ARK’s Cathie Wood Disrupted Investment Management. She’s Not Done Yet

The “her” is Cathie Wood, who founded ARK Investment Management seven years ago, and joins our list of the 100 Most Influential Women in U.S. Finance this year. Michel’s is the sort of investor fanaticism that has made ARK a household name and Wood an unlikely celebrity. Her success seems very of-the-moment, but she has been laying the groundwork for years. She was early on many themes—she embraced active management when investing seemed inexorably tied to indexing; she implemented her stock-picking in active ETFs while the largest asset managers said it couldn’t be done; and she bought companies that others thought were overpriced, a joke, or both.

It isn’t just that ARK’s actively managed funds have done well, although they have—phenomenally so: Last year, five of its seven ETFs returned an average of 141%; three were the top performers among all U.S. funds. Wood’s rise to star-manager status is reflective of today’s zeitgeist. Some of the biggest investing stories recently—

Tesla

(ticker: TSLA), Robinhood, Reddit,

GameStop

(GME), and Bitcoin—are about outsiders upsetting the status quo.

“ARK is an outsider, too,” says John Rekenthaler, vice president of research for Morningstar. “Cathie Wood has been around, but this is a new company. There is a sense of outsmarting Wall Street, outsmarting convention.” Wood has a following on social media, which has fostered a sense of community and fandom akin to the Bogleheads or Buffett mania. The firm even acquiesced to demand for ARK merchandise (all sale proceeds go to a Covid-relief charity).

ARK has taken in $37 billion in new money since the beginning of 2020, the third-highest inflow among money managers, behind only Vanguard Group and

BlackRock’s

iShares, each of which has hundreds of funds. The firm’s flagship ETF,

ARK Innovation

(ARKK), has grown more than tenfold within a year; it now has $22 billion in assets. ARK has $47 billion in all of its ETFs combined.

Wood’s focus on innovative companies with technology to disrupt the way we live means that her portfolios are loaded with stocks that have skyrocketed—Tesla is a big holding in three of her funds. Other ARK holdings include

Square

(SQ),

Teladoc Health

(TDOC),

Roku

(ROKU), and

Shopify

(SHOP). Many have compared Wood to the star managers of the 1990s, who rode high as the tech-stock bubble inflated, and vanished after it burst.

When stocks soar, there’s always the risk of them flying too close to the sun, and ARK Innovation is getting singed: It has dropped 23% in the past two weeks. “ARK funds are bull-market stories; they’re obviously going to do bad in a bear market. There’s nothing controversial about that,” says Rekenthaler. “These are highly aggressive, high-beta stocks.”

Wood isn’t focused on short-term fluctuations. She takes a long, and bold, view—a year ago, she said that Tesla could reach a split-adjusted $1,400 a share in five years—and says we aren’t in a bubble today. The big ideas blossoming now were planted 30 years ago, she says: “We are ready for prime time now.”

Wood, 65, bears none of Icarus’ hubris. Her parents immigrated to the U.S. from Ireland and settled in Los Angeles. Like many immigrant families, Wood grew up with education and career at the forefront. “I was raised as a firstborn son,” says Wood. “I was going to blaze the trail for my family.”

Wood’s father served in the Irish army and the U.S. Air Force, and became a successful radar system engineer, who, according to Wood, was extremely detail-oriented and always sought to “peel the onion” in his work. He pushed Wood to discover connections between things. Wood’s mother, she says, was “very supportive” and “full of laughter and life.”

Wood graduated from the University of Southern California with a degree in economics and finance. She landed her first job at Capital Group through her mentor, celebrated supply-side economist Arthur Laffer. She spent three years there as an assistant economist. In 1980, growth shop Jennison Associates was looking for someone to crunch economic data; Wood moved to New York and became its chief economist—at age 25.

It was those days that truly shaped her skill for argument, Wood says. In the early 1980s, interest rates and inflation were in the double digits, and productivity and growth were collapsing. While most of the best-known economists of the time—including Henry Kaufman, known as “Dr. Doom,” and Milton Friedman—believed that inflation was embedded in the system, Wood thought interest rates had peaked.

Spiros “Sig” Segalas, co-founder of Jennison and Wood’s boss and mentor, often brought in these economic luminaries to share their forecasts, and challenged Wood to debate them. “For four years, nobody believed us,” she recalls. “I would have to go up against Henry Kaufman one-on-one. I knew my numbers; I knew what I was talking about, but I had to convince them I did because of my youth.”

Segalas calls her a “lady with unbelievable, unwavering conviction.” He installed Wood in a nearby office so he could pick her brain and tasked her with writing the firm’s quarterly letter. “She was by far the sharpest,” Segalas says. “She always made me look good.”

Wood spent 18 years at Jennison, while raising three children. Interest rates began to decline in the 1980s, allowing tech companies more runway for growth, and setting the stage for a new era of innovation—featuring personal computers, semiconductors, and wireless capability. Wood decided that she wanted to become an equity analyst and portfolio manager.

Wood looked at places that other analysts were ignoring. “I was like a little dog looking for scraps under the table,” she says. She found stocks that sat at the intersection of multiple industries, and weren’t followed by analysts from any side. This, she realized, is where innovation happens. Reuters, for example, was this mystifying “database publishing” company that collected data from financial companies and then sold it back to them in aggregate. Nobody understood this business model, so Wood took it up: “I just felt it was something big, and, of course, it was the precursor of the internet.”

After leaving Jennison in 1998, Wood co-founded Tupelo Capital, a hedge fund; she joined AllianceBernstein as a portfolio manager and thematic research strategist in 2001, managing more than $5 billion. She continued to invest with strong conviction in high-growth, high-risk, smaller-cap stocks.

Wood researched stocks with the same dogged determination she applied to economics. “Cathie is insatiably curious; she was a voracious consumer of research from all over the Street. She read everything from everyone,” says Lisa Shalett, Wood’s boss at the time, now chief investment officer for Morgan Stanley Wealth Management. “She was tireless; she works 24/7 to make sure the team has the most thorough research and differentiated view.”

Wood’s portfolios performed very well in the bull market of the early 2000s, but they fell harder than the market during the 2008-09 financial crisis. “It goes without saying that Cathie’s strategies are vulnerable to going out of favor,” says Shalett. “When you have a liquidity crisis in the market or big changes in interest rates, all the holdings could move together. That doesn’t provide a lot of diversification for your clients.”

Indeed, Wood’s high-octane style was putting off some institutions, and AllianceBernstein wanted guardrails on the funds. Her portfolios were often deemed too volatile, says Wood, and she was asked to make adjustments by owning indexes like the S&P 500. She disagreed: “I felt that the move toward benchmark investing had gone too far, and there was a void evolving in the marketplace having to do with innovation.” She saw that investors in private companies were willing to assign higher valuations to companies than stock investors who were wary of volatility. “We saw companies in the public market sometimes selling for just 10% of what private markets were willing to pay [for similar companies],” she says….