The queen of the bull market faces her toughest test

This is an audio transcript of the FT News Briefing podcast episode: The queen of the bull market faces her toughest test

Marc Filippino
Good morning from the Financial Times. Today is Wednesday, December 15th, and this is your FT News Briefing.

[MUSIC PLAYING]

The Federal Reserve is continuing to ramp up its fight against inflation, and a British regulator lashes out at what it calls irresponsible cryptocurrency ads. Plus . . . 

Colby Smith
So she’s sort of been a bull in a bull market, and that’s worked out really well for her until now.

Marc Filippino
We’ll talk about Cathie Wood. She’s been one of the most successful asset managers during the pandemic. Now she’s stumbling hard. I’m Marc Filippino, and here’s the news you need to start your day.

[MUSIC PLAYING]

The UK’s advertising watchdog says several cryptocurrency companies have put out ads that are misleading and irresponsible. The Advertising Standards Authority is set to issue a formal rebuke today. It called out to companies — Coinbase and eToro — by name. It also criticises Papa John’s for a promotion that offered pizza in exchange for bitcoin. The regulator says these ads make crypto investing sound fun and easy and downplay the risks. The watchdog will also tell companies to make it clear that crypto assets are not regulated in the UK and that investors are subject to tax liability.

[MUSIC PLAYING]

The Federal Reserve is set to toughen its stance on inflation today. Fed officials looked set to boost expectations for more interest rate increases next year to fight rising costs, and they’re expected to announce a faster scaling back of the pandemic bond-buying programme. Here’s our US economics editor Colby Smith.

Colby Smith
In early November, it revealed that it would be winding down its asset purchase programme by a pace of 15bn a month. Now they’re looking to slash those purchases at double that pace so by 30bn a month. And that’s in order to set the Fed up to have space to raise interest rates next year earlier than it initially expected.

Marc Filippino
Then, when it comes to rate increases, there’s a new dot plot coming out today, and Colby reports that Fed officials will likely signal support for two increases next year, and three or four the following year. She says for now markets are taking the new outlook in stride.

Colby Smith
What would potentially rattle financial markets is if the Fed was taking a significantly more hawkish approach. So let’s say they’re pencilling three interest rate increases or more. Or, you know, the tone or Powell’s tone during the press conference shows that they are really kind of thinking about a different approach to policy in the face of higher inflation. But for right now, it seems like markets are more or less in line with Fed expectations at this point, so hopefully there isn’t too big of a shock later today.

Marc Filippino
Colby Smith is the FT’s US economics editor.

[MUSIC PLAYING]

Cathie Wood is known as the queen of the Bull Market. The founder of Ark Invest is famous for targeting disruptive technology companies. She bought into Tesla early on. For the past five years, her flagship Ark Disruptive Innovation Exchange traded fund has shot up about 40 per cent a year. But now her investments are taking a beating. The FT’s asset management editor Harriet Agnew joins me now to talk more about what’s going on with Cathie Wood and Ark Invest. Hey, Harriet!

Harriet Agnew
Hi Marc.

Marc Filippino
So, Harriet, tell us more about Cathie Wood. You know, how did she make her mark on the markets?

Harriet Agnew
I’d say that over the past couple of years, Cathie Wood has really found her place as the sort of poster child of the tech-driven bull market that we’ve experienced. She talks about these big picture themes around things like the genomic revolution around automation and robotics, artificial intelligence, space exploration. And all of these things have really captivated the minds of retail investors, and she’s built up a big following within a lot of them to the point where there’s even Cathie Wood merchandise. So there’s a great T-shirt where you see her writing on a, on top of a bull and it just says Cathie Wood, queen of the bull market. In many ways, she’s sort of the antithesis of what we think of as traditional Wall Street. She’s developed a big presence on social media, and she’s very savvy with how she markets herself.

Marc Filippino
Yeah, I mean, she does a great job marketing herself. But what is her financial success based on?

Harriet Agnew
I suppose one of the most eye-catching moments for her was a couple of years ago, in May 2019, when Tesla shares were trading at around $200 a share. Anyway, Cathie Wood came, and she outlined this incredibly bullish valuation for Tesla at 1.4tn, so basically saying that each of its shares were worth $6000 a share. And then in 2020, during the pandemic, she just had this year of incredibly eye-catching performance. So the fund was up 150 per cent for the year, which is enormous. And I think what happened was Covid accelerated the digital trends that were underway already and benefited a lot of her holdings.

Marc Filippino
Now, how important has Tesla been to her success?

Harriet Agnew
Tesla is now Ark Innovation’s biggest position. And so if you strip out the performance of Tesla, which has had a phenomenal run, then the performance of Ark doesn’t look as good. And indeed, if Tesla shares come off, then Ark’s is going to be hit by that as well. So she’s not just vulnerable to rising interest rates, she’s vulnerable to any jitteriness around Tesla.

Marc Filippino
So earlier, you said Cathie Wood is very popular among retail investors. But what do asset managers think about her strategy?

Harriet Agnew
Look, she’s brought an enormous amount of innovation to the asset management industry just through being a pioneer in this actively managed ETF market. Critics will say that she’s been a sort of massive beneficiary of the monetary stimulus that we’ve seen during the pandemic. So low interest rates have really benefited a lot of these high-risk companies that Ark bets on. So she’s sort of been a bull in a bull market, and that’s worked out really well for her until now.

Marc Filippino
Yeah, I mean, Ark is down 25 per cent this year.

Harriet Agnew
Yeah, I mean, I think the other really important point about the performance is that while her performance of Ark Innovation looks really strong, so over the past five years, it’s recorded an average of 40 per cent a year, which on the face of it looks phenomenal. But what happened was for most of that time, the fund’s asset base was really small. And so she made big returns on a small asset base. So a lot of the investors who came in towards the end are actually now nursing losses. So really, this 40 per cent a year over five years kind of masks the reality, which is that most of her investors in Ark Innovation will be underwater.

Marc Filippino
So Harriet, if one of the main criticisms of Ark and Cathie Wood’s strategy is that it benefited a lot from low interest rates, where do Cathie Wood and Ark go from here as we start to enter a higher, higher interest rate environment?

Harriet Agnew
That’s the big question for Ark and a lot of its holdings. As interest rates go up, these are likely to sell off because they’re very sensitive to rising interest rates. And so the worry is that sentiment could be turning against these kind of companies. Sentiment could be turning against Ark. And I think you’ve got a lot of these phenomena that benefited Ark on the way up may hurt it on the way down. So for example, when you were investing in less liquid companies and you’re putting more and more money into them, when they’re going up, it pushes them up, and that’s a great virtuous circle. But then the same thing can happen in reverse on the way down, and it can put the price, push the prices down if you have to, if you have to redeem from them. There’s also the point about transparency, which I think is one of the we spoke about earlier, the sort of notion of authenticity helped to find favour with retail investors. And people love that transparency that she gives around her research and things and her positions. But again, this could be a double-edged sword because people could sort of front run her positions because they, because they know what they are and they know what she’s trading.

Marc Filippino
Harriet Agnew is the FT’s asset management editor.

[MUSIC PLAYING]

Before we go, Britain can now be called the world’s leader in pest control. Britain’s Rentokil is buying the US pest group Terminix in a nearly $7bn deal that will make Rentokil the biggest pest control company on the planet. And it’s a good time to be in the business of trapping and killing bugs and rodents. The industry is growing. There are more middle-class households and more fear of viruses and diseases brought about by Covid-19 and climate change.

[MUSIC PLAYING]

You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

 [MUSIC PLAYING]

This transcript has been automatically generated. If by any chance there is an error please send the details for a correction to: typo@ft.com. We will do our best to make the amendment as soon as possible.