00:00:00 Harry's Introduction to Kathy

Overview: Harry introduces Kathy and her background in finance.

Kathy's Background

Kathy was introduced to Capital Group at the tender age of 20.
She was fascinated by economics and the way the world was going to work in the future.
She has been running from indexed based investing and benchmarks in the traditional Asset Management world.

00:01:26 Kathy's Investment Strategy

Overview: Kathy explains her investment strategy which is centered around five Innovation platforms.

Kathy's Investment Strategy

Kathy's investment strategy is centered around five Innovation platforms: genomic sequencing, robotics, energy storage, artificial intelligence, and blockchain technology.
She believes that passive investing has become a dangerous way to invest due to the amount of innovation that is evolving today.
She believes that the pendulum has swung too far towards passive investing and that it will destroy the way the world has worked and create a whole new world.

00:03:50 Lessons Learned from Hard Times

Overview: Kathy reflects on the lessons she learned from the 0809 bust and Tupelo Affirm.

Lessons Learned

Kathy was not there for most of the 0809 bust, but she was there for three years when they built the firm from 250 million to 1.2 billion.
In year three, 2000, they were down 20 percent.
Kathy believes that we learn a lot from hard times.

0:05:41 Buying Puts for Protection

Overview: In this section, the speaker discusses how they bought puts to protect their investments during the late 90s and early 2000s.

Protection Strategy

Bought puts to protect investments during late 90s and early 2000s.
Agreed to disagree with partner about taking off the puts in January 2001.
Responsible for 20% decline in 2000 due to putting on puts.

0:06:09 Excess Supply of Capital

Overview: The speaker talks about the current Venture cycle and the excess supply of capital chasing too few deals.

Excess Supply of Capital

Since February 2021, disruptive innovation strategies have been destroyed.
Growth strategies are being sucked into Venture and down rounds are occurring.
Believes there is an Arbitrage opportunity and is buying into down rounds in the private markets.
Private markets have a better handle on valuations than public markets.

0:09:30 Risk-Off Period

Overview: The speaker discusses how traditional investors move back to benchmarks during a risk-off period.

Risk-Off Period

Traditional investors move back to benchmarks during a risk-off period.
Stocks not in benchmarks are down 80-90% from their peaks.
Fundamentals will disrupt the way of thinking in the next few years.

0:10:29 Self-Doubt

Overview: The speaker talks about how they deal with self-doubt when seeing red in the markets.

Self-Doubt

Data and research driven approach helps maintain strong conviction.
Asks honest questions to stay focused on fundamentals.

00:11:40 Assumptions and Expectations in Risk-Off Periods

Overview: In this section, the speaker discusses the assumptions and expectations of stocks during a risk-off period, and how to adjust portfolios accordingly.

Averaging Down and Concentrating Portfolios

During a risk-off period, stocks are likely to be dumped, so investors should take advantage of this by averaging down and concentrating their portfolios towards their highest conviction names.
This means reducing the number of stocks in the portfolio from 58 to 32-33 names.

Irrational Markets

The speaker cautions against assuming that markets will remain irrational longer than companies can remain solvent.
He points out that the traditional Asset Management world was wrong about Tesla in early 2019, and that loyal shareholders would have bought into a secondary offering.

Selling Stocks

The speaker explains that when stocks fall below a minimum hurdle rate of return over a five-year period (15%), they should be sold.
He gives the example of NVIDIA, which was sold when its valuation became too high due to its inclusion in the index.

0:17:27 Analysts Responsibilities and Index Investing

Overview: Discussion of the responsibilities of analysts and the impact of index investing on large cap tech stocks.

Analysts Responsibilities

Analysts are sector generalists, responsible for understanding how technologies scale to mass market levels.

Index Investing

Last year, the market reached all-time highs, with the FANGs (Facebook, Amazon, Netflix, Google) accounting for nearly 50% of the NASDAQ 100 and a substantial percentage of the S&P 500 and MSCI.
Crowding into indexes supported those stocks, but the company did not own them due to competition, social commerce, and supply chain issues.
Performance of large cap tech is tied to the growth of passive ETF index investing.

0:18:42 Risk Management

Overview: Discussion of risk management and the company's approach to investing.

Risk Management

The company does not own stocks like the FANGs due to macro and micro concerns.
Strategies are starting to outperform on days when benchmarks don't.
Less than 10% of the portfolio is in the same stocks as the benchmarks.

Investing Approach

The company is focused exclusively on disruptive innovation.
Asset allocators determine how much of the portfolio should be allocated to the company's strategy.
The company provides asset allocators with an opportunity to make up for the massive short in their portfolios.
The company's strategy is volatile due to uncertainty, while benchmark stocks are more about the past.

0:23:26 The Secret to Great Adventure Investors

Overview: This section discusses the secret to great adventure investors, which is the willingness to be uncomfortable and lonely. It also explains why Ark hasn't had more outflows, and what people should do now that the strategy is down 79%.

Willingness to be Uncomfortable and Lonely

Being a great adventure investor requires the willingness to be uncomfortable and lonely, even when everyone else disagrees.
This can be difficult in traditional asset management, given performance and people's general discomfort with uncertainty.

Why Ark Hasn't Had More Outflows

Ark gives away its research and is active on social media, allowing investors to take the journey with them and understand their five-year investment time horizon.
Last year, Ark had 17 billion dollars in net flows, and this year they haven't even outflowed 1 billion.
Investors know that Ark provides something they won't get anywhere else, and is a good diversifier for long-term outperformance and risk control.

What People Should Do Now

Good asset allocators should be buying Ark's strategy and selling some of the more index strategies that have held up well.
On the social media side, it will be considered provincial in 3-5 years to not share research.
Ark's research starts from the top down, sizing opportunities using Moore's Law, followed by bottom-up analysis and a six-point overlay scoring system.

0:28:50 Accreditation Process for Retail Investors

Overview: Discussion of the accreditation process for retail investors and how it can be modified to use knowledge as a metric for accreditation.

Knowledge as an Accreditation Metric

Hester Pierce at the SEC believes that the accreditation process should be revolutionized to use knowledge as a metric instead of income and asset thresholds.
This would allow more retail investors to participate in growth opportunities, even if they don't meet the income or asset threshold.

Arc's Interval Fund

Arc has chosen to focus on retail investors with an interval fund structure.
The fund has a zero percent carry fee and a 2.75% management fee, which is lower than the average 9% fee of a top quartile Venture Capital fund.
Titan is Arc's distribution partner and will help retail investors get to know the companies by interviewing CEOs and featuring Arc's analysis.

0:35:13 Comparing Fees and Attracting Talent

Overview: A comparison of fees between the 2.75% management fee and the 2 and 20 French Venture Fund, and how Arc is set up differently to attract talent.

Comparing Fees

Arc's all-in management fee is 2.75%, compared to the French Venture Fund's 2 and 20.
Over time, this would mean paying 40% more in fees with the French Venture Fund.

Attracting Talent

Arc's analysts have been following private companies for years, and are given equity from the beginning.
Arc's analysts benefit from all of Arc's funds, not just the Venture fund.
Arc's analysts are not divided into public and private sides, allowing them to stay with a company from early stage to Mega cap.
Arc has partnered with top tier Venture funds to introduce them to their top ideas.

0:36:37 Biggest Risk and Access to Deals

Overview: The biggest risk for Arc is that one of their companies is disrupted by a new technology or company, and how they have access to the best deals.

Biggest Risk

Arc's biggest risk is that one of their companies is disrupted by a new technology or company.

Access to Deals

Companies have asked Arc what it takes to get into their portfolios.
Arc has a top-down analysis and metric scoring system to explain what it takes to get into their portfolios.
Arc's research carries a lot of weight due to their selectivity and concentration.
Arc showcases the most Innovative and disruptive companies in the public markets.

0:41:22 Utilizing Bitcoin to Create Sustainable Energy Solutions

Overview: This section discusses how Bitcoin can be used to create sustainable energy solutions by incorporating it into utility ecosystems, overbuilding solar and wind, and utilizing natural gas fields. It also covers how the company Cruso Energy was able to use their research to connect with venture capital firms and private companies.

Capital Planning in an Evergreen Open Strategy

Capital planning in an evergreen open strategy is more difficult than in a closed down 400 million fund.
Arc has opened doors for the company, as well as their research.
They are getting more than their fair share of attention from venture capital firms and private companies.
They are walking before they run and not leading deals right now.

Disruptive Technologically Enabled Innovation

Disruptive technologically enabled innovation is currently priced at seven to eight trillion dollars in global markets.
This is expected to increase to 210 trillion dollars in the next 8-10 years.
Strategies need to be able to scale and stick with companies from early stage to mega cap.
The risk taken on investing in the venture fund is that it can convert a media company into a top tier investment firm.

0:47:33 Investing in the Public Markets

Overview: This section discusses the importance of having a long-term investment time horizon and the stomach to deal with volatility when investing in the public markets.

Long-Term Investment Time Horizon

Having a long-term investment time horizon is essential for success in the public markets.
Volatility is to be expected, and investors must be prepared to handle it.
If an investor cannot handle the volatility or does not have the long-term time horizon, they should not invest in the public markets.

Minimum Investment

The minimum investment amount is $500.
This allows investors to take on some risk without having to commit too much capital.

0:49:03 Favorite Book

Overview: Kathy shares her favorite book and why she loves it.

The Emperor of All Maladies

Kathy's favorite book is The Emperor of All Maladies, a biography of cancer.
She finds it inspiring how we have turned cancer from man's worst enemy to man's best friend.

0:50:00 Evaluating Facebook

Overview: This section discusses the current state of Facebook and how it may need to pivot away from its current strategy.

Facebook's Current State

Brad Gerson's letter suggests that Mark Zuckerberg is investing in an idea before its time.
Zoom is already in the metaverse, and it is unclear where it will take us.
Despite this, Facebook's engagement remains high, making it a potential value stock.

0:51:13 Elon and Twitter

Overview: This section discusses Elon Musk's recent acquisition of Twitter and what it could mean for the platform.

Elon and Twitter

Twitter is the best social network for getting the word out and engaging with people.
Elon Musk is considering subscription along with advertising as a way to monetize the platform.
He may also pivot Twitter into the metaverse more gracefully than Facebook.
Elon's experience with Tesla may give him insight into how to disrupt Apple's Walled Garden.

00:53:24 Investing with Conviction

Overview: In this interview, Kathy Xu discusses her relationship to money, her strategy for investing, and her vision for Arc in the future.

Investing Strategy

Kathy's strategy is to bet against the market when she has evidence and data that suggests the opposite of what the world is saying.
She believes in taking risks and investing with conviction, rather than diversifying her portfolio.
Her flagship fund toggles between Tesla and Zoom as the top two investments.

Relationship to Money

Kathy is focused on making sure Arc is doing the right thing for their clients.
She is willing to take risks and invest in innovation, such as crypto and private funds.

Vision for Arc

Kathy wants Arc to be known for its deep research into technologically enabled innovation.
She also wants it to be a place where anyone can come to learn about how the world is changing and get on the right side of change.

jxnl/20vc-cathywood.md