Investors can capture growth through the quick advancements in technological developments. In an attempt to hone in on the potential opportunities, one should consider the criteria used to identity a disruptive innovation and look to an exchange traded fund strategy that adapts to the changes.
On the recent webcast (available On Demand for CE Credit), How Investors Can Identify Disruptive Innovation and What it Can Add to a Portfolio, Catherine Wood, Chief Investment Officer and CEO of ARK Invest, explained three broad criteria to isolate a disruptive innovation platform. Disruptive innovations should enable rapid cost declines and economic tipping points, cut across sectors and geographies, and spawn further innovation.
For example, robotics help enable rapid cost declines and economic tipping points.
“We believe many investors don’t do the work to understand these unit-economic thresholds and misunderstand the potential scope of a transformative technology,” Wood said.
Deep learning or artificial intelligence is seen as a type of transformative innovation that cuts across sectors and geographies. Woods explained that relative to the Internet, Deep Learning could impact more sectors, causing more profound disruptive innovation across different industries.
“Spanning across sectors also provides the opportunity for better product-market fits and insulates the innovation against business cycle risk,” Wood said.
Additionally, autonomous technology may be seen as an example of innovation that could spawn further innovation.
“Innovation spawning platforms are typically underestimated over expansive time horizons because successful forecasts require that an analyst anticipate the scope of new products and services that they will spawn,” Wood added.
ARK’s Focus on Disruptive Innovation
As a way to tap into these disruptive technologies, ARK focuses on disruptive innovation in an effort to take advantage of four market inefficiencies, including the market’s short-term time horizon, the passive public markets, the silo-ization of Wall Street and the closed-off research and investment mentality, Tom Staudt, Chief Operating Officer for ARK Invest, explained.
The market can be distracted by short-term price moves, potentially losing focus on the long-term effect of disruptive technologies. In an attempt to address this market inefficiency, ARK can try to take advantage of this arbitrage opportunity, targeting companies that offer growth over 3-5 years that the market is ignoring or underestimating, according to Staudt.
Innovation investors tend to be crowded into the private markets while at the public markets have increasingly gone passive as witnessed in the rapid growth of index-based fund strategies. Consequently, Staudt argued that innovative public companies with forward looking growth are the most inefficiently priced part of the market.