Cathie Wood stays the course as Ark Innovation loses a fifth of its value: 'Truth will win out'

Published Fri, Dec 17 202112:58 PM ESTUpdated Fri, Dec 17 20214:22 PM EST

Closely-followed innovation investor Cathie Wood has a message for investors who may be concerned about her fund's underperformance this year: "Don't drift from your style. Just keep your eye on the prize. Truth will win out." The founder, CEO and chief investment officer of Ark Invest, made these comments Tuesday during a company webinar. Wood also let the virtual meeting with her shareholders run long for extra questions, repeating "we are here for you." Her flagship exchange-traded fund Ark Innovation — which trades under ticker ARKK — is down 21.9% in 2021. The fund has been pressured by major losses in names like Teladoc Health , Zoom Video and Exact Sciences . The innovation fund sits about 40% below its 52-week high reached in February. Ark Innovation's 2021 performance is a stark reversal from the banner year Wood had in 2020, when the same fund rallied nearly 150%, as the pandemic accelerated innovation trends. The fund centers around ″disruptive innovation," or technology that will change the way the world works. Ark invests in stocks that touch one or more of the following innovation platforms: DNA sequencing, robotics, energy storage, artificial intelligence and blockchain technology. Wood said these five technologies are ready for "prime time" after the "seeds were planted for them during the tech and telecom bubble." Now that they have had roughly two decades to gestate and costs have come down, Wood thinks they will change the world order. Despite Ark Innovation's lackluster performance of year, the fund has seen more than $4.8 billion in inflows in 2021, according to FactSet. This is down from 2020's roughly $8 billion in inflows, when Ark Innovation became the largest actively managed ETF. The depreciation in Wood's stocks from mid-February has not changed Ark's forecast, however. Wood said she is just getting her highest-conviction stocks at lower prices. This should result in a quadrupling over the next five years, she said. The compound annual rate of return expected over the next five years for Ark Innovation rose from 15% in February, at the fund's high, to 40%. "We have the best research on innovation in the world and I know the returns that we will generate for our clients over the next five years, if our research is right, are going to spectacular," Wood said. Top holdings Wood has doubled down on the stocks she is the most confident in — like Roku , Unity Software and Twilio — and consolidated Ark Innovation to about 44 holdings this year. "We're not afraid to be concentrated," Wood said. "What we do during corrections like the one we've been in for the last nine months is we concentrate our portfolio to our highest conviction names, while other investment teams typically are diversifying to get closer to their benchmarks." Take a look at Ark Innovation's top ten holdings and their year-to-date performance. Ark Innovation would be far deeper in the red this year if it weren't for Tesla's 32.1% rally. Tesla is the fund's largest holding, accounting for more than 8% of the ETF. Wood, a longtime Tesla bull, was taking profits in the electric car marker in the second half of 2021. However, the investor clarified this was simply for liquidity to buy shares of high conviction stocks that were beaten down this year. "Our conviction in Tesla is as high as its ever been," Wood said during an Economic Club of New York webinar on Monday. "Tesla's next big move is autonomous technology, full self-driving cars," Wood said. "We think that Tesla will get the lions share of that market in the United States." Shopify , which is up about 17% this year, is the only other stock in the fund's 10-largest holdings that is higher for the year. Zoom Video, the fourth-largest Ark Innovation holding, has lost more than 40% this year. Yet Wood is bullish on the video-conferencing stock that grew in popularity during the work-from-home shift. "We are not going back to the past," Wood said. "Once you find ways to do things better, cheaper, faster, more creatively, more productively, why are you going to go back? That makes no sense." "So it's been amusing to me to listen to this stay-at-home narrative out there," Wood said, referencing individuals that say the pandemic-related stocks are dead. Best and worst performers of 2021 The best-performing stock this year in Wood's ETF is Roblox, which went public via direct listing in March. The video game company's stock has more than doubled in 2021. Roblox was founded in 2006 and is best-known for providing entertainment to children. The company doubled its revenue in the third quarter. Intellia Therapeutics , 3D Systems , Trimble , Stratasys , Iridium Communications and 10x Genomics are the other top performers. On the other hand, Berkeley Lights is the worst performing stock in Ark Innovation. That name is down about 80% this year. Take a look at the other worst-performing stocks in the fund for 2021. Proto Labs , Compugen , Invitae , Iovance Biotherapeutics , Materialise , Skillz , Editas Medicine , Teladoc and Crispr Therapeutics are the other big losers this year. One stock that doesn't appear on either list is digital real estate platform company Zillow. ARK Innovation sold all of its shares of Zillow this fall, calling it the "poster child" for "mistakes" in 2021. Wood said she was too trusting of Zillow founder Richard Barton, who said he had the digital real estate world figured out. "It was relying on someone that delivered the goods in the past and seemed to have been waiting for this moment in time, but hadn't thought it through clearly enough," she said. Wood's 2022 call: 'An innovation age' Wood has a controversial call for 2022. The prevailing wisdom on Wall Street is that the economy is facing an inflation problem. The Federal Reserve announced this week an acceleration of the tapering of its bond buying program, which was put in place during the pandemic to prop of the economy. The central bank also sees at least three interest rate hikes next year. In her contrarian nature, Wood expects deflation to grip the economy in 2022 amid a breakdown in commodity prices, a failure of companies that fell behind innovation, company stockpiling and innovation trends taking off. "We are experiencing today, the biggest uplift in innovation, an innovation age that likes of which we have not seen before," Wood said. Ark Invest's other ETFs are also suffering this year. The Ark Next Generation Internet ETF is down about 17% in 2021. The Ark Genomic Revolution and Ark Fintech Innovation ETFs have lost 31.4% and 18.8%, respectively, this year. Meanwhile, the Ark Autonomous Technology and Robotics ETF is down slightly in 2021.

Catherine Wood, chief executive officer of ARK Investment Management LLC, speaks during the Milken Institute Global Conference in Beverly Hills, California, on Monday, Oct. 18, 2021.

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