ARK’s Cathie Wood on Tesla, AI, and Bitcoin

Valerio Baselli: Hello, and welcome to Morningstar. This week we are all about thematic investing, and I’m very glad to be joined today by one of the most famous thematic investors, the founder and CEO of ARK Invest, Cathie Wood.

Cathie, first of all, thank you for joining me. Let’s start with a general question. Thematic investing was one of the biggest winners in the postpandemic recovery period, but it has struggled in the following market downturn. We even saw record outflows from the thematic strategies last year, for example. Now, of course, AI is back on the trend, but overall, what do you expect from thematic investing in 2024?

Cathie Wood: Well, Valerio, if we are correct that interest rates have peaked globally, they’re already starting to come down in the rest of the world. The US will lag just as it did on the way up. We think that’s going to be a very good environment for thematic investing. Last year, it was a very good year on balance for thematic investing, but we’re seeing some seesaws as fears about inflation and interest rates continue. We think they will resolve toward lower interest rates and much lower-than-expected inflation. Great for thematic.

Baselli: Of course, artificial intelligence is the big story. Speaking of AI, you’ve been investing in it for years. Now that it has become mainstream, let’s say, can we still consider it a disruptive innovation?

Wood: Yes, actually, it has just begun in terms of its impact on enterprises and consumers. Right now, we feel we’re in the equivalent of the early ‘90s when it came to the internet. We had just begun, and we had miles to go. In fact, we’re still learning how powerful the internet is. That is where we are with artificial intelligence today. I also think what is not appreciated is how big a catalyst AI is going to be to all kinds of innovation around robotics, energy storage, blockchain technology, multiomic sequencing. It’s a huge catalyst, and it’s barely begun.

Baselli: In your latest research paper, “Big Ideas 2024,” you listed your strongest convictions. Among them, you mentioned robotics, AI, bitcoin, and also electric vehicles. You anticipate that EV sales will grow from roughly 10 million units in 2023 globally to 74 million in 2030, which is a lot, frankly, and which today I think is a very contrarian view given the increasing unpopularity of electric vehicles worldwide. Why are you so positive about that?

Wood: Well, we believe that one of the issues, range and range anxiety, is going to change as range increases. But more important, we see electric vehicle prices dropping into the $20,000 to $25,000 range within the next five to 10 years. And if you look at price points historically, you adjust for inflation, you look at price points at which auto sales really take off, model by model. It is around that $25,000 to $30,000 range. And so we believe that electric vehicles will scale to roughly 70% of the market by that time, and price will be the biggest reason.

Baselli: Right. In a few days, there will be the long-awaited bitcoin halving. You have been one of the early adopters of bitcoin. What do you expect from it?

Wood: Well, I think there has been some anticipation about the impact of halving. Typically, after halving, and this time we’re going from a 1.9% increase in supply per year to a 0.9% increase in supply per year, and that’s below the long-term average of gold supply growth if you look very long term. So, it’s an important milestone and really highlights the rules-based monetary system that bitcoin represents. While there may have been some anticipatory moves, we think that, just like in the other halvings, it will generate more significant publicity this year because more people understand it now that institutions are getting involved, and therefore we think the result will be much like it’s been in the past, which is solid appreciation going forward, not without volatility, but solid appreciation.

Baselli: Absolutely. More broadly, searching for disruptive innovation is the core of your investment philosophy. Your flagship fund, ARK Innovation ARKK, provides exposure to some niche sectors as space exploration or genomics, and I guess you’re very bullish on that, but what about the risks? Can you articulate downside scenarios for some companies or themes you hold in your portfolio, and how do you manage a stronger correction?

Wood: The biggest risk we faced, we think has passed, and that was the impact of monetary shock, interest rates going up 24-fold within a little more than a year’s time. We think that innovation and thematic-based strategies paid their dues while that was taking place. It was a very severe correction. We think we’re on the other side of that. If we’re wrong, what we do during a downturn is we concentrate our holdings toward our highest-conviction names, as we did during ‘21 and ‘22. After last year’s run, we began to diversify more. Our portfolios are a diversified exposure to innovation compared to what you would find in traditional benchmarks, and therefore the volatility is higher. But if we’re right and we’re moving into these themes, onto these platforms in their early days, based on the convergence between and among the technologies that we’re analyzing, the growth rate should be longer term, what we call super exponential, rapid growth accelerating as artificial intelligence really catalyzes or accelerates the pace of innovation.

Baselli: Very interesting. At the same time, we know that investing in disruptive innovation could be beneficial in terms of the diversification of the portfolio. Of course, there are several possible strategies to do that. How do you suggest investors choose between them, and how do you envision their use within investors’ portfolios?

Wood: I think very importantly, research on how these technologies are going to evolve is critical. You’ll see many strategies will put anything that has the word “artificial intelligence” into a portfolio, anything in the prospectus, let’s say. That’s one way of doing it. But we are much more focused on who’s going to take the lion’s share of this market. And it’s a winner-take-most market in many cases. The most interesting one to us, and probably the one that will scale enormously during the next five to 10 years, is robotaxis, or autonomous taxi platforms. That’s the convergence among robotics, autonomous vehicles are robots; energy storage, they will be electric because costs are coming down with this new technology; and artificial intelligence. They’ll be powered by AI. We believe that that entire opportunity is going to generate revenue of $8 trillion to $10 trillion in 2030, half of which will go to platforms like Tesla TSLA. Tesla is the biggest artificial intelligence project in the world, we believe, as it moves toward this goal of autonomous taxi networks.

Baselli: Well, that’s very interesting. Finally, last year, Ark Invest acquired Rize ETFs and officially entered into the European market. What are your plans for Europe at this stage? And what are your expectations on active ETF adoption in Europe? As you know, active ETFs are sort of a new thing for European investors.

Wood: Yes. Well, we started here in 2014, and it was the same thing. Active equity ETFs barely had begun. I think Europe is a little more advanced than the US was at that time, and it has the US example to see how successful this wrapper has been in terms of these thematic portfolios. So, what’s interesting about Europe, and it’s country by country, of course, but certain countries in Europe are extremely interested in thematic. I would say all are interested, but I would say your own country, Italy, from my experience, is intensively interested in thematic and where the world is likely to go. That’s a very good thing for our strategies. And I know because of regulatory constraints, we can’t say too much right now, but stay tuned, in the very near future, I think we’ll be able to showcase the three portfolios that we are evolving and actually launching in the not-too-distant future.

Baselli: Well, Cathie, thank you so much for your time, and I can confirm about Italy, by the way. For Morningstar, I’m Valerio Baselli. Thanks for watching.