Cathie Wood predicts inflationary pressure will prove temporary

Cathie Wood admitted on Thursday that Ark Investment Management’s funds had been hit by climbing interest rates, but told investors that the rotation under way in US financial markets would not ultimately upend the group’s strategy of betting on disruptive and high-growth companies.

Wood, who oversees Ark’s almost $50bn portfolio of investment funds, has become an influence in US equities since markets began to rally last year. Ark funds, including the $22bn Innovation exchange traded fund, have attracted tens of billions of dollars of inflows over the past 12 months.

But shares of several of the firm’s ETFs have stalled or declined this year.

“A lot of observers worry that this rise in interest rates will hurt strategies like Ark’s, and that has been the case in this rotational period in the market,” she said in a discussion held by the exchange operator Cboe. “A key question for us is how far will interest rates go up and that involves fears around inflation.”

The rise in long-term Treasury yields, fuelled by rising economic growth projections and a back-up in inflation expectations, has taken the air out of many of the best-performing stocks of the past two years. Higher Treasury yields reduce the value of companies’ future cash flows and earnings, undercutting the rich valuations of fast-growing companies in particular.

Shares of Tesla have fallen 11 per cent this year and are down more than 30 per cent from a February high. The electric car maker is the Ark Innovation fund’s largest holding. Other large holdings of the fund, including the tele-health provider Teledoc and the videoconference start-up Zoom Video Communications, have fallen more than 40 per cent from their all-time highs.

“As interest rates have been rising rapidly we have seen high-valuation stocks hit hard,” Wood said. “Longer-run, the growth rates from these companies are going to be scarce out there. The growth we’re seeing in these innovative companies . . . will be treated very well over time.”

By contrast, shares of many companies hardest hit by the pandemic have rallied, with so-called value investments enjoying large gains this year as investors have rearranged their investment portfolios. The Russell 3000 value index is up almost 10 per cent this quarter, outpacing both its growth counterpart and the benchmark S&P 500.

“We like the fact that the bull market has broadened out and has not continued to narrow into our kind of strategies,” Wood said.

“We believe we’re in a nice cyclical bounce right now but we think there are two powerful deflationary forces at work in the global economy,” she said, citing technological breakthroughs and heavy debt burdens on some companies. “Will inflation continue or will it revert? We think it will revert.”

Wood, an early adopter of bitcoin, continued to endorse the cryptocurrency on Thursday, saying money managers should put 2.5-6 per cent of their investments into bitcoin.