Playing it safe only counts if you’re content to float on the tide. Real ambition requires taking risks and making waves.
Last year presented the wealth management industry with a simple binary test. You could see the pandemic disruption as an existential challenge or an opportunity.
Those who fixated on survival shut down non-essential activities to preserve resources that could become scarce in a protracted market storm. When retention is your only priority, growth fades into the deep background.
But those who realized that disruption could be a friend as well as a threat are now eating the weakest survivors’ lunches. Take Cathie Wood, the breakout star of the COVID year, as an example.
Wood didn’t hide in her shell and wait for the storm to recede. She took big, differentiated, bold bets and wasn’t shy about telling the world.
She loved Tesla when big Wall Street banks were speculating about how that company was really worth next to nothing. Even today, she says it’s going to be a $3,000 stock in the near future.
That’s not the wisdom of crowds. It’s an extremely contrarian call that leads to dramatic binary outcomes.
Either you’re wrong, Tesla crashes and you look ridiculous, or you make your clients a massive amount of money.
Wood called the coin toss right. While most advisors prefer to go with the flow, it’s worth reviewing her risk-reward strategy here.
Nothing To Lose
Before Wood decided to raise her profile, Ark Global didn’t even have a reasonable-sized RIA’s assets to manage.
Across three thematic funds, her team was working with $2.6 billion, with more than half of it in the flagship Ark Innovation. She really didn’t have a lot to lose on the coin toss.
The shareholders she already had on board were early adopters, basically seed capital and probably pretty loyal over the long haul.
After all, Ark has been running money since 2014. While AUM climbed with the market, the absolute numbers didn’t really move the needle much beyond that relatively firm base.
It was a good, steady, long-term business, just like a lot of advisory practices and generating fee revenue of 0.75% a year.
At most, Ark had $19 million in revenue at stake. Not an empire. Vulnerable to external shocks. For a lot of people, holding onto that AUM would be the core mission.
But Wood wanted to build an empire. She made the coin toss and won big. One COVID year later, she now has $40 billion under management.
Granted, a big piece of that AUM gain comes from performance, but at a glance $30 billion of it came from new investors lining up to buy the shares.
We all know hot money chases hot funds. Ark Innovation gave shareholders roughly a 300% return over the past 12 months, so even if Wood never went on TV to talk Tesla, the power of the portfolio would have spoken loud enough.
After all, she backed up her TV talk with Ark money. The flagship fund is 10% Tesla and then packed with other emerging tech names like Roku, Spotify, Shopify and Zoom.
Building buzz around the stocks helped move the portfolio as well as raise Ark’s profile. Again, it’s the equivalent of doubling down when you have high conviction.
Backing Up The Book
When you really love Tesla, you want it overweight in the portfolio. I don’t doubt her sincerity here.
Cathie Wood really loves Tesla. How she calculates and tests her target prices is a little mysterious, but over the last year she’s made a compelling case that the direction points up.
She loves a lot of emerging tech companies. They’re disruptors. They were disruptors before the pandemic and retain a competitive edge against the old status quo.
Betting on the power of disruption is what Ark does. And on those terms, betting her career on disruptive messaging makes perfect sense.
In Cathie Wood’s world, change can be great if you back the right side. But you have to pick a side.
There’s no random walk here, no passivity. She runs active ETFs that live and die on how well they differentiate the investment experience from a vanilla S&P 500 or Nasdaq fund.
If Tesla were to go to zero, it’s a pretty good bet that Ark would hemorrhage a little AUM and more than a little prestige. You want them to have the courage of their convictions.
But the portfolio itself isn’t a GameStop hype machine. It’s well diversified for the relative weight of companies that fit the theme.
Tesla is big. It’s got a big slice of the portfolio and Wood spends a lot of time talking about it.
Other hot money tech stocks are smaller. They have the potential to grow to Tesla size over time. If any of them implode along the way, the rest of the portfolio can cushion the impact.
Of course, watching her on TV, you might think she only has a few stocks to watch. But there’s a lot more science here than the GameStop crowd has on display.
That’s probably the best lesson to learn here. Real success is a combination of sizzle and steak, hype and substance.
The Ark portfolios had the substance all along. They were poised for some of their stocks to evolve into market superstars. It was only a matter of time.
When the time came, people who like crunching numbers saw the funds show up on their screens. But to really make the sale, someone had to get out there and tell the tale.
Explaining what goes into Ark funds was an essential piece of ramping up AUM in a year when most managers were content to simply drift with the market as a whole.
So Wood went on TV. Her message makes good television. It’s bold, memorable, compelling.
What’s your message? Persistence or prosperity?
