This is Bloomberg Business Week from Bloomberg Radio. I'm Jason Kelly and I'm Carol Master. Welcome to the Bloomberg Business Week Extra. It's a weekly podcast bring you an in depth interview you will not hear anywhere else. This week it's Kathy Would, CEO and ce IO of Arc Investments. So from fintech to biotech, to Tesla and more. She breaks down by what's going in the markets. Yep, it's a troublesome thing and it's worrisome and it certainly has
a human toll. But there's also when you see financial disruption, there's innovation and that means opportunities for investors well and her investors have made out very well with her calls over the past year. Is one of the top performing managers out there. Also incredibly thoughtful. She gave us a sense of the secret sauce. Check it out, so we are delighted to have back with us. Kathy Would. She's CEO at Ark Investment. They've got about eleven billion dollars
in assets under manager. She's also Chief Investment Officer. She's back in our Bloomberg Interactive Broker Studio and I have to say first of all, welcome back. I know it's I know it's a busy time and I was looking at a bunch of your funds and they're still up this year. And what's been a really tough obviously as you know already market environment and where we've seen a broad based selling um Before we talk specifics, what do you how do you assess this market environment right now? Well,
I think there clearly is a lot of fear. The VIX got up to sixty two, that's higher than it has for a number of years, So there is a lot of fear in the market. It has been stirred by the coronavirus. UH and UH. I think that a lot of whether it's hedge funds, are just managers within a negative bias having to do with debt and debt deflation, feel like this is the moment we capitulation or what well they feel like. And you can start with the
energy sector. The energy sector, much of it is highly leveraged, right and UH, and we're seeing an in plosion of oil prices now shale, the shale gas and oil movement is going to stop. And what are they going to do? How are they going to service their debts? So we're getting you know, real to rest in that in that sector. This doesn't surprise us at ARC because we've seen a lot of companies, not just an energy but in many sectors. Even Apple has done this. They've leveraged up to buy
back their shares over many years. Now. Apple is nowhere near any trouble. But the companies that were in cyclical, very cyclical areas of the market, they're going to be in trouble. So from that point of view, we agreed with the bears out there. Uh, but we're not participating in those spaces in the market. That's maybe one reason that. And I'll say until today most of our funds were up.
Today may have taken them below below positive And so Cathy, when when you come into a moment in the market like this, everybody you know likes to say, well, it's like this, And then there are other people, you know, like this other time, or it's like the financial crisis, or it's like the dot com bust or whatever. There are some people who subscribe to the this time it's different sort of narrative. What narrative do you like? What
narrative do you bring to this? Yes, well, I wrote a piece for our website, and I only write usually when the markets down and under duress, so it's on our website. And basically, as I said there, you know, I have only seen three times during my career where all the policymakers throughout the world, both monetary and fiscal are have been all on the same page. Uh. The first was in the mid eighties. The dollar had gone up fifty and we were in a deflationary at the
risk of deflation globally, especially in the emerging markets. The the Plaza A Corps is where the finance ministers came together and the monetary authorities cooperated as well. The second was oh eight o nine, and I remember after Lehman went under. I remember saying to my team, look, every policymaker in the world is focused on this problem, and they all want the same thing to happen. It's probably going to happen. And actually we started out performing in
November of that year. And then uh, this is the third time. And of course the coronavirus is what has united everyone. We we uh, we want to control that and uh, and we've got the monetary and fiscal policy makers again all on the same page. So are we going to better get them against them. I'm not. I'm not. I guess what people are saying, Well, they can't control the coronavirus. And I do think there's a lot of
hysteria out there around the coronavir virus. We're in much more of a social media, viral, networking world, and I think that's causing a lot of the hysteria. You know, as more and more people are doing their homework, they learn thirty to forty people a year in the United States die of the flu. Thirty to forty million, get it. I don't think we're going to see anything like those
numbers from the coronavirus. So then, how quickly do you think Since there, it does look like we're moving towards a much more coordinated move among global policymakers, Cathy, So when we get to that point and what we have, I keep sit talking about parameters on this virus. When we know it's contained and we understand that there will be an end to this, how quickly does everything bounce back? In your view? Well, the way we're looking at this,
this started in China. China is the leading indicator, and we know that the number of deaths now is below the number of recoveries, so that is that's the early sign of a turn. Now the fatality rate now in China is higher than we think it will be in the rest of the world. And the reason I've been in Wuhan Province. Uh, it's a chimney anyone anyone going there, whether it's smog or smoking both. Uh, it's like a chimney.
So because this coronavirus, which by the way, we have two or three other coronavirus is making the rounds annually here. Because this coronavirus is focused primarily on those with compromised lungs for whatever reason, whether it's asthma or you know, elderly lung issues, smoking caused by smoking, or i'll say vaping as well. Uh. You know, those people have to be very careful. What's so interesting is this is not
hitting the young. Now, maybe they have it and maybe they're spreading it, but they're a what doctors would call asymptomatic. So that's very interesting because that's another vulnerable part of the population. So at least we can isolate it to you know, those who are compromised when it comes to the lungs, right, I mean One of the arguments that's out there. One of the discussion points is that one of the reasons that we're seeinging this relatively quick reversal
in China is because it's an authoritarian government. You know, they're able to sort of lock it down in a way that other countries, certainly not this country that we're sitting in, can do. How much do you worry about that, understanding the world as you do. Yeah, obviously they they did all they could and and then some in terms of because when says stay home, people stay home. Yes, yes, I think, you know, I think that all of us
are taking precautions. I think one thing that I think will happen is that the traditional flu is probably not going to be as deadly or contagious because we've suddenly found all of these good hygiene habits. I mean, I'm seeing people talking about scrubbing their hands and doing the alphabet while they do it, you know, So I think I think that is also going viral, which is very good. Yeah. My favorite thing, sorry, just asn't aside, since we have
a little time. My favorite thing that I found today is there's a website. I'll tweet it out and send it to Dave Wilson already that you can put in your favorite song and it will do it. It will put the lyrics against all the different steps of watching your hands. So whether it's Stairway to Heaven or Sweet Nome, Alabama, or whatever it is, you know all the different steps that it's useful baby shark for you, very shark for me, Kathy.
What I do wonder and the conversation we keep having is what changes long term as a result of this. We've had such a I feel like a conversation of around supply chains coming off the US China trade war. You know, tech is your you know you look at disruption, you look at technology. Um you've been to like you understand this global supply chain? Does that change going forward? Well?
What now you have to consider the source. But what I'm about to say, but what is true that during times of turbulence, innovation actually gains traction and market share. And I can give you two tangible examples from O eight oh nine, we thought the world was falling apart. Tech budgets were cut by right Salesforce. Dot COM's worst quarter from a revenue growth point of view, worst was
up Amazon. Amazon's worst quarter was up four. So and in this particular crisis, we saw this sequencing of that virus, of the coronavirus COVID nineteen in two days. For Stars in two thousand three, it took I think it took five months before they could even figure out what it was. Right, we had two days and uh. And now, of course we're accelerating the timeline to trials for vaccines and then and then the scaling of vaccines. That's going to take time for sure, but I think we'll have a vaccine
for the next flu season. How do you invest in a time like this. We concentrate our portfolios toward our highest conviction names and so and towards these names generally are going to be a part of the solution. So you talk about supply chain. Three D printing has taken a long time to take off. It's been, if you
look at some other stocks, for six years. Okay. Now, remember we've talked about Tesla a lot in the past, and I always used to say, uh, you know, I look at a base like that, and that effectively is the bulls and their bears fighting each other. There's a big controversy, right, Uh, And bases either break out or they break down. In the case of Tesla, we're saying, watch out, there's a big base, this is going to be a big breakout. I would maintain the same for
three D printing stocks. Now it's a little different because the industrial sector isn't as uh, it's more methodical. It isn't as quick as break things uh in the tech world. Right. Uh So, but we do know the aerospace world, which is is going to be in a world of trouble here. They've got to cut their costs. They got to cut
their costs. And with three D printing, not only can you cut costs and they're they're printing engine parts now by you can cut cost by plus, but you're also shrinking the form factors, are lightening the weight of the planes as well, so bringing many more efficiencies. All right, just want to bring you a headline just crossing the Bloomberg Brazil stocks having their worst day in twenty one years and entering into a bear market. It's something that
we're talking about a lot. We're talking with Dave Wilson. Are stocks that are earlier about what a bear market, what that number is? Uh? Here in the United States, we're not there yet but getting close, and as Day pointed out, if we have another day like today, we will get there. Also want to bring you some headlines from stitch fix. It's a name well known to our audience. A lot of stitch fixers out there disappointing with their forecast.
UH the stock following about the after I was this third quarter revenue, Uh, their view trailing its lowest estimate. The estimate had been for five six point three million. They said it will be in the range of four sixty. That's pretty big mess. So you asked what might turn this and uh, you know, Warren Buffett uh said, just a few weeks ago, or maybe it was last week, he said, when bond yields were at two percent, He said, do you know that's the that bonds are selling for
fifty times earnings and their earnings are not going to increase. Well, think about what fifty basis points is, right, that's two hundred times earnings. Stocks are selling at seventeen times earnings, and the end on average, there's there's probably close to a two percent yield in stocks. Now, so you go back to that comparison, right, I mean, from the allocation point of view, Uh, stocks are becoming, um, you know,
very attractive. You do have to aim away from heavily leveraged companies that have not been investing in their future. They've just been buying back their own stock. You are listening to Bloomberg this week Jason Kelly Carroll Masser streaming live on YouTube as well. Still with us, Kathy would We've captured her for the better part of an hour. CEO and chief investment officer of our invest looking after
more than eleven billion dollars. So, Kathy, we just heard very much that first part of what would be a V or a you the downward part? Are we headed for a V shaped recovery here? Well, we think that that could be the biggest head fake coming out of this. Uh. And one of the reasons is if you look at consumer sentiment in spending both in the United States and China until perhaps mid February, we haven't gotten all those numbers yet. Uh. They those numbers were very strong, very firm,
and consumer confidence was very high. In the United States especially, the consumer confidence was very high. Uh. And so consumer we're spending was was it was carrying on while businesses we're cutting back. They were they were worried about the China trade conflict, they were worried about the inverted deal curve. Last year they were there, they were negative from a sentiment point of view, they were turning quite negative, and so you had to disconnect consumption up and purchasing managers
indexes around the world plunging. So we had been saying, well, okay, if the consumer keeps spending, businesses are going to have to have to start investing again, both in inventories and capital spending, uh to meet that demand. Right, otherwise they'll just lose business and they'll lose out competitively. Now we've had this crisis, and I believe that the reaction of businesses is even more dire than it is for consumers.
If you think about consumers, they're hoarding, right. So so maybe consumers spending in some respects has gotten a booster here and we'll give way a little bit. But the inventories have to be depleting rapidly, and we know capital spending has gone nowhere in the last years except perhaps down. UH. So you know, you've had the largest part of the
US economy moving forward and the business sector not playing ball. Uh. This will cause an interruption but I think if we're right and this is going to pass, We've got spring coming, and viruses don't like spring. Uh. If this is going to pass, and the and the fatality rate is nowhere near China's. In other words, we do start comparing this more not completely to the traditional flu. Uh, then I think the turn could be a very sharp v as
businesses scramble to catch up. Pretty dramatic. Yes, all right, So I am curious then, because I know you know you you invest in these various disruptive spaces, and I do wonder, um, one of your funds is the genomic revolution? Is is there a healthcare? Is there a genomic play here for you? Because of the virus? Sure sequencing? So illumina? Uh? Do you have owned for a long time? We've owned it for a long time. It's been flagging recently. We
understand why it has um there. They've launched a new product cycle and we think that's going to get it going again. But hearing news about the virus being sequenced in just two days, uh, and then we have to keep sequencing it because we need to know if it's mutating our right, So sequencing is critical. There have been a number of vaccine we did own, or we do own an Ovo, which has tripled, quadrupled now today it
had a hit because Citron went after it. But you know, some of the vaccine UH makers are are benefiting nicely. Our Tourists is another one that has benefited. That is benefiting for the same reason, and pugen is UH is benefiting from for a different reason. It has not sold off at all, and that's because it has identified more targets from an immunotherapy point of view cancer immunotherapy than almost any other company. And it's just a very small
company out of Israel. So it's held in very nicely, I have to say, and I looked at these numbers. I think it was either around noon or one that fund is up twelve point four percent this year, so in a market back gave back a lot today. But I'm just saying, in a market environment where you can't
really find any cover, you're still holding out of some game. Again, this is innovation gaining traction during difficult times because businesses and consumers are willing to think about doing things differently when they're afraid. Cathy Woods, CEO CIO of archivest here with us in our new York studio. So what's the mood like in your shop right now? Okay, Well, we have been through these ups and downs, risk on, risk off since we started in two thousand and fourteen, more
than I ever have experienced in my career. And uh, the mantra in our at ARC is innovation gains traction during tumultuous times. So let's let's let's pick concentrate our portfolios towards those companies that are going to help solve these problems. And that's what we do. So it's I won't say it's exciting because we never like to see the market going down. But you know, the other thing that we do is sometimes we lose confidence in some
stocks relative to others. This is a nice time to do some house cleaning, and what we do is generate losses that we can take games against in the future. So so you are cleaning out some names at this point. Yeah, we we have taken down some names. Yes, we have. We've sold names. Like you know, I always forget the ones we're so but out of sight, but by do is is one of them, mostly in in our Autonomous
Technology and Robotics fund. We just don't we see a lot of disarray in the electric vehicle and autonomous vehicle space in China, and that's why, primarily why we owned that one, and so uh yeah, we we bought more more Tesla, of course, uh Tesla. Tesla one might think might be hurt by lower oil prices because of course
internal commission. But we think that even with oil prices coming down, that the total cost of ownership of an electric vehicle today is lower than that of a gas powered car, and it's only going to get lower still with us Kathy Wood, CEO, and see io at our investment in our Bloomberg Interactive Broker studio, they have over eleven billion dollars in assets under management. So I'm gonna go through some names with you. We didn't. We did
cheat a little bit about Tesla. You and I, Jason, we've all talked with you a lot about your position in Tesla. You're still very much a ball on it. Yeah, And we got some new information last week from g M. It had its Electric Vehicle Day and we took some of the specs they threw out there. They weren't too generous, but what with what we got, we were able to confirm that Tesla is three years ahead of GM on certainly battery technology. Uh. They also we're talking a lot
about cobalt reducing that in the battery. Tesla's already there. So you know, it was very interesting illuminating. Yes, it's a big gap, and Tesla's good. Three years from now will be in a completely different place. Did that did three years surprise you? Did you think they have been We had no, no, no, no, we we had been saying three to four years when it comes to autonomous vehicles and artificial intelligence chips than most automakers are four
years behind Tesla. We believe Kathy is GM the one though to fault, Like I wonder is it more like Mercedes or one of the years? Like who is the automaker that's maybe potentially closer to nipping at Tesla's heel in interesting uh. Elon Musk has said he he would not take any manufacturer seriously until they vertically integrated and build out their own battery plant. Volkswagen's doing that, interestingly.
Now they're having a heap of trouble with their software though, and so so you know, this is a completely different dynamic from traditional auto manufacturing. So they have mountains to climb right, and uh, we think it's going to be a very tough lift for them. Way Mo is the one most people would point to. Very interesting Google now
is using outside funding for Waymo. They don't want to put all, you know, their investment dollars into these moon shots, and we're wondering if they're getting ready to spin it. We have no idea, but they've certainly distanced themselves to some extent. They don't want to, uh to take all the risk, uh when it comes to the autonomous vehicle fronds. So talk to us about the last year eighteen months,
especially when it comes to Tesla. Not always easy to be to be a bull, certainly amid all of the you know, we talked a lot about narratives today, amid all the loud narratives, especially from the Bears, that obviously is quite a down a lot over the past six months. Because but do you ever have any moments of doubt
on that one? So I'm probably the most trolled portfolio manager on Twitter because of Twitter and bitcoin and uh no, actually, um, a Wall Street Journal reporter on Twitter, I didn't even know it was a reporter said, so, Cathy, would how do you feel losing all your your clients all this money in Tesla. This was April May of last year when it was in the one nineties one eighties, and I didn't know who, And I rarely respond to those things. I said, I don't feel any regret or doubt in
the least. In fact, our conviction has gone up during down times for stocks. We double down on our soul searching. Of course, that's when some of our most interesting insights occur again because we're digging deeper and deeper. Uh so we we actually our conviction in Tesla increase during that downturn. Do you sell the like at all? When like it? Because I thought I looked at as at the end of last year that you guys had paired back a
little bit. Well, if you look at the page on Bloomberg you would see that, but we have it has stayed our top position in the flagship funds. So it would have been a twenty five percent position. We've kept it at ten percent. So we did sell a lot, But that's what a portfolio manager does when a stock quadruples, quintuples and other stocks are down thirt you know that's what we do. So take us inside the room. What does that soul searching look like at ARC? I mean,
are you sitting around the table like what? What? What is it? So we have morning meetings every morning and so we will be getting news from At that time, it was all the bears and you know, so then we kept looking at the bond market, and the bond market actually got this right before the stock title did. Uh, so that became, uh, you know, a daily conversation. We have brainstorms every Friday from ten thirty to twelve thirty. If you'd ever like to join, you'd be more than welcome.
It's open. People can video in and they do. And uh, we are as hard on ourselves as you you could imagine because it's all analysts coming at this from different directions. So James Wang is our artificial intelligence analysts who has been instrumental to our understanding of how far ahead Tesla
is with its AI chip. But we've got our genomics team. Uh, they know the brain, that's what neural networks are modeled after, and so they will they will join in the conversation and it's it's no, it's very respectful, it's very methodical. It's not in emotional, it's uh, it's we're seeking the truth, you know. And and the motto I always use is truth wins out. It always does. So okay, So a
couple of minutes left. Is there a new investment idea that you guys have been looking at, or new disruptive technology that's not on everybody's radar that you think it should be. Well, we do think that the digital wallet space is underappreciated for what it is. We think it's going to be very disruptive to banks. So Venmore, you know, Venmo Paypals, Venmo Squares, cash app, which we think is actually growing much faster than Venmo now because of some
really brilliant marketing strategies. Uh, they're the number of digital users at each of those companies is higher than at JP Morgan and JP Morgan as a digital strategy and they're going and there. And the reason is the cost of customer acquisition for these viral networking services is about twenty dollars for a bank to get a new checking account or credit card card customer. That's anywhere from dollars to two thousand dollars because of all the overhead and safes.
This is bricks and mortar and so forth. So that's one thing, and you know the other differences. You know, the the the amount of data that Square and Venmo have on their user base is unlike anything a bank could hope to have. And it's real time. It's real time. They know exactly how much they can loan these merchants, uh and ultimately consumers. You know how much working capital they might need. Oh, maybe you need to payroll service. They're gonna they're gonna be full service and the banks
aren't going to know what hit them. They aren't. And that was Kathy Wood, the CEO and ce IO of ARC Investment, A great conversation. You've been listening to Bloomberg Business Week ext be sure to tune into Bloomberg Business Week Radio Live Monday through Friday at two pm Wall Street Time. I'm Bloomberg Radio. I'm Carol Masser and I'm Jason Kelly. This is Bloomberg