Valerio Baselli: Hello and welcome to Morningstar. I’m very glad to be joined today by one of the most famous names when it comes to actively managed thematic ETFs, the founder and CEO of ARK Invest, Cathie Wood.
Thank you for joining me, Cathie. In your latest report Big Ideas for 2025 you listed your strongest convictions, with artificial intelligence being probably the biggest one. When the Chinese company DeepSeek launched its much cheaper AI a couple of weeks ago, we saw a shock wave through the market. First of all, what is the lesson you learned from this, if there is one? And do you see that as a game changer for the sector?
How DeepSeek’s AI Costs Stack Up Against OpenAI and Anthropic
Cathie Wood: Yes. Well, we looked at DeepSeek’s model and learned that it is moving down the cost curve associated with this new technology at a rapid rate, but not much different from the rate at which, OpenAI and Anthropic are riding down the cost curve. So, inference models, the cost to develop them, they’re dropping 85% to 95% per year. Now, the big question with DeepSeek is $6 million, really? Is that all it cost to develop that model? Compared to ten times that or more from OpenAI and Anthropic? There’s a big question mark there, because we don’t know how much pre-training there was done before developing that model on a high-end workstation. So, the drama was really around, wait a minute, is it going to cost much less? Because AI model development is moving to the edge to high end workstations instead of cloud providers? That’s where the question marks are. And we don’t have all the answers. But in terms of the cost declines that we’re seeing both on training and inference, DeepSeek is just following that pattern.
Where to Invest in AI: Tesla, Palantir, and the Healthcare Revolution
Baselli: Fair enough. More concretely, what are the consequences on your investment strategy? Where do you see value right now across the artificial intelligence industry?
Wood: Yes. Well, we know it all started with hardware, Nvidia NVDA, TSM TSM, and we’re still involved with those in a number of our funds. But we have been evolving our portfolios in terms of weightings, towards software and what we call embodied AI. Software, more platform-as-a-service, like Palantir PLTR, embodied AI would be Tesla TSLA, moving towards autonomous mobility, which could not happen without artificial intelligence. And also, importantly, we’ve been focused on the multi-omics or genomic space, where the convergence between sequencing technologies, artificial intelligence and Crispr gene editing, that convergence is beginning to cure diseases. So, we think, while the most, while the biggest opportunity in the next 5 to 10 years from a revenue generation point of view might be autonomous mobility, the most profound applications, we think, could be in the health care space as we move towards curing disease and increasing human longevity.
The Future of EVs: Can Tesla Lead a Market Revival?
Baselli: Speaking about that, when we spoke almost a year ago, you were very bullish on electric vehicles and especially robo-taxis. Since then, we saw several car makers rethinking their commitments to EVs, as sales have in general failed to meet expectations, and also there has been a shift in policies concerning electrification of cars, for example in the US. Has your view on that changed? If so, how?
Wood: Well, electric vehicles, are facing macro headwinds, just like, internal combustion engine vehicles. So, if you look globally last year, I believe electric vehicle sales were up 12% while internal combustion engine related sales were down by 1%. And if you look at the gas-powered vehicle sector, as recently as 2019, gas-powered vehicle sales globally accounted for 92% of all sales. Today, they account for only 72% of sales. So, we do think the shift towards electric, and a bit of a jog towards hybrid, certainly here in the US, but I think that was true around the world, might be distorting the pure battery electric vehicle space. But we do think as costs associated with electric vehicles continue to fall, and we think they will, Tesla TSLA is rumored to debut a car for somewhere in the $25,000 range this year. And robo-taxis, we think, could drop to a cost of roughly $15,000 in the next couple of years. So, we think the move towards electric is still in place. Might have slowed down a little bit. But we think there’s no stopping it.
Tesla and Trump: Will Musk’s Political Role Harm Global Sales?
Baselli: You mentioned Tesla TSLA, we all know Elon Musk’s new role within the US administration. I do not want to discuss politics, but his close relationship with President Trump appears to be hurting Tesla’s car sales globally, especially in Europe, and particularly in Germany and France. Tesla is your largest holding, and you’ve been invested in it for a long time. Do you see Musk’s political involvement as a possible key risk for the company?
Wood: Well, you know, it’s interesting. Last year, the political risks were all around, in the US at least, Republicans not being interested in electric vehicles. They wanted to support the energy industry and gas-powered cars. This year, it seems, that now that Musk is in charge of DOGE, the Department of Government Efficiency, that the Democrats are not happy with that, but the Republicans are. So, I think there are puts and takes here. I think one of the other, confusing factors is, Tesla TSLA has the largest-selling car in the world, the best-selling car, the Model Y. The Model Y is now going through a major refresh cycle, much like the Model 3 did last year. And so, people like me, I was going to buy a Model Y in December. And, the Tesla showroom people said, no, wait, wait, because the Model Y refresh is going to be quite significant, so I waited. So that’s another, bit of confusion out there. There’s no doubt, that, some people will stay away from electric vehicles in the short term, perhaps for political reasons. But as the costs associated with electric vehicles continue to come down and drop well below the gas-powered vehicle prices, we think economics will win the day.
Bitcoin’s Future Under Trump
Baselli: Let’s talk crypto, now. Donald Trump promised to make the US the world capital of cryptocurrencies, and bitcoin has surged tremendously since his victory back in November. At the same time, though, we saw crypto prices falling on fears of the new tariffs. So, what do you expect from bitcoin between favorable regulation coming on one side and a possible trade war on the other?
Wood: Well, in terms of bitcoin specifically, we characterize it as three revolutions in one, and they’re all global. So, the US might want to encourage innovation around crypto asset or digital asset activity. But we do think that bitcoin is a global monetary system. It’s a new global asset class. It’s the first of its kind in a new asset class. And it is a technology, a global technology. So, no one country is going to have a lock on it. Perhaps, with the right incentives, there will be innovation around bitcoin and other digital assets. And we do think this administration here in the United States is very interested in cultivating this movement here in the United States, much like the internet.
The internet, in fact, this is just the next generation internet. This is the part of the internet that developers did not build in the early 90s because they never knew that financial services and commerce would take place on the internet. So, this is the next generation internet. And just like the first generation, it is global. There are many companies benefiting from it. I do think, some of the major ones, certainly the Mag 6 here in the United States have been some of the biggest beneficiaries. And I do think this administration wants to make sure that it- government policy, in other words- does not get in the way of innovation.
Could Lower Interest Rates Benefit ARK Innovation in 2025?
Baselli: Very interesting. Searching for disruptive innovation is the core of your investment philosophy. Your flagship fund, ARK Innovation ARKK, has been having a very good start of the year so far, while in 2024 it underperformed quite significantly the Nasdaq or even the S&P 500. What were the main headwinds you had to face last year, and what are your expectations for this year?
Wood: Sure. So, we are moving from three major headwinds to what we believe are three major tailwinds. So, the headwinds started with interest rates. While they started to come down, they didn’t come down as much as many people expected. And while we do not think that our strategies should, be held hostage to interest rates, meaning, even if you look within our own history, in 2017 and 2018, interest rates went up. We had two of our best years ever. One in an upmarket and one in a down market. So, interest rates shouldn’t be a headwind. But the way algorithms are set up these days, they assume that interest rates and our strategy, which is long duration strategy, should be inversely correlated. So that was a headwind. The second headwind was the increasing concentration of the market towards the Mag 6. Now, there is a Goldman study out there which suggests that the concentration in the markets, that the market that the markets hit at their peak concentration, we’ve never seen that kind of concentration before. Even in the Great Depression in the early 1900s, the market was less concentrated than it was towards the Mag 6 recently. That is starting to change.
That headwind is turning into a tailwind because the market is broadening out, towards smaller cap stocks as interest rates, maybe they’ve discounted, they’re just going to settle in around here, the markets just accepted that. So, it’s not as much of a headwind anymore. And then the third headwind is valuation. And valuation- our valuation- hit a peak relative to the market in 2021. And it has come down, all the way to almost a market multiple during the Yen carry trade unwind last year. So, three headwinds now are turning to tailwinds. Interest rates, they’re not going up anymore. And there’s discounting of ‘maybe they stay here for a while’. Concentration of the market? The market is broadening out. Valuation? Our valuation has spent 3 to 4 years moving back down towards a market multiple. And now we really believe that our portfolios are really, if you give us a five-year investment time horizon, deep value portfolios.
How Tech Themes Could be a Hedge Against AI Risk
Baselli: Beyond ARK Innovation, your whole range of funds provides exposure to some niche sectors as space exploration or genomics, and you’re bullish on that, you have a vision. But what about short-term risks? Can you articulate downside scenarios for some companies or themes you hold in your portfolio? And how do you manage a strong correction when it occurs, do you buy the dip?
Wood: Yes. So, we have a six-metric scoring system to help us manage the risks in the portfolio. Four of them are quantitative- quantitative meaning, they are scored from 1 to 10- and the other two, valuation and thesis risk, are somewhat different. But six metrics, that we monitor all the time. And when we feel that the risks in one or more of our stocks are increasing, we will concentrate our portfolios towards our higher-conviction names, as we are looking for other new ways to exploit some of our themes. So, the scoring system is very helpful to us. I think when people think about risk and our portfolios, true, there is volatility. We think volatility is more a function of uncertainty than risk per se.
So, five major platforms: robotics, energy storage, artificial intelligence, blockchain technology and multi-omics or genomic sequencing, all of those march to different drummers. So, they don’t all behave the same way. As more and more people begin to understand how powerful some of these themes are as different kinds of news come out. I think recently the notion that we might actually be moving towards autonomous mobility, whether it’s robo-taxis or drones, I think more and more people are beginning to understand that. They’re beginning to see it in their own lives. If they live in an area where Waymo is giving autonomous rides. So, they all move a little differently. When we think about risk, and we’re talking to advisers, for example, we’re saying: We should not be the core part of your portfolio, but we play a very important role, because if we’re right, disruptive innovation, which is volatile, is going to be a good hedge against some of the value traps that are in traditional portfolios, because many companies are going to be disrupted by truly disruptive innovation.
So that’s a bit of a long answer where many people consider our portfolios risky, we consider our portfolios to be an important hedge. And we think most asset allocators out there are short truly disruptive innovation. So, we solve that problem as well.
ARK Invest’s European Roadmap: AI, Robotics, and Healthcare ETFs
Baselli: Finally, in 2023, ARK Invest acquired Rize ETFs and officially entered the European market. Last year, you launched in Europe three actively managed ETFs which replicate strategies already available in the US for several years. What are your plans for Europe at this stage? And what are your expectations on active ETFs' adoption in Europe?
Wood: Well, our plans, and we’ve already started- I just did a roadshow through parts of Europe, and I will be there again in May- we are sensing great excitement for our strategies and our flows have started to develop momentum in Europe. We’ve crossed $100 million in the actively-managed ARK strategies. And, and we’re finding great excitement. ARKI is the artificial intelligence and robotics portfolio that is available in Europe, but not in the US interestingly, it’s the combination of two of our strategies from the US. But it is, squarely focused on this autonomous mobility opportunity. And that is really generating a lot of excitement. It is the fastest growing of the three funds.
And we’ve also noticed an interest, a deep interest, in healthcare and how healthcare might change thanks to these new technologies. So, it’s a slower-growing portfolio, ARKG, but we think that it’s eliciting a lot of attention, because what are we talking about? We’re talking about people’s own lives and human longevity and curing disease and so forth. So, it’s a vitally interesting topic. And for Italy specifically, and I know you’re based in Italy, I think of all the countries in Europe, Italy seems to me to be one of the most thematically oriented. And we’d love to find a strategic partner in Italy to help us spread the good news, about our research and our portfolios, and speak to a highly engaged audience.
Baselli: Cathie, thank you so much for your time. For Morningstar, I’m Valerio Baselli. Thanks for watching.
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