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Wednesday, March 13

Union League Club of Chicago

On Wednesday, March 13, 2024, the CFA Society of Chicago’s Distinguished Speaker Series (DSS) Advisory Group welcomed Cathie Wood.  The group convened at the Union League Club of Chicago.

The event began with a general introduction from Chris Vincent, CFA, President & Chief Executive Officer of CFA Society Chicago.  He highlighted that CFA Society of Chicago is the oldest and 6th largest CFA Society.  He also noted that the CFA Society of Chicago will be celebrating its Centennial next year.  Vincent then introduced the moderator and speaker.  

The moderator of the event was Arthur Olunwa, CFA.  Olunwa is the Head of U.S. Portfolio Management at Aflac Global Investments.  Cathie Wood, the speaker, is Founder and Chief Investment Officer of ARK Investment Management LLC.  With over 40 years of investment experience, Wood has redefined investment strategies, focusing on disruptive innovation.

Olunwa took a moment to acknowledge Women’s History Month.  In that theme, he asked Wood how she began in the Investment Management business, an historically male dominated field, and asked what advice she might have for other women in the industry.   

Wood briefly outlined her early career.  In 1977, as a student at the University of Southern California, she was unfamiliar with the industry.  At the time, Art Laffer was one of her most influential professors.  He introduced her to Don Conlon at Capital Group.  In turn, Wood had the opportunity to work with Conlon.  She recalled one of her early assignments researching potential impacts of Hong Kong’s handover from Britain to the People’s Republic of China.  She thought the project was “so cool.”  More broadly, she recognized that the industry itself was a place where you are “paid to learn.”  

She suggested that young people should not discount the value that they may already bring early in their career.  Young people tend to have more knowledge in certain areas.  Being digitally native fosters technology, efficiency, and productivity.  Wood advised, “make your boss look brilliant” by introducing them to your creativity and energy.  If your current boss does not allow you to advance, then move on to the next opportunity and make your new boss look brilliant instead.  She also offered advice in the entrepreneurial domain.  She recommended finding an “unmet need.”  

In the case of ARK Investment, she believes the market needed a portfolio that did not look like an index.  Wood commented that ARK investment is comparable to what NASDAQ once was.  The early NASDAQ did not have today’s concentration of mega-cap stocks.  It was more about innovation.  If you review the constituents of the NASDAQ today, it includes food and other industries that you would not necessarily associate with technology and innovation.  On many days, ARK investment is not correlated with the NASDAQ or interest rates.  Further, ARK Investment performance does not always match the narrative that they benefitted solely from low interest rates.  For example, in 2017, while interest rates were increasing, her fund was up 87%.  ARK Investments often behaves like a “deep value” portfolio as observed by one of her institutional investors.  Observers may find that surprising.  However, they have a 5-year investment time horizon which allows them to build positions if there is short-term pressure to the downside.  ARK is often a liquidity provider when the rest of the market is looking to buy or sell.

Olunwa remarked that Ark is at its 10-year anniversary.  He asked how innovation has changed in that period and how it might change looking towards the next 10 years.

Wood commented that the seeds for today’s innovation were planted during the 1990’s Tech Bubble.  At that time, too much capital was chasing too few opportunities and too soon in the cycle.  Although this ended badly, it provided the infrastructure that allowed technology to scale.  Using the same analysis that ARK uses today, one might have recognized that 1990s valuations were too rich.  

Now, we are seeing multiple technologies evolving at the same time.  This includes five major platforms: robotics, energy storage, artificial intelligence, blockchain technology and multiomic sequencing.  She is seeing convergence and accelerating exponential growth.  The environment is more like the 1800’s with the advent of the telephone, electricity, and combustion engines.  Further, the market is climbing a “wall of worry” which can point to a more sustainable trajectory.  

Wood believes that today’s technology is ready for primetime.  She noted that there are already several automated commercial transportation services operating in the world today (mostly in China).  She also cited Elon Musk as the primary example of an industry leader who understands this convergence.  She believes Tesla is the largest AI project in the world. 

Rather than specializing by sector or industry, ARK analysts specialize by technology.  Technologies now have the potential to converge and impact multiple industries.  Looking through only a sector perspective can be too limiting.  She cited comments from a retail analyst when Amazon was first entering into cloud services.  At the time, AWS only represented 1% of Amazon’s overall revenue.  On that basis, the retail analyst failed to see the potential value of AWS.  Of course, in hindsight, this was a missed opportunity.

Arthur then inquired what sector(s) are most likely to be disrupted by AI.

Wood stated that AI is in the 1990’s internet stage.  Any company that does not harness AI is in harm’s way.  The impact is mostly in cost cutting.  She conservatively expects productivity to increase by at least four times.  She then provided an example of how AI might disrupt current business models of Google and Amazon.  Although Google seems to be in harm’s way, Amazon may not be “cut out of the party.”  This is because of Amazon’s use of AI and robotics.

Olunwa then asked Wood to elaborate on ARK investments current thesis on NVIDIA – including recent trade activity and potential competition.

Wood provided context on their initial thesis for NVIDIA.  Like others, ARK recognized NVIDIA’s advantage in PC gaming.  However, ARK also recognized that NVIDIA had potential to be something bigger.  While researching AI, she and her team realized that the brain of autonomous systems was the GPU.  At that point, “the lightbulb” went off.  Since their original purchase of $4, NVIDIA had traded higher to almost $400.  While they have taken profits, they remain positive on NVIDIA.  It has continued to climb significantly.  Any recent sell activity should be taken in the context of other opportunities.  For example, since selling NVIDIA, ARK has bought Coinbase – and Coinbase is up more than NVIDIA in that time.  

Wood also addressed comparisons to Cisco during the dot-com collapse and subsequent recovery.  Something similar could occur with NVIDIA through an inventory correction.  She noted that “hyper scalers” using NVIDIA chips may eventually be able to exercise negotiating power.  Meanwhile, these same “hyper scalers” (Amazon, Meta, Google, Microsoft, and AMD) are designing their own chips.  If successful, this may impact demand.  

Of course, other broad market events will also continue to influence prices.  For example, the last crypto winter led to a meaningful drop in demand for computing power.  From a macroeconomic standpoint, a hard landing is possible.  Companies continue to lose pricing power and operating margins have lost 100 bps in the last four quarters.  Wood believes that we are already in a rolling recession.  Once unemployment finally increases, we will reach the final stage of this recessionary process.  She expects this to play out during this year and into the next.

Olunwa then shifted the topic to crypto currency and blockchain.  He asked Wood to discuss bitcoin (BTC) in terms of a store of value, medium of exchange and other characteristics of money.

ARK Investments first blogged about bitcoin in 2014.  In 2015, Wood took a more in-depth look.  At the time, BTC traded in the range of $200-$250.  She collaborated with her previous mentor/professor, Art Laffer, on a white paper.  Laffer commented, “this is what I have been waiting for, for last 50 years”.  He suggested that the market cap for bitcoin could potentially match the U.S. monetary base.  

Wood emphasized that Bitcoin is the first Global, Digital, Decentralized, Rule-Based, Private Monetary System in history.  She drew special attention to the “Rules Based” aspect with a limit of 21,000,000 bitcoin ever to be minted.  This protects against monetary debasement.  She also drew attention to the decentralized nature which makes it extremely difficult, if not impossible, for a central authority to shut down.  

Wood offered a recent example of a BTC use case.  When Nigeria decided to allow its currency to float, the currency dropped by two-thirds.  Subsequently, the Nigerian government detained Binance executives demanding the disclosure of the top 100 holders.  The executives are of US and UK origin.  Wood suggested that BTC held in a cold wallet (directly on the decentralized blockchain) would have offered insurance to the citizens of Nigeria.  The BTC would have offered an inflation hedge, and holding in cold storage would have eliminated counterparty exposure (ie, Binance).  While this is a use case for developing countries, developed countries are also subject to inflation and counterparty risks.  She highlighted the U.S. regional banks that collapsed last year as well as ongoing bank exposure to commercial real estate.

Arthur congratulated Wood on the recent Bitcoin ETF approval.  He inquired how ARK Investments handles storage and if growth will be limited (given the 21,000,000 cap on BTC supply.)

Wood stated that institutions are reviewing carefully and “kicking the tires” on bitcoin.  There is a learning curve to understand related concepts such as the halving, forks and airdrops.  But these institutions cannot ignore the potential of an entirely new uncorrelated asset class.  One benefit of the ETF approval across multiple providers is a broader educating effort that will benefit the entire space.

For storage, ARK uses Coinbase, but intends to diversify in the future.  Bitcoin is held in wallets which have never touched the internet and the address is not disclosed.  They are partnering with Chain Link to provide audit evidence of the Bitcoin held.  They also have partnered with 21shares for other infrastructure.  ARK feels that their approach is sound.  Wood noted that, on most days, their ETF has the tightest spread between ETF and spot BTC (as compared to other Bitcoin ETFs).

Olunwa again pivoted to another current topic.  He cited recent FDA approvals in the field of genomics (particularly relevant to the African American community).  He asked about the potential to treat sickle cell anemia and related diseases.  He also shared that this is a personal topic for him because he has friends who have been directly impacted.

In response, Wood stated in certain terms, “These are cures.”  Currently, such conditions require periodic and unpredictable transfusions on an emergency room basis.  With these new treatments, there are examples of patients who have had a single gene edit and have not required a blood transfusion since.  

As progress continues, costs have declined markedly.  A gene sequencing which previously cost over $2 billion, is now $200.  Gene edits remain expensive, but still more attractive than repeated emergency room transfusions over the life of a patient.  There is also potential application for other conditions such as diabetes types 1 and 2.  Eventually, she expects treatments to be available across many conditions under value-based pricing.

Questions were then opened to the audience.  The first question challenged the concept of bitcoin as an asset class because it has no underlying backing or collateral.  

Wood responded that bitcoin is, in fact, backed by the largest computer network in the world and history.  The value is in that network.  Ark continually monitors the health of that system in terms of computing power.  Because it is an open-source ecosystem and so many people’s livelihoods are built on that system, there is a huge “neighborhood watch.”  She observed that the base layer itself has never been hacked – which many corporations cannot claim.  She also noted that past estimates for a “51% attack” (an attempt to overwhelm the blockchain consensus using computing power) would cost a few billion dollars.  It would be materially more expensive today.

The next audience member asked how investments monitored over time given that their theses have such a long time horizon.  

Wood explained that a large part of their monitoring process relies on Wright’s law, which is related to Moore’s law.  Where Moore’s law views adoption as a function of time, Wright’s law is a function of units.  In practical terms, Wright’s law measures learning curves associated with technologies.  For semiconductors, Wood believes that Wright’s law is currently more pertinent than Moore’s law.  Likewise, Wright’s law applies to DNA sequencing, industrial robots, AI, and electric vehicles.  For every doubling of units produced, costs decline accordingly.   This all points to deflationary pressures.  As applied to AI, for example, data and training costs are dropping 75% per year.  Wood believes that the use of Wright’s law has allowed ARK Investments to predict innovation more accurately than other industry participants.

The last audience question concerned the long-term impacts of these innovations.  The audience member contrasted this optimistic discussion against GDP estimates of 1% to 2%.  Olunwa cited a recent article which put GDP growth closer to 7% when considering through the lens of real innovation.  

Wood agreed and quipped that he had “stole her punchline.”  She acknowledged that ARK Investment real GDP estimates of 6% – 8% may seem aggressive to industry peers.  However, she has grown comfortable with doubters.  Some of these same people may not understand that much of that growth will be digital.  Instead, they are anchored to a physical mindset.  Much of the identity of young people today is online.  New services will be in that space.  Additionally, one might assume a real growth rate of 6% – 8% implies a nominal growth rate of 12%.  However, Ark Investment’s thesis is calling for deflation (noted above).  This would require a lower nominal rate.