1 Comment 1 Commentby Jenni McManus
Renato Leggi, client portfolio manager at Florida-based Ark Invest, told a webinar last week aimed at Kiwi clients that while tech stocks are being punished by the market, the environment is “starkly different” from the tech and telecom boom and bust of 1999-2003.
The biggest difference this time around is that many tech stocks, including some in Ark’s portfolio, have strong revenues.
But investors seem not to have read the memo and have fled to broad-based indices and defensive stocks. Many of these new tech companies are now trading at valuations and stock prices that are below pre-pandemic levels.
Ark has been hammered hard. At its peak, on 31 January 2021, units in the Ark Disruptive Innovation fund were trading at US$159.70. Their most recent trade was at US$45.41. The fund more than doubled in size from its inception on 30 September 2019 to its peak, then slumped sharply, halving in value.
As its name suggests, the fund is focused solely on disruptive innovation, with investments in businesses on five different platforms: DNA sequencing, blockchain technology, artificial intelligence, energy storage and robotics. New Zealanders can invest via a PIE fund administered by NikkoAM which has a strategic partnership with Ark.
Leggi says the revenue growth in some of the companies on Ark’s platforms are in the region of 50% to 60%. However, fears of inflation and high interest rates have focused investors on safety and short-term growth.
Ark’s outlook is longer-term – 5+ years. And Leggi says many of the technologies developed by companies in Ark’s portfolio were adopted during the pandemic – for example, one in every four American adults has used Teladoc (the biggest global digital healthcare platform), governments globally are increasingly turning their attention to EVs (Ark holds 8.51% of Tesla) and Zoom (another Ark stock) has become a household name.
But the market is now associating innovation with the tech and telecom bust of 2000, Leggi says. “We think we’re nowhere near that type of environment. These technologies [and] these companies are here to stay, and they continue to gain adoption.
“We think that those five innovation platforms that we’re investing in could be worth – if you look at the underlying companies associated with them - US$210 trillion by 2030. To put that number into perspective, the global equity market cap is [now] roughly about US$100 trillion.”
There are obviously a large number of assumptions in here. But Leggi believes investors who are piling into “value” companies run the risk that these traditional industries will be disrupted in the next few years by the type of companies in Ark’s portfolio. He mentions traditional energy businesses, fossil-fuel-based industries, big banks and big pharma.
“Our job at Ark is to provide clients with the exposure to these breakthrough technologies and what we believe will be the best companies associated with the key enablers and beneficiaries of these underlying technologies,” he says.
In short, Ark is looking for the next group of FAANG stocks: Facebook (now Meta), Apple, Amazon, Netflix, and Google, so it can provide clients with that exposure. The FAANGs are no longer disrupters, he says, and are at risk of being disrupted themselves.
The Ark Disruptive Innovation fund is a highly volatile investment – NikkoAM places it in its highest category (seven) for volatility risk – but Leggi says Ark has taken action to dampen volatility over the past few months and reposition the fund to take advantage of opportunities when the market recovers in the coming year.
At peak performance, there were 58 companies in the fund. That has been reduced to 40. Some positions have been exited but Ark has also added a few companies that Leggi says have been “disproportionately punished” over the past 15 months.
“We don’t know if we’ve bottomed,” he says. “But it feels as if we are bottoming out or getting very close, based on what we’re seeing in the macro-economic environment.” Signals from the US bond market suggest inflation will not be prolonged (10-year Treasury bonds are trading at 2.7%) and Leggi says he believes inflation has peaked.
Ark, however, “mis-assessed” the duration of pandemic supply chain issues, exacerbated by the war in Ukraine. He attributes Ark’s “dramatic under-performance” to a combination of inflation concerns and rising interest rates.
However, Leggi says investors who are flooding into what they believe are defensive stocks could be more at risk than they think.
“One of the main risks that investors are not particularly focused on is that the exposure to the underlying companies held in these indices is fairly concentrated.”
For example, the FAANGs and Microsoft make up about 43% of the Nasdaq 100. That overlaps with the S&P 500 index which has a 20% exposure to those stocks.
“So, investors are crowding into these now-considered defensive names that were once the disrupters, but disrupters can be disrupted themselves.
“This latest earnings season has made this clear. Meta and Netflix are no longer the disrupters and are no longer safe companies to potentially invest in.” Other businesses like Tik Tok and Roku are starting to disrupt these larger tech-oriented companies, he says.
“If we’re right about inflation and interest rates, that would likely give way to a shift away from value in favour of growth. In a recessionary environment, growth will be scarce, but we believe these innovative companies will provide double-digit growth opportunities.”
The top 10 companies in the Ark Disruptive Innovation fund are Tesla, Zoom, Roku, Square, Coinbase, Exact Science, Unity Software, Teladoc, Twilio and Crispr Therapeutics.
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