The following is my summary of Cathie Wood’s thoughts on recent market volatility, as presented in her latest video on the Ark Invest YouTube channel (~42 min) – I strongly recommend you check it out.
The minimum expected rate of return for a stock to enter an ark portfolio is 15% CAGR. Cathie contends that she sees the recent volatility as a gift to gain alpha over the intended 15% return in many of her high conviction names.
She mentions that at Ark, they have a five year time horizon, and it is counter productive to compare its performance with a benchmark (like the s&p) over a shorter period. She further adds that many stocks in traditional indices today are a potential value trap, and that ark etfs “are a good hedge against broad based benchmarks.”
She reiterates that “we are not in a bubble” – and that the seeds of their 5 innovation platforms were planted in the dot com bubble, and are now ready for prime time, in a period of reality. Fear of a bubble likely stems from benchmark sensitivity and backward looking institutional investors. Furthermore, intuitions should be worried about their own strategies as “creative disruption will impact nearly 50% of the s&p500”.
To Cathie, interest rates going up suggest that ‘real growth is going to pick up’ – and that she understands the concern over her own stock picks potentially underperforming as a result. However, she believes that that the market has assumed that interest rates will stabilize at a 4 to 5% range - which inversed (1/4 or 1/5) gives a normalized p/e of 20 or 25; so markets didn’t actually misprice assets to begin with. She thinks that nominal growth however, will not be at 4 to 5%, but instead around 2-3%, which can lead to greater valuation support for companies that can grow more rapidly.
Rotation from growth to value was also expected on her part. She repeats that value will face massive headwinds going forward. Energy and financial stocks have done amazing in the past month - which is a good thing as the bull market is broadening out unlike the dot com bubble, where ‘too much capital chased too few opportunities, too soon’. Energy and financial sectors booming will likely be short lived as they are both ripe for massive disruption.
(20min delay)