The ARK Europe Active Approach (Part 1): Why Active ETFs for Investing in Disruptive Innovation

Unique Investment Philosophy

ARK’s investment strategy for harnessing disruptive innovation is deeply ingrained in over four decades of experience. We define disruptive innovation as a catalyst for profound change, characterised by rapid cost declines (i.e. Wright’s Law), burgeoning demand and a sweeping impact across sectors and geographies that fosters further innovation and growth over long periods. This definition is epitomised by historical breakthroughs such as the invention of the printing press, light bulb and the automobile, and encapsulated within ARK’s five focal areas of innovation that look into the future today: Artificial Intelligence (AI), Robotics, Energy Storage, Blockchain Technology and Multiomic Sequencing.

By analysing these transformative technologies—modeling their cost reductions, market potential, demand elasticity and adoption curves—ARK projects the future cash flows and, consequently, the potential equity market value that will be generated from their propagation into the global economy.

ARK’s approach integrates both top-down and bottom-up research within a benchmark agnostic framework, aiming to pinpoint companies poised to lead, enable or benefit from technological innovation. ARK’s Open Research Ecosystem stands out as it embraces both internal and external insights to navigate this rapid technological convergence effectively. This strategy entails evaluating the expansive potential of innovation and selecting companies believed to be in the best position to thrive. ARK strives to select companies that expect to generate a minimum rate of return of 15% per annum over a five-year time horizon.

Through an iterative and active process focused on building these high-conviction stock portfolios, ARK also seeks to avoid companies that are likely to be undercut by technological progress.

Active ETFs: Why They Make Sense For Investing In Disruption

Investing in disruptive innovation through active management offers several advantages, particularly due to the rapid pace of technological change.

1. 1. Actively Selecting Winners / Avoiding Losers: Not all companies in the innovation space will be winners, and the success of disruptive technologies can be uneven. Active management allows ARK to invest selectively and uncompromisingly in companies with the strongest fundamentals, most innovative products and best growth prospects, rather than being tied to the performance of an equity benchmark (e.g. S&P 500 Index). Importantly, many of the most disruptive companies fall outside of standard equity benchmarks due to their smaller size or lack of investment coverage, making ARK’s Open Research approach and benchmark agnostic stock selection valuable when allocating to this space.
   2. Opportunistic Agility and Risk Management: Active management allows ARK to quickly adjust its portfolios in response to technological advancements, industry news and company announcements. The landscape of disruptive innovation moves swiftly, with new technologies evolving and market dynamics shifting at a rapid pace. Active management affords us the flexibility to capitalise on opportunities and mitigate risks as they arise.
   3. Bypassing the Market’s Short-Term Horizon: The market is often easily distracted by short-term price movements, losing focus on the long-termism of investing in disruptive technologies. We believe there is a time arbitrage of which ARK can take advantage in line with Amara’s Law, which states that humans tend to overestimate the effect of a technology in the short run and underestimate its effects in the long run. Accordingly, ARK seeks out opportunities that offer growth , and that the market is often not focusing on.
   4. Expertise and Insight: Active management allows for the leveraging of specialised knowledge and research. At ARK we have deep domain expertise in our five innovation platforms, including, for example, AI and Multiomic Sequencing, which helps curate for the companies we believe are the most likely to be leaders in these areas. It helps us distinguish between genuinely transformative technologies – through the application of unit economics – versus short-lived trends, and make better and more informed investment decisions.