ARK Investment Management LLC (“ARK”) is making its name in technology disruption investments. Its family of exchange traded funds (ETFs), specializes in thematic investing centered on five innovation platforms: robotics/automation, energy storage, genomic sequencing, artificial intelligence, and blockchain technology. According to ARK estimates, these five innovation platforms are expected to generate more than $50 trillion in value and new wealth over the next 10 − 15 years. This figure represents over 50% of the world’s GDP in current prices! In other words, around half of the economic activity will be attributed to new technologies stemming from core innovations around these investment themes. Today, they account for less than $6 trillion in global equity market capitalization.
ARK sees particularly compelling opportunities in financial technologies. Its actively managed fintech fund ARKF aims to provide exposure to innovations in mobile payments, digital wallets, peer-to-peer lending, blockchain technology, and financial risk transformation. ARKF returned astonishing return of over 60% in 2020, more than 5 times the S&P500 index and more than 8 times the MSCI world index.
ARK CEO, Cathie Wood, deeply believes in fintech because it is a hybrid of several technologies, including mobile value transfer services, artificial intelligence (A.I.), cloud and blockchain, with synergistic effects among them and exponential potential for growth.
Digital wallets present a case-in-point for growth potential in fintech. Their expansion disrupts all traditional financial services, including brokerage and lending. Digital wallets could serve as lead generation platforms for commercial activity beyond financial products. One advantage the wallets have over traditional services is that they are always close, always residing in users’ pockets and handbags. According to ARK’s research, compared to the roughly $1,000 that a traditional financial institution might pay to acquire a new checking account customer, digital wallets may invest as low as $20 thanks to viral peer-to-peer payment ecosystems, savvy marketing strategies, and dramatically lower cost structures.
In The US, digital wallet users are surpassing the number of deposit account holders at the largest financial institutions. As traditional banks face sizeable legacy risks, digital wallets enter new business areas such as unsecured lending market, suggesting that traditional bank lending is unlikely to recover to the peak hit in 2019. ARK estimates that fintech challengers helped to put pressure on bank interest income on credit cards by more than 10%, or roughly $16 billion in 2020, and this trend is likely to continue further accounting for additional $35 billion by 2025. At the same time, bank branch costs continue to rise while their utility decreases.
Digital wallets are valued between $250 and $1,900 per user today but could scale to $20,000 per user, representing a $4.6 trillion opportunity in the US by 2025. Globally, fintech breaks new grounds in unprecedented growth. Volume of mobile payments in China increased more than 15-fold in just five years, from roughly $2 trillion in 2015 to an estimated $36 trillion, nearly three times the size of China’s GDP in 2020. Innovations in digital currencies may further fuel significant growth, together with greater trust, institutional framework, and infrastructure development.
Financial technologies already set in motion deep-seated changes that will define transformation of financial markets, removing friction, and increasing accessibility to financial products and services. ARK envisions that these changes will expand and affect nearly everyone globally, creating continuing investment opportunities for decades to come.
It is a well known observation that active funds have tendency towards annual reversals. Moreover, as funds grow larger, it becomes harder to allocate large amounts of money due to price impact, front-running, and shrinking liquid opportunities for large positions, and, not least, self-perpetuating effect of fund flows following returns. Recently Ark’s stock market positions have come under attack over valuation concerns and interest rates policies, which affect high pricing of shares in faster-growing tech companies. This may hinder the overall performance but, for now, Ark holds its commitment to the promise of disrupting technologies in the future.
References
[1] ARK ETF Trust Annual Report July 31 , 2020, ARK Investment Management LLC, 2020
[2] ARK ETF, Big Ideas 2021 report, ARK Investment Management LLC, 2021
[2] ARK ETF, Big Ideas 2021 report, ARK Investment Management LLC, 2021
