extensive research, Nadig doesn’t feel that the level of research is readily available anymore with less companies going to IPO or going the SPAC route.
The trend seems to be reversing in the last twelve to eighteen months, though, with more companies going the route of IPOs and SPACs. “This is opening up the market. Mainly, innovative companies are becoming public, so the universe is actually expanding, and that’s creating more opportunities,” Leggi says.
However, the research aspect from traditional analysts is one that ARK believes is still “not up to par with how they should be structuring their research for these innovative companies,” Leggi explains. When moving from the private space to the public, key things in research focus on the top-down and sizing how large they believe the opportunities to be in five to ten years. This helps build the bottom-up approach that finds the best opportunities within different technology areas.
With an abundance of companies going the route of SPACs, Leggi discusses how important valuation is in those situations and is one of the biggest reasons why ARK may choose not to invest in a SPAC.
Some SPACs simply don’t make sense with the technologies being invested in from a start-up perspective, such as space exploration, but one prime area that ARK believes is investible is genomics. Some of the genomics companies that were private and are now going public are doing so at “multi-billion dollar valuations that are justified,” Leggi says, despite by and large flying under the radar.
For more episodes, check out The Switch Video Series playlist.