ARK Invest’s Cathie Wood on performance, Nvidia and China

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The US investor, and manager of the ARK Innovation ETF A USD Acc GBP (LSE:ARCK), talks about criticisms of her investment performance, the prospects for the Chinese market and why she’s not more heavily focused on NVIDIA Corp (NASDAQ:NVDA).

She also deals with questions about the psychology of investing in volatile times.

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Dave Baxter, senior fund content specialist at interactive investor: Hello and welcome back to our Insider Interviewseries. I’m Dave Baxter and joining me today from the US is very special guest in the form of ARK Invest’s Cathie Wood.

We’re now going to go through some questions put to us by ii customers via our social trading network, ii Community. They’ve had lots of burning questions, lots of interesting themes to raise with you.

The first one is – you can’t get away from it – artificial intelligence (AI). One customer has basically said that it is driving rapid innovation across multiple different industries. However, in that context, how is Ark assessing which AI-focused companies do actually have those real defensible, long-term competitive advantages versus those names which are overhyped or depend on short-lived breakthroughs?

Cathie Wood, founder of ARK Invest: OK. Well, every stock in our portfolio is there because of AI. Now, you’ll notice that many of the very well-recognised AI stocks we own are much lower positions than, let’s say, in the broad-based benchmarks or in most portfolios. Nvidia would be one of them.

Our largest position is Tesla Inc (NASDAQ:TSLA), we think that’s the largest AI project on Earth. We’re in print at a $2,600 price target by the end of ’29. And that, of course, is well above where it is in the 400 to 450 range right now. So, a very big opportunity.

And, as Tesla launches more and more cities with robotaxis, and more and more analysts do the modelling around those launches, we believe they are going to come to the same conclusion.

Another name in our portfolio that is somewhat controversial but is probably the biggest software opportunity in AI is Palantir Technologies Inc Ordinary Shares - Class A (NASDAQ:PLTR). Palantir really defines the platform-as-a-service opportunity, and we think this is going to take share from software-as-a-service and other applications out there.

The problem is it would be at the top, right at the top with Tesla, except its valuation has soared. And while we still believe it will be able to deliver a minimum 15% compound annual rate of return over time, it is high multiple, so in corrections, we’d probably want to buy more as opposed to buying any today.

Dave Baxter: Speaking of high multiples and a name you’ve already mentioned that is all many people can talk about, why don’t you hold more Nvidia? It’s driven such big gains and it is still in many quarters seen as the AI poster child.

Cathie Wood: Nvidia is an incredible company. We put it in our portfolios when, on this basis, it was about 40 cents in 2014 when we launched the firm, because we understood that it was going to benefit enormously from autonomous mobility broadly – and AI generally.

So, we think that now that everybody really does understand how well placed it is, there is going to be more of a focus on competition. Advanced Micro Devices Inc (NASDAQ:AMD) actually has been a better stock this year. We have a bigger position in that, in AMD, than in Nvidia.

Just recently, Meta Platforms Inc Class A (NASDAQ:META) announced that it was going to start using Google’s [tensor processing units] TPUs, which compete against Nvidia’s chips. Now, one of the reasons that’s happening is Nvidia’s gross margin, its guidance, is in the 75% range. Meta Platforms’ margins are high, but they are falling. So, I think Meta is reacting to that because it needs to invest so much to capitalise on the future opportunities associated with AI.

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Dave Baxter: OK, let’s talk about China next. Chinese equities have had this really phenomenal rebound in the last year or so, and it is being seen as more of a force in the AI space. But it’s only a minimal allocation in your flagship fund. So, what would persuade you to invest more there? And are there any other markets that are standing out that may make more of an appearance in your portfolios?

Cathie Wood: We pulled out of China completely, having weighted it roughly 20% in late ’20, early ’21. And then it went through a phase called ‘common prosperity’, which was all about ‘cut your margins so that we can give people in rural areas access to these new technologies’. So, that lasted for a couple of years.

Then about two years ago, President Xi Jinping, started using the expression ‘new productive forces’, which got our attention because it seemed to be pointing to technology as a major focus and growth area. But having been through the ‘common prosperity’, Jack Ma being banished, online education being nationalised, gaming being cut back, we were a bit wary. Talk is cheap.

But very recently, something has happened. President Xi Jinping has talked about ‘anti-involution’. And what he’s saying is, we’re still very interested and focused on technology but in talking to the Chinese companies themselves, he’s saying, wait a minute, BYD, you are beginning to kill not only the competition in the rest-of-the-world EVs, but also our own EV champions. Let’s be a little bit more rational from a pricing point of view.

OK, now China has our attention and, as you say, they are making great strides in AI. Alibaba Group Holding Ltd ADR (NYSE:BABA) and Baidu Inc ADR (NASDAQ:BIDU) are two of the positions we have. Alibaba for its cloud and AI expertise, and Baidu for its autonomous taxis. And stay tuned. If the rhetoric and the narrative continues and there is some rational pricing developing instead of the commoditisation of everything, we will become more interested. But this is fairly recent, this anti-involution comment. And we just want to see it play out.

Dave Baxter: Is there any other kind of market that is on your watchlist in that respect as well?

Cathie Wood: Well, you know, in Europe, believe it or not, there are champions of innovation in the chip space or the semiconductor-related space. ASML Holding NV (EURONEXT:ASML) owns the EV market that has got us to two nanometre geometries. So, we’re focused, we do not own that one right now, but that is one.

We do own Spotify Technology SA (NYSE:SPOT), that’s a Swedish company, andAdyen NV (EURONEXT:ADYEN). CRISPR Therapeutics AG (NASDAQ:CRSP) is technically headquartered in Switzerland. Now, a lot of its operations are in the US, but it is a Swiss company, and that is one of our larger holdings. It’s in our top five.

And we do have private portfolios, so we have more European companies there because we are seeing start-ups evolve in Europe that are very interesting, especially around the defence tech space, given Europe’s collective decision to increase defence as a share of GDP.

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Dave Baxter: I mentioned that we’ve canvased our Community members for questions and thoughts on your portfolios. Some members are quite big fans, but some are quite critical of the undeniable volatility that your funds have seen in the last five years or so. And some have cited Morningstar’s criticism of Ark as being a great wealth destroyer. How do you tackle that criticism?

Cathie Wood: So, one of our answers is that the returns we’ve delivered since inception, which are, for our flagship fund – and it’s the US flagship fund – that number is in the 14-to-15% range at a compound annual rate, since inception. And I think, we have, we’re a little bit above the S&P, not above the Nasdaq. On a three-year basis, we’ve trounced both of them, so I think endpoint sensitivity is very important.

From a five-year point of view, we have lagged badly. Why is that? Well, we boomed during 2020; we were up 150%. Too far, too fast. Even at the end of that we were saying, keep some powder dry as it related to our own strategies. And we experienced the other side of that afterwards. I think we’re through that. I actually don’t think that will ever happen again, that kind of volatility, because while we might have a pandemic again, we will not see governments throwing money at a pandemic the way they did that last one, because it has created all kinds of problems.

The other thing I’ll say about volatility, in particular: volatility is not a measure of risk; it is a measure of uncertainty. And because we do such deep research into our technologies, our certainty is obviously higher than the average investor’s, and our willingness to tolerate the volatility associated with other investors’ uncertainty is higher.

And so, as I always say to our team, we have a five-year investment time horizon. And, you know, keep your eye on the prize, because we think we are in prime time now for the technologies that we’ve been researching for the last 10 years and more.

Dave Baxter: So, let’s talk about another form of ups and downs: emotions. Investing can be an inherently emotional affair, especially when you’re dealing with some of these racy, exciting areas that are very up and down. One member asks, how much do you factor things like behavioural finance into a process alongside things like quant analysis, and what form does that actually take?

Cathie Wood: Yes, that’s a very good question. I think many people are surprised to learn that Ark is a liquidity provider. And what that means is we don’t chase momentum. We sell into sharp appreciations and we buy into sharp depreciations of various stocks.

During bear markets, we will concentrate our holdings towards our highest-conviction names, which from a behavioural psychology point of view, what we’re doing is selling those stocks where we have some doubts in a bear market where everything’s getting crushed, and moving into those which score more highly according to our bottom-up scoring system.

The opposite of that is during bull markets, when a lot of names race and everybody gets very excited about the stocks in which we’ve been invested for a very long time. We will take profits and diversify into names that are actually more cash-rich but still in the innovation space, because we know that the hype that many other investors might be chasing, that probably is too much too soon. We did that in 2020, but we didn’t do enough of that, to be sure. So, we’re going to be much more intentional about that particular move in this cycle.

Dave Baxter: Do you think that discipline’s got more focus now? I suppose you’ve previously been criticised for timings of things like selling Nvidia, that kind of thing.

Cathie Wood: Yes, well, whenever there’s a sale, you have to look at the buy that is, or the use of the proceeds. In that case, Palantir has done better than Nvidia. Coinbase Global Inc Ordinary Shares - Class A (NASDAQ:COIN) has done about as well as Nvidia. Those were two of the stocks and they were both troubled stocks at the time. Again, we’re a liquidity provider. Nvidia was hyping, and you’re right, should we have kept some in or more in the portfolios at that time? Sure, if you’re looking at Nvidia all by itself, but you have to look at what we did with the proceeds.

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Dave Baxter: And finally, what reasons do you have to be fearful in 2026 and to be cheerful?

Cathie Wood: OK. I always like to start with bad news. That’s what I tell my teams: bad news first, please. If we’re right next year and the economy starts moving from what we have characterised as a rolling recession – manufacturing’s been down for three years in a row, for example – into a rolling recovery, which then evolves into a productivity-driven boom, if the Fed starts raising rates, will that hurt the stock market? It depends on the psychological backdrop of a lot of investors. We will not be worried by that. But other investors might be.

We will not be worried because the Fed will just be letting the markets work. If we’re in a boom situation and GDP growth, you know, moves up into the five, six, seven per cent range, interest rates should go up, and we have outperformed in rising rate markets in a way that many people do not understand. 2017 and ’18 – one an ‘up’ year, one a ‘down’ year – we outperformed, even though rates were rising. So, while rising rates might worry a lot of people, and we may have a correction and we’ll be watching out for that, we won’t be as worried.

In terms of the reason to be cheerful, it is what I just said. We believe that the One Big Beautiful Bill – OB3 – the tax cuts are going to dominate tariffs in ’26 and that we are moving into a productivity-driven boom. And because it’s driven by productivity, we think that inflation will surprise. Seriously on the low side of expectations, maybe even going negative for a time. We think very strong real growth with falling inflation is a Goldilocks scenario. So, we’re pretty excited about it.

Dave Baxter: Well, thank you, Cathie. Lots of interesting points there. That is it from us but do let us know what you think in the comments. And as per usual, if you like this series please do hit the ‘like’ button and the ‘subscribe’ button. Thanks and take care.