As we discussed in a recent Story Time Thursday, conviction is an important part of successful investing. It’s not just having the right ideas that generates outsized returns. Sizing them in a portfolio so they can make a difference to performance matters a lot as well.
As part of our 2H 2021 look-ahead series, today we will take that principal and go looking for high-conviction ideas in disruptive technology. Our sources are both human and algorithmic, because both can consistently generate investable ideas.
We’ll start with the top holdings in AIEQ, a US exchange traded fund that uses IBM Watson-powered artificial intelligence to make investment decisions. It’s up 17.7 percent year-to-date versus 14.3 percent for the S&P 500. We have a small personal position in the fund but otherwise have no ties to the product or its sponsor. Here’s what the “machine” currently likes:
#1: MongoDB (MDB, 3.2 percent weighting): Database program.
#2: Tesla (TSLA, 3.1 pct): Electric vehicles.
#3: Roku (ROKU, 3.1 pct): Streaming.
#4: CoStar (CSGP, 2.9 pct): analytics in commercial real estate.
#5: Appian (APPN, 2.8 pct): coding automation platform.
These 5 names are fully 15 percent of AIEQ and all are well above their weightings in any broad market index (S&P, NASDAQ, Russell 2000) so we’re certainly in the “high conviction” zone with any of them.
Now, moving on to a few ETFs from the highest profile investor in public market disruptive tech, Cathy Wood:
ARK Innovation ETF (ARKK)
#1: Tesla (TSLA, 9.7 pct weighting): Electric Vehicles.
#2: Roku (ROKU, 6.2 pct): Streaming.
#3: Teladoc Health (TDOC, 5.9 pct): Telemedicine.
#4: Square (SQ, 4.4 pct): Digital payments
#5: Zoom Video Communications (ZM, 4.4 pct): Tech communications.
ARK Genomic Revolution ETF (ARKG)
#1: Teledoc Health (TDOC, 7.0 pct weighting): Telemedicine.
#2: Exact Sciences (EXAS, 5.3 pct): Molecular diagnostics.
#3: Pacific Biosciences of California (PACB, 4.8 pct): Biotech.
#4: CareDx (CDNA, 4.4 pct): Precision medicine.
#5: Regeneron Pharmaceuticals (REGN, 3.9 pct): Biotech.
ARK Fintech Innovation ETF (ARKF)
#1: Square (SQ, 10.1 pct weighting): Digital payments.
#2: Shopify (SHOP, 5.8 pct): E-commerce.
#3: Sea LTD-ADR (SE, 4.7 pct): Internet and mobile platform.
#4: PayPal (PYPL, 4.7 pct): Online payments system.
#5: Zillow (Z, 4.6 pct): Online real estate marketplace.
As with the AIEQ portfolio, there’s no lack of conviction in any of these names. Ark’s had a spotty 2021, true, but the firm clearly has not backed away from making big bets. In point of fact, they have little choice and that’s important to understand as you cull through their ideas for your own portfolio. Disruptive tech investing means (at best) treading water on many of your investments but making huge returns on a few. It’s not quite as brutal as VC investing, where many positions go to zero, but it’s closer to that than just buying the S&P 500.
Now we’ll move on to a factor driven ETF with a proven long run track record vetted by years of academic research: iShares MSCI USA Momentum Factor ETF (MTUM).
#1: Tesla (TSLA, 5.7 pct weighting)
#2: JPMorgan (JPM, 4.5 pct)
#3: Walt Disney (DIS, 4.5 pct)
#4: Berkshire Hathaway (BRKB, 4.4 pct)
#5: Bank of America (BAC, 4.2 pct)
Worth noting: did you know TSLA was still a momentum stock? We didn’t either … And if you’re surprised to see 3 Financials names, those are new to the last rebalance.
And lastly/on a somewhat different note but still interesting, here’s how our favorite institutional bond fund manager, Jeffrey Gundlach, is positioning his portfolio at present:
- His SPDR DoubleLine Total Return Tactical ETF (TOTL) currently has a 6.0 average maturity and duration of 4.4 years.
- His benchmark’s average maturity is 8.5 years and its duration is 6.6 years.
Gundlach is making a high conviction call here, with a portfolio that is materially shorter in maturity/duration than his benchmark. If you’ve heard him speak or read his work, you know why: his worries about looming inflation.
Summing up: in terms of “highest conviction ideas”, Tesla, Square, Teladoc and Roku are the names with the most cross over between AIEQ and/or the various Ark products. We’re not necessarily recommending any of these companies, but wanted to present some targeted calls by big names in disruptive tech for those who are interested in single stock ideas.