Blain’s Morning Porridge – 12 Feb 2021: Tech, luck and Megatrends
“Games are won by players focused on the playing field, not by those whose eyes are glued to the scoreboard.. ”
Sometimes it’s difficult to ignore the noise, the clashing cords of confusion, speculation, terror and joy that drives the current market. Just like cold water swimming, it’s shocking but refreshing when something new and different emerges to make us think, something that feels more in tune with your own beliefs.
One investment firm that has seized the market’s mood is Ark Invest. Their success and pitch is based around “Disruptive Innovation” and they’ve a list as long as your arm about how the world is changing. ARK’s CEO, Cathie Wood, has become the investment superstar de jour, channelling the zeitgeist discordancy; clearly explaining how her team works through the complexity to identify and understand the innovation behind the opportunities out there: “Those hewing to the benchmarks, which are backwards looking, are not about the future. They are about what has worked. We are about what is going to work.”
Ark’s performance, on their series of innovation-based ETFs, has been extraordinary – they’ve doubled in recent months. Their strategies have produced a 39% return since foundation in 2014. What’s not to like?
They have slipped these surly bounds of financial gravity in terms of outperformance – apparently. Sure, they’ve been helped by Tesla being the largest holding across their funds. I would buy them if they didn’t look so expensive. (US readers – that’s a polite way of saying… when Tesla corrects so will they.) Nearly 9% of its assets are Telsa – according to Morningstar. As the WSJ observes it’s the classic: “When you own a few shares of a stock, you own it. When you own a lot, it owns you.”
Wood is also a bitcoin fan – actively followed on Reddit for her guidance on crypto. Nearly 5% of Ark’s Next Generation Internet ETF are in Grayscale Bitcoin Trust. She predicts if corporates put 1% of their cash balances into Bitcon, then the crypto would see a $40k positive impact, or $400k if every corporate followed Tesla and put 10% of cash into crypto. As Wood’s said: “Bitcoin is a $600 bln market cap. So even half the size of Apple or Amazon, right now. Doesn’t that put in perspective? And yet, it is a very big idea, I think. A much bigger idea than Apple or Amazon”.
Still, I recommend you watch the ARK video on their homepage, count the buzz-words, and wonder why your own dull, stodgy civil-service minded bureaucracy of an investment firm doesn’t feel half as exciting as the ARK Office looks to be. Their BIG IDEAs pitchbook is fascinating, exciting, and 0f course… I’m suspicious. It propped corporates diversifying into Bitcoin. Guess what Tesla did next. I’ve spent a lifetime in financial services – the trick is selling stuff by convincing people you know more and do stuff better.
ARK is successful. So are many good investment firms. Ark has got ideas and its investing in them. It’s done spectacularly well. Kudos to them. Ark’s disruptive innovation theme is as good a theme as anything else. New Emergent Tech and how it changes the world is a great trend to invest in. BUT, Ark is not for me on the basis of its weighting on Tesla and Bitcoin. I perceive both to be a future liability – both feel like speculative bubbles driven by the crowd rather than a fundamental change in the world.
There are alternatives. A number of very smart investment funds have not dissimilar ideas on how new innovative Tech is driving the work and what investment opportunities these changes will throw up. Within my own firm (Shard Capital) we have a stable of funds including Sure Valley Ventures; a fund focused on the software driven 4thgeneration tech revolution in areas including AI, Machine Learning, the Internet of Things, Augmented and Virtual Reality (I invested the moment I tried a VR simulation designed by a firm the fund was invested in) and Cyber Security.
Above the level of Tech, there is a much larger Macro underway – Megatrends.
Everyone says they watch the megatrends – long-term structural changes to the foundations of the investible universe. These will be irreversible and are happening all around us – you have no choice but to adapt and run with them. Many trends have facets that are inter-related i.e: Better education will slow population growth, drive wealth, open tech innovation opportunities, reduce agricultural and water pressures, and defuse geopolitical tensions. What opportunities do these create? You get the drift.
The market is working around a number of Megatrend themes:
Climate & Environmental Change – is the most obvious as it redirects investment into new energy sources, depolluting the environment, and cutting carbon emissions. The challenges of rising sea levels, warming temperatures, severe weather events including storms, fires and floods will raise costs from the real, social and health damages they create.
Demographic Change – The implications of aging working populations, insufficient pensions and care provision, low-paid population density in cities versus the sudden Covid-driven explosion in hi-wage earners working from country homes, and the threat of water and food poverty? Education, Health and Welfare are all part of the theme.
New Technology – The ways in which new technologies will combine, change and broaden our lives are legion, from food processing, health and drugs, 3D printing, quantum computing, the cloud, robotics, data, virtual reality, nanotech, buckyballs, to you-guess-what-it-is: Ark’s list of genomics, AI, Autonomous Tech, Robotics, Fintech and Space is as good a list as any. The potential opportunities are unlimited, and the pace of change, adoption and replacement is speeding up.
Geopolitics – The increased tensions between China, Russia, the US/UK, Europe and the rest look increasingly complex.
However, perhaps the biggest Megatrend/theme of them all, but the one that gets the least attention is Equality, Justice and Capitalism.
Capitalism and democracy go hand in hand – or so we thought. But now the richest 3% no longer particularly care. Making sure we all share the pie in terms of social justice, opportunities and quality – is something we should all ascribe to, but we aren’t doing it very well. We are thrilled a young footballer is the one explaining to government about food poverty – yet we elected the government that would not listen to him. We laugh at the excesses of “Wokery” – but the roots of Woke are in people rightly demanding out to be treated equal.
I suspect we are coming to the end of the corporate power excess cycle. That is a megatrend point to consider. The age of Shareholder capitalism has proved imperfect and spawned massive inquality. Rich CEO’s now earn 100s of times more than their GIG economy workers who earn less, have zero security and now scrabble on the periphery of society. Such inequality over every aspect of our lives will change – especially as we realise more about what governments can do.
Last Friday I wrote about Norges Bank divesting stocks which aren’t transparent about their taxes. I got a massive mailbag on that one – including many referencing the pressures being put on them to meet ESG standards, while also being expected to generate Tesla and Bitcoin type returns. Bitcoin uses more electricity than Argentina to mine coins – but apparently that’s ok because it happens in places when renewable power is available. Musk fails every corporate governance test out there – but that’s also apparently ok?
The current book on my desk is Mariana Mazzucato’s Mission Economy – her concept of moonshot to change capitalism. I share her concerns, although I don’t necessarily agree governments will do that much better than capitalism at solving the massively complex world we live in. What is going to be really interesting is figuring out how governments can lead and use money creation to rectify the inequalities that have multiplied over the last 40yrs – without crashing capitalism and “entrepreneurial animal spirits”!
Technology and Innovation are definitely going to be a massive part of our future, but inequality is an immediate and pressing challenge. Switching capitalism from its focus on shareholders towards serving all stakeholders is critical – because if we don’t fix the rotting foundations of capitalism, sometime sooner rather than later the whole edifice will come crashing down.
This is not communism. Its basic. Capitalism will thrive if its fair. Not what its become today..
Bandiera Rossa La Triumfera!
Five Things to Read This Morning
Master Investor – I am more and more convinced it’s time to buy UK Plc.
Out of time.. Have a great weekend – going to be tense in Blain household as Wales and Scotland face up on Rugby field.