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Cathie Wood discusses investing in disruptive technologies

In this conversation with Dr. Arthur B. Laffer, Founder and Chairman, Laffer Associates, Cathie Wood, one of the top-rated fund managers in the country, discuss emerging investment decisions, capital markets and cutting-edge technologies.

Video transcript

- And welcome back to Yahoo Finance. ARK Investments Cathie Wood joined Dr. Arthur Laffer, founder and chairman of Laffer Associates, at The Economic Club of New York earlier this week to discuss emerging investment decisions, capital markets, and cutting-edge technologies. Take a look.

CATHIE WOOD: Our focus is solely on disruptive innovation. We are not a generalist portfolio team. We are focused on the five-- five platforms, innovation platforms, and 14 underlying technologies. Our analysts' responsibilities are broken out by those technologies. They are specialists when it comes to the technologies and generalists when it comes to the sectors. But we're focused only on disruptive innovation.

And we have a study up on our site, which would suggest that because most-- most asset allocation allocators are short innovation in the public equity markets that if-- if they were to include our portfolio, let's say our-- our flagship portfolio, perhaps 10% of their equity allocation to our flagship, and then if they were to use the benchmarks for value and growth over a five-year period-- and we did the study based on facts, our own experience-- over a five-year period, ARK's strategy would increase returns and lower risk because the correlation of our returns with other strategies is very, very low.

So-- so that's the primary reason. We depend on asset allocators, advisors, to allocate as much or as little to our strategy. One thing I will say is given the massive amount of innovation taking place right now that is going to be highly disruptive, we do not believe that most asset allocators have enough allocated to innovation.

And-- and I think that the traditional benchmarks talk about risk because of these innovation platforms-- DNA sequencing, robotics, energy storage, artificial intelligence, blockchain technologies. Because those are going to rip through the traditional world order and disturb it mightily, that those benchmarks are probably where we're seeing the bubble today.

I know what I find so interesting about movements in the market today is the fear of interest rates and inflation picking up. Really started in February of this year as-- as people were getting vaccinated. And-- and the markets went after our strategy to express the risk and basically shorted our strategy.

What I find so interesting about this is that the market's multiple-- broad-based market. So S&P's multiple on next year's earnings is at 24 times. NASDAQ's is at 31 times. These are near-record highs except for the tech and telecom bubble. If inflation is really the risk out there, why isn't the entire market's multiple coming down? I remember when I started in the business late '70s, early '80s, Art introducing me to Capital Group on the West Coast-- and I'll be forever grateful.

Back then, I think by the end of the bear market in 1982, the market's multiple was down to six. I just mentioned that we're up to 24 on that basis right now. Now, you're going after multiples in our space. And what has happened, the depreciation in our stocks from mid-February to today has-- has not done anything to our forecast. We're now just getting our-- we're now just getting our-- our companies and our stocks at lower prices.

So in mid-- mid-February this year, as we did our five-year forecast, and we assume massive multiple compression during the next five years to something like FAANG multiples, EV to EBITDA in the 18 to 20 range, when we did that in February at the peak of our strategy, the compounded annual rate of return we expected from our portfolios was roughly 15%.

Today, doing that-- that analysis-- some of our projections have increased-- the compounded annual rate of return we are expecting is close to 40%. So in February, we were expecting a doubling over five years. Today, we're expecting nearly a quintupling over five years.

ART LAFFER: Can I tell them a little bit of a personal experience with you, Cathie? As you know, I've grilled you over the years on your picks. You now publish them right along with everything you buy and sell. But I can't tell you. I got in Illumina, NVIDIA, Blue Bird, Tesla, all of these back in the early days because of you. I didn't even know how to pronounce the names.

And you know, when I look now at retroactively just how amazing you were in doing what you did back then, can I ask you just sort of where you're looking at the markets, with all your platforms? I think its five platforms you do. What-- what are the areas you really think are big winners coming forward? And what are the losers? And by the way, I don't want you to mention Biden in the loser category. That's my job. I'm just joking.

CATHIE WOOD: So I think the-- the platform that has been hit the hardest in this correction is the genomic revolution. And the reason is many of these companies are losing money. We're in a-- this-- this is a movement in its infancy. And I think the most exciting thing is we can now isolate mutations in and among our 6 billion bits of code in our genome. So 3 billion base pairs. So 6 billion bits of code.

Until recently, we could not isolate those mutations. Mutations are the earliest manifestation of disease. And now what we're beginning to understand is the convergence between and among DNA sequencing, artificial intelligence, and CRISPR gene editing as well as other gene therapies is curing disease. We have functional cures now for beta thalassemia, sickle cell disease, ATTR. Now, these are blood-related diseases, but these-- the companies involved are now focusing on some of the most complicated diseases like diabetes.

And what we're learning from companies like Freenome, which is a private company focused on the convergence of AI and DNA sequencing, we're learning that the body sets up for disease and that artificial intelligence is able to discern when that setup is taking place. So wouldn't it be wonderful to discover cancer in-- in phase one or stage one or maybe even before, before it starts, before the cells start replicating?

So the genome-- genomic revolution fund that we run has been hit very, very hard this year. Now, it had a magnificent last year up 180%. I think it's down 35% this year. And we're probably more excited about that opportunity in terms of how it's going to transform lives.