Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
‘It makes no sense’: The world according to Cathie Wood
While 2022 saw a withering bear market for big ideas, ARK Invest founder Cathie Wood says that investors are starting to wake up to a new wave of innovation that will reshape society – and the market.
“ChatGPT really brought innovation to the forefront again,” Wood told Morgan Stanley’s Australia Summit last week. “I was astonished last year that, in a terrible bear market for innovation generally, but for the broader market as well, that there seemed to be no sense of wonder or awe at what was happening.”
That sense of wonder should have come from advances in technologies like base editing – a way to edit DNA sequences, and which Wood said had recently saved the life of a young cancer patient – and robotics, but they’ve mostly gone unremarked upon.
“The fear that was gripping markets last year was so all-consuming that they couldn’t see good news when it was staring them in the face,” Wood said. “And of course, ChatGPT came out in November but didn’t capture the imagination of consumers or businesses until January of this year.
“All of a sudden innovation starts working in the market place. Last year we were dead, and now we’re alive. And people are beginning to understand how profound the innovations and innovation platforms around which we’ve centred our research are going to be in transforming our lives.”
That transformation will be so profound that people aren’t grasping its true impact. Moderator Adam Jonas, Morgan Stanley head of global autos and shared mobility research, compared the rise of AI to the advent of atomic technology – world changing, but potentially world ending, and so requiring new regulation to deal with it. But Wood isn’t an AI cynic.
“We don’t think this is the end of humanity at all,” Wood said. “We actually think this is one of the greatest innovations of all time. And will increase productivity – and when you increase the productivity of the planet, which it will, it will accelerate growth and lower inflation. AI is highly deflationary. We believe the bigger risk and opportunity out there is deflation, associated with innovation is a very positive thing.”
But the initial deflationary force will emerge sometime next year as a result of macroeconomic pressures easing, Wood said. That will be a boon for the performance of ARK’s flagship Innovation ETF, which has been concentrated from 58 to 27 “high conviction” names and which Wood said is up circa 36 per cent for the year. Investors are living in the 70s when they thinks about inflation, when really they should be looking to the 1910s and the supply chain dislocations caused by the Spanish Flu and World War One.
“If you look back at that period we were on the Gold Standard, so the Fed had no choice but to shrink the money supply. Our money supply is shrinking now; it has not shrunk since the 1930s. And if you go back then, supply chain issues associated with a war and a pandemic took inflation, even though we were on the gold standard, up to 24 per cent by June of 1920.
“Because the Fed had to shrink the money supply, it dropped from 24 per cent to -15 per cent in one year. And we believe we’re going to see an echo of that… We won’t go to -15 per cent, but we do think it’ll go negative. And by this time next year we’ll all be talking about deflation. The Fed will not only have pivoted – it’ll be running in the opposite direction.”
