This podcast is sponsored by SoFi to help you get your money right and is for informational purposes only. Nothing in this program is a recommendation from SoFi to you or any listener. You should not rely on this program for any financial advice or legal or tax advice. The views expressed do not necessarily reflect the institutional views of SoFi or its affiliates. SoFi makes up about 5% of ARK's Fintech Innovation ETF portfolio, but ARK Investment Management holds a little over 1% of SoFi's outstanding shares.
This is The Important Part. I'm Liz Thomas, Head of Investment Strategy at SoFi. My guest today is Cathie Wood, Founder, CEO, and CIO at ARK Investment Management LLC. ARK's funds are known for taking big bets on disruptive innovation, meaning tech companies at the forefront of innovation in areas like AI, biotech, robotics, and cryptocurrency. In other words, technologies that can potentially change the world. Cathie founded ARK back in 2014. She started her career at The Capital Group and has spent time at Jenison Associates LLC and AllianceBernstein. She also previously co-founded the hedge fund Tupelo Capital Management. Cathie, welcome to The Important Part. Thank you so much for joining me today.
Oh, very happy to be with you, Liz. Thank you for inviting me.
So let's start at the beginning. You founded ARK back in 2014 with a focus on innovation from the jump. People can define the word innovation very differently, and in today's world that is dominated by technology and all sorts of technological themes that we will get into in this interview, I think what would be useful just to lay the groundwork is tell us how you define innovation at ARK.
Right. Well, we define it—it meets three characteristics, and we describe these as innovation platforms. One, they follow a learning curve, which means costs fall over time. That's the critical one; it's the starting point. And so they are technologically enabled. Technology is deflationary, so that's the first one. The second is they cut across economic sectors. This is also important because technology is now permeating every sector, every industry, every sub-industry, and it's actually starting to blur the lines between and among industries. We saw that, of course, when the GICS, against which we measure performance of various sectors, had to split technology into communication services and technology because initially Facebook, at which it was called at the time, Google, Amazon, all of those—or some of those—were in the technology space, but they were becoming much more advertising-centric, and so they had to split them apart. I think that's going to happen more and more over time. So, declining cost curve, cutting across economic sectors, and then these innovation platforms serve as launching pads for more innovation. And so an example of that is DNA sequencing in the multi-omic space, we call it. It's life sciences, healthcare. If we weren't able to identify what was going wrong in our genome thanks to sequencing technologies, we would never have been able to invent gene editing to fix those problems. Just to give you a sense, in terms of the five innovation platforms themselves, they are multi-omic sequencing—I just mentioned that one—robotics, energy storage, artificial intelligence, and blockchain technology. And the final thing I'll say about them is they all meet those three characteristics. But what makes this new world so exciting is they are converging with each other as well. So, you know, in the world of innovation, we talk about S-curves. What's an S-curve? An S-curve in innovation is slowly, slowly, then all at once takes off. A new technology takes off. Well, think about three S-curves feeding each other as they are in autonomous taxi networks, robo-taxis. That is the convergence of robotics—autonomous vehicles are robots—energy storage—they will be electric—and artificial intelligence.
Okay, and we'll get to this later in the interview, I imagine. In today's world, in today's market world, we've got this trading mentality, and everybody wants results tomorrow. They buy a stock today, they want the result tomorrow, if not maybe next week, but we're certainly not going to wait longer than that for the result. If we're thinking about it from an innovative perspective, it's feeding into this—I'm going to call it an innovation tunnel—where everything sort of converges and then builds the innovation even more to scale afterwards. That takes time. And I'm just sort of teasing that for later in the interview with something that we can get a little deeper into. What I found really interesting when, you know, before this episode doing much more deep research on you as an investor is that you have a background in economics, which I'm guessing most people don't really know. So tell me about how the background in economics feeds into your investment philosophy today.
Yes, I think in a few ways. What have investors been really worried about in the last few years? Interest rates, inflation, and therefore interest rates, right? We had a very strong point of view on what was going to happen to both in the last few years. We did think that the surge in CPI, so consumer-based inflation, to 9% was going to unwind, and here we are at roughly 2.5%. And based on what I just told you about the technologies we see evolving and actually becoming needle-movers when it comes to inflation, we think inflation is going to continue to surprise on the low end of expectations, and therefore interest rates will be lower than many people have feared. That's an important call for our kind of strategy, which is long-term in nature. Interest rates help us figure out what we should pay now for a given stream of cash flows. If interest rates go up, we pay less. If interest rates go down, we pay more. So that's a very important economic concept. I also, as an investor, have felt because so many of the concerns on a day-to-day basis have to do with economics—we get economic statistics reported every day, that's a constant feed on the various news stations and on the various websites—that to have a point of view is important to allay fears or to actually agree with them and say, 'Hey, we agree with you, this is risky, and we're going to take risk out of the portfolio.' Now, we have a long-term time horizon. We're not trading around economic statistics at all. In fact, our investment time horizon is five years. So we'll often look at something which we believe is short-term in nature, as this inflation surge was, and we will lean into it, saying, 'Okay, well, this is going to change,' and we think investors are going to worry less about it and that the stock market will therefore do much better than many people fear.
So I want to go back to a couple things you said in that answer just for our listeners' benefit. You mentioned interest rates and how they affect basically what we pay for in the future. A lot of times we refer to that as a discount rate, and the way that you do that mathematically is that the discount rate goes in the denominator of the fraction. So if the denominator is smaller, the result gets larger. And you hear that talked about a lot in media, the discount rate of such and such stock. And the reason it matters is because what people are willing to pay for that stock today changes if the discount rate changes. And to your point, it is an important call to say that rates might be lower than we expect them to be because we're in an environment right now where rates have risen considerably in the last month or so, and a lot of the speculation—I would even venture to say consensus expectations—are for rates to stay elevated. So that is an important call. The other thing that I think is important to remember, and I say this all the time, I mean, I spend a lot of my time on macro data, I spend a lot of my time on the economy and what it means for capital markets. And some of the criticisms of that are from, let's say, what we would call a bottom-up stock picker who would look at things and say, 'All that really matters are the earnings of the company, all that really matters is whether or not the company has a good competitive position, what the competitive environment is.' That's certainly important, but I've always thought even if you are a bottom-up stock picker, you have to know what environment you're picking those stocks in. And the way to understand that environment, the way to understand, let's call it the weather pattern of when you're picking these stocks, is to look at the macro data and understand not only what's going on right now but have a view of what you think might happen in the future. And right now, what we're dealing with is what might happen in the future is a new administration that could change policies quite a bit and change that environment quite a bit. So what would your broad take on the economy be today?
Well, let's start with interest rates. I think one of the reasons for the backup in interest rates is many investors fear an explosion in spending given all of the election year promises. To take a point of view on that, based on our knowledge of Elon Musk and Vivek Ramaswamy, we think that the Department of Government Efficiency—clever, DOGE—yes, we do think that's going to be successful. And one of the reasons is technology, especially artificial intelligence. And I think they're very serious. We're excited about the government efficiency. You know, government spending is taxation. You're either going to be taxed now—they're going to raise taxes now to defray it—or in the future, so that could be our children—or inflation. Inflation wipes away debt. You know, it lessens the burden of debt, but it's a horribly regressive tax. So we think this deficit reduction is going to happen both because of the government efficiency moves and because we believe economic growth, once we understand what the policies are and once they are effective. I think any tax cut that they put in place has to be retroactive to the beginning of the year, otherwise you're going to have deferred activity. And we could really—we feel we've been in a rolling recession for the last two years since interest rates shot up, with housing down, autos very weak, commercial real estate very weak, capital spending now falling. The consumer is holding things up, and mostly the high-end consumer. So we've got a lot of cyclical sectors very depressed right now. And if we get clarity on these policies, then I think we will have a very strong recovery. It may take until the second half of next year, but I think if they make policies retroactive, we won't need to fall into a recession. This reminds me very much of the Reagan years, very early in my career. The biggest mistake that Reagan made was phasing in the tax cuts, and everybody waited for the lowest tax rate. So I don't think they're going to make that mistake. So we do think there will be a strong economy, and we also believe that productivity is going to be much stronger than many investors expect. Most of this is because of technologically enabled innovation. AI, of course, artificial intelligence is the biggest catalyst to probably the biggest productivity gains we're going to see in our lifetimes. Right now, productivity growth is 2%. We think that productivity growth could go north of 4%, 5%, really going back to the 90s when we had a surge in productivity, and it could go even higher depending on the policies. Productivity growth will also be an anti-inflationary force. Wages can go up 4%, if productivity is up 4%, then unit labor costs are zero. So we're very enthusiastic about that concept. And you know, I know a lot of people worry about a resurgence in inflation. They think about the deficit, but I would submit, based on what we see going on in the world of technology from venture capital—now that is going to be freed up thanks to deregulation, innovation broadly freed up, especially in healthcare. I think that's probably the most misunderstood sector in terms of the impact of technology moving forward.
Okay, I want to clear up for anybody who's listening that's confused about the tax conversation. So we're thinking about the possibility of tax cuts that the new administration might get through, let's say towards the end or in the second half of 2025. So we're talking about a retroactive period. It would be back to the beginning of 2025, not back to the beginning of 2024. I just want to be clear about that with everybody.
Oh, absolutely. And when I say that, the quicker they communicate that, even if the policy isn't in place, the better off we will be.
So if you ask really any investor or any person, I think at this point, what's the most innovative thing that's going on in the world right now, I am willing to bet at least 80%, if not 90% or more, will say AI. And it has become pervasive in conversations, and I think most people understand that it's here. We're trying to figure out exactly what to use it for, exactly where the profit is coming from. If I'm thinking about the ARK Innovation ETF that you run, you've already referenced AI a few times and that you think it's going to be a productivity benefit. There's all sorts of things, there's still a lot to come in the space yet. Many of the buzzworthy AI names—that shall remain nameless here, I suppose—but the buzzworthy AI names are absent from that portfolio or have been absent for the better part of this year. And I'm sure you've taken a little bit of flak for that, perhaps a lot of hard questions on it. So tell us, has that been a decision thematically? Has that been a valuation decision? Has it been a risk management decision? And then maybe how would you play the AI space today?
Sometimes cyclical analysis can hurt. If you look at the semiconductor industry broadly, it has not done well recently. It has been hurt badly, except for NVIDIA and the special few. Our thought process at the time was, all right, NVIDIA is surpassing $2 trillion—and we do own NVIDIA, I should say, in ARKW and some of our more specialized portfolios. In the flagship, our thought process was, all right, NVIDIA, $2 trillion in enterprise value, or three, now three and a half trillion. Okay, that's wonderful. It's been a great stock, and we were so early on this stock. We bought it at 40 cents on the dollar in 2014. So now it's nearly $150, and we do own it in many portfolios. So we were very early. And as it was escalating into the trillions—we bought it at $6 billion—as it was escalating into the trillions, we were saying, 'Okay, this is a signal that AI is going to reach deeply into the global economy and is going to impact many, many other companies. Otherwise, why would it be worth that much?'
So I'm going to paraphrase and tell me if I've got it right. The fact that there were certain buzzworthy names that were absent from the portfolio, or from your flagship portfolio, wasn't a call against AI, wasn't a call against a certain name. It was trying to identify what other industries, what other companies might benefit from this theme that you thought was still really quite in its infancy.
And understanding that maybe a couple of those buzzworthy names, or even the semiconductor industry overall, was just emblematic of how this theme might take off and be pervasive through many things. So then trying to position the portfolio to benefit from that next step.
And to give you a sense of how we think about that, there are four criteria. We're looking at companies—almost every company in the portfolio—we view through an AI lens because that is the most important technology platform shift in history. And so what are the four criteria? Each company—and because it's going to sweep throughout the knowledge worker industry, we think the productivity gains are going to be huge, and so you're going to see that in every company that focuses on AI correctly from our point of view. Four criteria: they must have deep domain expertise—and I'll go back to healthcare again, that is an area, biology is one of the most complicated areas in which we invest. So we are looking for companies with deep domain expertise, taking AI seriously, either hiring a partner or hiring their own engineers and focusing them more directly and exclusively on AI. Global distribution, either with partners—this is going to sweep through the world pretty quickly. And then the most important one after those three is proprietary data. Companies that have data that no one else has can create new products and services that others cannot. And so that also is very important to us. So we're not looking at AI as a few stocks as beneficiaries at all. We're looking at every company potentially benefiting. It just depends how aggressively they harness these new tools.
Which is a different mindset than I think the market and maybe media has framed AI in the sense of. It seems to me like everybody's out there trying to pick the winners, right? And choose those one or two stocks that are going to be the godfathers of AI for decades to come. And look, maybe that does work, who knows? But I think that this still is an early theme, and themes in general take at least two to five years to play out. And what we've seen already in the market reactions to earnings of a lot of these companies is that all of the enthusiasm and the optimism was pulled forward. We had all the spend on AI, and it pulled forward the optimism, which is fine. I mean, that's what markets do, they price things before they happen. But now we're entering this era where companies are being more scrutinized for the spend. Now you've spent all this money, what's to show for it? Where's the profit? What's the use case? Where's the productivity? What does it add to the bottom line? And the bar has gotten higher and higher every earnings season for companies to not only beat the expectations for their results on revenue and earnings, but they have to raise their guidance. And they don't have to just raise their guidance by a little bit, they have to raise their guidance by a lot in order for the market to really reward them. It's almost as if they have to surprise to the upside in an exceptional way to be rewarded by the market now. And look, maybe that's a more rational way to look at this now. If it is so revolutionary, then it should start to produce results sooner, or it should start to produce profit, and maybe investors should be more critical of how much we're spending. Is that a fair characterization?
Definitely. I also think one of the reasons for what you are saying, Liz, is that the market's multiple by historical standards is quite high, depending on the metric you use, low 20s. And so there's less room for error, shall we say, if you're looking at valuations in a historical context. Now, we believe there are going to be some transformational business models out there. We often describe Tesla as the largest AI project on Earth, and we do believe that. We describe what's going on in healthcare when it comes to AI as the most profound application of artificial intelligence because we're going to be diagnosing cancer in stage one or before stage one now that the convergence between sequencing technologies and AI are coming together in molecular diagnostic tests, which are effectively blood tests to figure out if we have cancer. We'll have regular blood tests, and we'll diagnose cancer way earlier than we do now. And then when you add to that CRISPR gene editing, in other cases, we'll be curing diseases. So this could not happen without artificial intelligence. I think when you are talking about the companies where investors are saying, 'Wait a minute, you are spending hand over fist on GPUs and the cloud generally,' you're talking about what many people call the Mag 6 that benefited so beautifully from the concentration that we saw in the market, or that we have seen for almost 10 years. It started 10 years ago, and I think reached a crescendo recently in the so-called Mag 6. Many of them are—I mean, I know Microsoft's capital spending budget has gone from, I think, 30 to it will be 60 in what, 18 months, something like that. And when investors don't see the needle moving much on the top line, they say, 'Wait a minute, you know, what is that all about?' So I understand it because they were the biggest beneficiaries, and their valuations, or PE ratios if you want to describe it that way, are much higher than they have been historically. And all of them got to the top of the heap in terms of this concentrated market move because they had huge cash hordes and interest rates, at least relative to recent history, were very high. And most people thought, 'Oh, these must be the prime beneficiaries of AI,' which they may or may not be, right? So it's still going to be affected by AI.
