Peter Brooke
Good day. I'm Peter Brooke, a Portfolio Manager at the Old Mutual Investment Group. This is Macro Perspective 10 of 2021.
And we're going to talk about ARK ETFs, that is ARK with a K. ARK has been a phenomenal success story, growing from a little $500 million business four years ago to having more than $50 billion of assets under management recently. Just to put that in context, at a fee of 75 basis points, that means more than 350 million of annual revenues, making it wildly profitable.
Cathie Wood, the CEO and CIO, drove this success by focusing on active ETFs. This is a clever strategy using the ease of trading and simplicity of an ETF. But instead of passively tracking an index, she very actively picked shares. All of these shares are focused on disruption, the winners of new technologies and automation genomics, FinTech, and the internet. This is a great area to invest in. And as world central banks pump liquidity into markets due to COVID, and we saw the surge of new retail buyers enter the market, ARK caught the wave and money flooded in.
The best example of how these events overlapped was when Tesla bought Bitcoin. Tesla is the biggest holding in the ARK funds, and ARK was one of the early pioneers of investing into Bitcoin. This is like hitting two jackpots in a row. As the fund returns soared, more money poured in, allowing them to buy more shares in the companies they liked, driving prices higher, creating a virtuous circle. So far, so good. But can you have too much of a good thing? From my varsity days, I can definitely say that it's true of alcohol.
One of the reasons I followed this story is huge success and huge failures, particularly in the public eye, are often the signposts of a turn and trend in markets. The speed of ARK's ascent is a worry sign, and a virtuous circle can be replaced by a vicious circle. In fact, Cathie Wood had an interview published in the Financial Times on the 11th of February, where she dismissed bubble talk and Tesla doubters. The next day was the recent high price in her ARK Innovation Fund, which has fallen 30% since then.
To be fair, I've tracked these signposts and wrote a note to myself about Tesla in September last year, saying it looked like euphoria. That was at $475 a share. It recently hit a high of more than $880 a share. So, these signposts can be early. Even at $600 a share, which is where Tesla is trading today, it is on 20 times sales. It might be a great business, but that doesn't always make a great investment.
Cisco, which is the poster child of the last tech bubble, peaked at 31 time sales, exactly where Tesla was three weeks ago. Cisco is still a great business, producing lots of useful product and has done really well since then. But its share price is roughly half of its peak 20 years ago.
So, what does this mean for you? Firstly, disruption is a theme and ARK was right to focus on it. We have no problem with ETFs. They're a great tool and we use them in building solutions. Many of the companies that ARK invests in are amazing businesses, which will have a profound impact on the future. But I would not buy ARK ETFs at the moment. Some signposts are looking ominous for the big winners over the last decade. And we have managed this risk by tilting away from the US to the rest of the world, away from growth to value. And we've even added some money to South Africa, which I would say is pretty much the opposite of innovation.
I hope you enjoyed this perspective. Until next week.