US ETF provider ARK Invest, with over USD4 billion under management, operates in the disruptive innovation space, offering investments through various wrappers including two actively managed ETF funds that both achieved returns of over 87 per cent in 2017.
The ETF suite, encompassing ARKW and ARKK, has some USD1 billion under management. A key part of their portfolio has been artificial intelligence (AI), run by analyst James Wang who came to the firm after nine years at visual computing firm Nvidia.
Nvidia makes graphics processing units that used to be solely seen in high end PCs or Xboxes, but are now used for high intensity general computation.
Wang says: “The boxes are basically high-performance computers that are sensitive to heat and power consumption.”
And their growing use has been in the development of autonomous driving, a key theme in disruptive innovation portfolios at the moment.
“Nvidia is one of the greatest performers in the last two or three years and a key holding of our ETFs since their inception in 2014,” Wang says. “It’s a great stock story for ARK.”
Wang is an example of a technology analyst who has moved to the financial world. He was product manager for software products at that reached 50 million users while he was at Nvidia.
“I loved technology but developed an interest in the investing side as well, so crossed over to the investment side to have more breadth of coverage in early 2015,” he says.
“It’s been a wonderful place for me as this is where my passion is. If I didn’t have a job, one of the things I would do would be to follow the progress of technology.”
The innovation suite of ETFs covers industrial developments, health care innovations, and next generation internet and an umbrella product that covers all three ideas.
“What is happening that is interesting and investable is, whether you are a very savvy individual or a money manager, you look at the world and realise that AI is playing an important role today and, in the future, will play an important role in every aspect of the economy,” Wang says.
“It’s on the scale of the development of the Internet in terms of how much value and disruption it will create. Over the next two decades the market cap should grow to USD17 trillion.”
The drivers behind the development of AI are many, Wang says, but key is a desire to solve certain problems that haven’t been solved before.
“This grand quest to achieve autonomous driving will bring the cost of transportation down by roughly half and change the whole transportation model from car ownership to hailing in the Uber model – but it will be electric and not have a driver.
“This will have an environmental impact because primarily it will be going to be electric which will shift the production of electricity from fossil fuels to cleaner sources of electricity elsewhere, so it will be good for urban air quality and the general state of the climate globally.
“This is just one example of how AI has changed an entire industry that was immune from software production.”
Wang believes that AI will enter every sector and be an extremely wide and investable field.
“If we look at AI it sounds abstract,” he says. “But it is already at a large scale as companies such as Facebook and Amazon have done so well and sustained revenue growth from 20 to 40 per cent, despite being decade old companies, due to the key ingredient of AI. The common thread through all these products is the recommendation engines.”
AI enables companies to show or sell people the things that they want.
“If you solve it well, people will come back every day, every hour and all these companies have solved that problem by using AI of the kind that we are talking about,” Wang says.
Facebook showed no more advertisements last quarter but had a 43 per cent increase in average advertising price in the last quarter of 2017 because it was able to find a better match using AI techniques of adverts for the users and improving the quality of matching viewers, Wang says.
“What makes our ETFs different is that first they are focused on where people have high conviction that they will play an important part over the next three to five years. And they are actively managed so not a market cap rule based strategy that may or may not work. The investments are the results of fundamental research, hand-picked in the traditional mould of a managed fund but in an ETF format, not a high fee product like a hedge fund.”