Thematic Commentary 31 July

In today’s rapidly evolving market, investors need to stay on top of the latest trends and themes that fuel growth. In this monthly publication, we offer our market commentary across our themes, covering new opportunities and potential challenges. By providing a deeper understanding of our themes, we aim to help you make more informed investment decisions and achieve your investment goals.

Innovation

During July, off-benchmark, longer duration equities rallied significantly on back of cooling inflation. On July 11th, CPI came in at -0.1% month-over-month signaling that the US Fed could shift more quickly into dovish policy. The Nasdaq composite lost roughly -2.0% on the day, while the Russell 2000 gained 3.6%; the largest single day differential in the last 30 years. Many investors began to ask the question, is the market finally broadening out? This market rotation positively impacted the flagship strategy’s performance, on both an absolute and relative basis, given its benchmark-agnostic approach – as exemplified by an active share of 94% relative to the Nasdaq 100 Index, and its rate sensitivity. July performance showed that the differential in performance in the first half of the year could narrow during both “catch-up” and “catch-down” scenarios. In a “catch-up” scenario, the momentum of a more diversified set of stocks may lead to a narrowing of the performance gap to megacap stocks in an upside market. On the other hand, investors may be weary of the potential for downside pressure after many market-cap weighted benchmarks recently hit all-time highs. A market downturn could be triggered by weakness in the Mag 6, potentially due to the interconnected nature of their sales and earnings, a falling rate scenario that no longer rewards companies with extensive cash balances, or a dollar liquidity crunch leading to a “catch-down” due to a narrowing of the gap as a diversified set of stocks loses less than the megacap names. ^1,2

Artificial Intelligence and Robotics

During July, off-benchmark, longer duration equities rallied significantly on back of cooling inflation. CPI came in at -0.1% month-over-month signaling that the US Federal Reserve could shift more quickly into dovish policy. The Nasdaq composite – held up by cash-rich megacaps – lost roughly -2.0% on the day, while the Russell 2000 – representing small cap stocks – gained 3.6%; the largest single day differential in the last 30 years.

Despite owning the “Mag 7” within ARKI, the lower weightings relative to competing index funds benefited performance during July’s “broadening out.” For example, the fund has an active share of roughly 75% to the Nasdaq 100 Index, providing investors exposure to the diversified spectrum of the AI & Robotics opportunity set. In our view, the funds benchmark-agnostic approach provides a pure-play exposure to two of the largest technological tailwinds the world has ever seen. This is evidenced by the rally in robotics names during the month, as demonstrated by the performance table below.^3,4

Genomic Revolution

During July, off-benchmark, longer duration equities rallied significantly on back of cooling inflation. CPI came in at -0.1% month-over-month signaling that the US Federal Reserve could shift more quickly into dovish policy. The Nasdaq composite – held up by cash-rich megacaps – lost roughly -2.0% on the day, while the Russell 2000 – representing small cap stocks – gained 3.6%; the largest single day differential in the last 30 years. Stocks associated with multiomic technologies, which tend to be long duration in nature based on the earlier-stage profile of underlying companies – and as represented by ARK’s Genomic Revolution strategy (ARKG), were up 5.6% on the day.

This macro backdrop is what drove excessive outperformance, though there were positive developments for underlying holdings. For example, Adaptive Biotechnologies, a top 10 name in the fund, reported progress in its T-cell receptor sequencing technology, showcasing its application in monitoring minimal residual disease in cancer patients. The technology’s ability to detect residual disease with high sensitivity and specificity underscores its potential as a valuable tool in cancer management and patient care.^5,6

Circular Economy Enablers

The rapid rise of fast fashion has led to a sevenfold increase in the global trade of used clothing over the past four decades, causing significant environmental impact due to the disposal of over 80% of purchased clothing as general garbage. A new report by the United Nations Economic Commission for Europe and for Latin America and the Caribbean looks at the second-hand clothing trade between Europe and Chile. In 2021, the European Union (“EU”), China, and the United States were the top exporters of discarded clothes, while Asia, Africa, and Latin America were the leading importers. The low-cost synthetic fibres and trade liberalisation have facilitated this trade. However, a large portion of clothing made from blended fibres is difficult to recycle, leading to waste accumulation, particularly in developing countries. Europe has seen a tripling of used clothes exports over two decades but still lags in sorting and recycling capacities. Despite the EU introducing several circular economy policies, large-scale solutions are still needed. Meanwhile, Chile, a major importer, faces significant environmental challenges with 75% of imported used clothes deemed non-reusable, creating pollution and health hazards. The report recommends policy measures for both exporting and importing countries to improve recycling, enforce regulations, and promote sustainable practices. Enhanced cooperation between the EU and Chile could set global standards for sustainable second-hand textile trade.⁷

Environmental Impact

In 2023, global investment in clean energy reached $USD 1.8 trillion. Yet only $560 billion was directed towards energy efficiency measures, despite their critical role in reducing energy consumption and greenhouse gas emissions. According to the International Energy Agency (“IEA”), energy efficiency could deliver over 40% of the emissions reductions needed to meet global climate goals by 2040 and save households and businesses around $680 billion annually. Key technologies driving energy efficiency include heat pumps, such as those produced by Johnson Controls, which can cut heating energy use by up to 50%, and smart infrastructure solutions offered by Siemens Energy and Signify NV, which optimise energy use in real-time and can reduce energy consumption by up to 80%. Other developments include advanced insulation materials produced by companies such as Kingspan and Owens Corning while advanced metering infrastructure from Itron and Landis+Gyr enables precise energy monitoring, achieving as much as an additional 20% in energy savings. Despite its advantages, energy efficiency investment lags other clean energy areas yet the sector offers one of the best risk-reward profiles in sustainable investing. By focusing on proven, scalable solutions like heat pumps, smart infrastructure, building insulation, and advanced metering, we can address climate challenges effectively, ensuring strong financial returns and immediate environmental benefits. Prioritising energy efficiency is essential for a sustainable future.^8,9

Global Sustainable Infrastructure

Our latest research note, “The Future of Infrastructure Today” dives deep into why our Rize Global Sustainable Infrastructure UCITS ETF is favourably positioned compared to traditional infrastructure exposures for today’s evolving landscape.

Prioritising investment in sustainable infrastructure is critical for fostering economic resilience and tackling climate and environmental challenges. Empirical evidence supports this shift: global investment in renewables reached a record $1.8 trillion in 2023, demonstrating a robust commitment from both government policies and private sector initiatives. Notably, the renewable energy sector accounted for 70% of all new power capacity additions worldwide in 2023, underscoring the world’s growing preference for cleaner energy sources. In the transportation sector, investments in EVs have surged, with global EV sales surpassing 14 million units in 2023 (3.5 million higher than in 2022), an increase of 35% year over year. Governments are playing a pivotal role, with the U.S. committing $550 billion over the next decade to modernise its physical infrastructure, including significant allocations for sustainable initiatives. In data infrastructure, investments in energy-efficient data centres and smart grid technologies are transforming how information is managed and distributed. Social infrastructure, including schools and hospitals, is increasingly designed with sustainability in mind, incorporating green building practices and renewable energy sources. To learn more, please read our “Prioritising The Future of Infrastructure, Today” blog.¹⁰

Sustainable Future of Food

Our Mid-Year Sustainable Future of Food Update is now available. In this update we explore the challenges faced by sustainable food equities over the past year. Despite these hurdles, the industry’s mid-cap bias and high allocation to sectors such as materials and industrials position it well to benefit as we move towards a period of recovery and expansion in the economic cycle. We view food valuations as attractive given recent challenges and believe innovative advancements and policy support could also drive earnings growth moving forward.

Artificial Intelligence (“A.I.”) is often thought of in the context of chat-bots but the reality is that its reach and impact on the real world is far greater, and the sustainable food space is no different. Take Givaudan SA, which is in our Ingredients, Flavours and Fragrances sector, this company has been leveraging A.I. in various aspects of its business, including flavour development. Its “Carto” system enables perfumers to use a touchscreen interface to select which raw materials they wish to mix. A robot then produces an instant sample, using real ingredients and A.I. to suggest a potential formula. This occurs at a speed that would be impossible using traditional methods.¹¹

Cybersecurity and Data Privacy

July saw one of the largest I.T. disruptions of all time as 8.5 million computers around the world crashed, grounding flights, closing businesses and bringing markets to a standstill. Yet this wasn’t a large-scale cyber-attack. CrowdStrike, a leader in the Endpoint Detection and Response technology, had a bug in its internal testing software which consequently failed to identify faulty code in a software update that was rolled out.  The full extent of the economic damage is yet to be determined although projections from insurer Parametrix estimate the outage could cost U.S. Fortune 500 companies around $5.4 billion. CrowdStrike has since strengthened its testing processes and in the future will roll out staggered updates which may allay customer concerns and limit any potential impact to ARR growth.

In other market news, cybersecurity startup Wiz rejected Google’s $23 billion offer and instead opted to pursue an initial public offering (“IPO”). Google’s offer, valuing Wiz at 46 times its forward revenue, underscores the cybersecurity sector’s impressive growth prospects. Wiz has rapidly expanded to $500 million ARR in 4.5 years and CEO Assaf Rappaport’s strategic vision on achieving $1 billion ARR before IPO reflects confidence in the company’s growth potential. We note a significant valuation gap between private and public cybersecurity companies, worsened by the recent industry sell-off following the CrowdStrike incident. Historically, these market valuations tend to converge, indicating an attractive entry point with upside potential for investors in public cybersecurity equities.¹²

Digital Payments Economy

A new partnership between Stripe, a leading online payment processing company, and Coinbase, a major cryptocurrency exchange platform, aims to enhance digital asset transactions and expand the global adoption of cryptocurrencies. Stripe is integrating blockchain technology to make conversions between traditional currency and cryptocurrency even faster. Meanwhile, Coinbase is incorporating Stripe’s currency-to-crypto onramp into its Coinbase Wallet, enabling users to buy crypto instantly with credit cards and Apple Pay. After discontinuing its cryptocurrency program in 2018 due to limited use cases for payments, Stripe has been expanding its cryptocurrency services over the past few years. The rise of decentralised finance and digital products like Non-Fungible Tokens has renewed Stripe’s interest in the crypto space. Partnerships, especially in the digital payments landscape, are crucial for increasing cryptocurrency adoption in payments. This collaboration is expected to streamline the process of acquiring and using digital assets for everyday transactions. Recently, Coinbase sued the Federal Deposit Insurance Corp. to challenge its efforts to prevent banks from collaborating with cryptocurrency firms, highlighting the ongoing regulatory challenges in the industry.¹³