Investment

The best performing funds in 2020, innovation…and the mind-blowing trends ahead

Innovation was the driving force behind top-performing US funds in 2020, as new sectors, such as healthcare and banks, felt its disruptive power. 

New York City-based Ark Invest and Edinburgh-based Baillie Gifford, devout believers in the trend, surged forward, upending traditional rivals and their obsession with backward-looking data. Hedge funds were left way behind. 

There is little doubt innovation is here to stay. But the leap in asset prices it inspired through the 2020 pandemic suggests a correction may not be far behind the euphoria which will result from a successful vaccination programme. 

To explain the power of innovation, few top ten players are better placed than Ark’s founder Cathie Wood. She is utterly convinced technology will lead to disruptions which will overlap, and utterly change, the shape of capitalism

By late December, following a recent surge, the best performer of 2020, by far, has been Grayscale Ethereum Trust with a rise of 460%.  Grayscale Bitcoin Trust was also in the top ten with 267%.

Both funds track the performance of cryptocurrencies without forcing investors to take custody. On 12 November, Family Capital pointed out family offices had started to view crypto as a safe haven compared to fiat currencies.

From this point, the main danger is that government regulators will move against crypto for fear of seeing a threat to fiat currencies down the line.  

Chinese regulatory action against Alibaba and its financial offshoot Ant Group, plus a US antitrust suit against Facebook, shows how quickly governments can bear down on tall poppies that grow too high. 

This agenda could become a developing theme in 2021 along with fears that prices have been driven too hard too fast in an era of easy money created by the Federal Reserve and other central banks to prop up economies during the pandemic. 

But a correction is overdue. Value investors say thematic passive funds and ETFs are hoovering up companies for prices they do not deserve. Howard Marks, co-founder of Oaktree Capital Management, warns a hike in interest rates will be a threat when inflation rears its head. Innovators are capable of preying on innovators.

None of this has worried the NYSE Fang+ index of internet stocks which rose 100% last year. The Bank of Montreal treble-leveraged Fang index fund saw a return of 336% (the second-best in 2020) while a double-leveraged version gained 201%.

Not far behind Fang + the Wisdom Tree Cloud Computing ETF saw a gain of 92% by tracking cloud-based internet stocks in a specialist Nasdaq index. Many say it will overhaul the Fang+ in 2021. 

The broader Nasdaq index only managed 43% in 2020. For the record, the S&P 500 index rose 14.2% by late December, thanks to growth stocks.  The Russell 1000 growth index rose 36.6% in 2020 but value fell -1.2%.

Hedge funds stayed out of favour with an average performance struggling to beat 10%.  The top performer was the Saba Capital credit fund run by Boaz Weinstein which took advantage of market volatility to generate 74%, according to Bloomberg. Other hedge funds like Coatue (58%) and D1 Capital (54%) outperformed by backing innovation. 

Tech-driven sustainable innovation should remain in favour in 2021 as investors, led by family offices, back clean energy and energy storage to limit climate change. The incoming Biden presidency and China are now committed to achieving net zero emissions. 

Invesco Solar ETF was a top ten US fund in 2020, with a gain of 238% by late December.  Invesco WilderHill Clean Energy ETF saw a gain of 210%. First Trust Green Energy ETF, up 179% also earned its place in the top ten. 

Actively-managed funds saw Ark Invest achieve top-ten gains of 196% for its Genomic Revolution active ETF, plus 160% for Ark Innovation.

Morgan Stanley’s Institutional Discovery Fund, run by Dennis Lynch, also takes a constructive view of innovation by backing low-profile mid-cap innovation. It gained 146% over 2020. 

Baillie Gifford of Scotland did marginally less well, but still trounced its peers with a 127% gain for its American fund and 108% for Scottish Mortgage which was early to see the power behind innovation.

To explain the power of innovation, few top ten players are better placed than Ark’s founder Cathie Wood. She is utterly convinced technology will lead to disruptions which will overlap, and utterly change, the shape of capitalism. 

She argues there are five key platforms for innovation comprising blockchain, energy storage, DNA sequencing, robotics, and artificial intelligence. They are capable of producing business worth $50 trillion in ten years as new applications gain users.

This expectation helps to explain why investors are jostling for position as opportunities mature and achieve mass acceptance. And 2020 data explains the extent to which euphoria is already driving bids, deals and floats.

This Autumn, according to Pitchbook, Orlando Bravo’s Thoma Bravo sold its Ellie Mae mortgage software business to Intercontinental Exchange for $11 billion – a profit of $9 billion in two years. This year it tackled 40 deals.

Disruptive insurer Lemonade became the year’s hottest IPO with a gain of 350% to $6.7 billion since February. 

Following a September IPO cloud data company Snowflake achieved a market value of $120 billion in December, briefly ahead of IBM. This compared to a Pitchbook private value of $12.4 billion in February, although the company recently saw its value hit $85 billion, as share lock-ups expired.

According to Bloomberg, billionaire Alec Gores turned $25,000 into $80 million in months by using his SPAC to buy a wholesale mortgage provider for $16 billion, although he also supplied risk capital, according to the company.

Workplace software provider Slack failed to live up to its 2019 IPO hype, but agreed to be taken over in December by Salesforce for a staggering $27.7 billion, a 55% premium to its market price. 

Tesla best symbolises the new golden age, after seeing its share price rise 7.5 fold in 2020 to hit a value of $630 billion, bigger than Toyota, VW, Daimler, GM, BMW, Honda and Ford, added together. 

But Ark believes its expertise stretches across several platforms – AI, energy storage, and robotics – opening up new opportunities beyond the ken of motor analysts. 

New narratives are continually developing. AI through machine learning has already become a powerful tool in management decisions, as Salesforce has demonstrated. New applications are under development in venture capital, including quantum computing.

This year we have seen drugs developed in less than a year to fight the pandemic. Moderna, earmarked as a possible vaccine provider by Family Capital on 2 March, has seen its shares sextuple in a year.

In less than five years, Woods believes geneticists will cure cancers by identifying DNA mutations and editing them out, leaving biotech in pole position to take disruption to the next level. 

3D Printing, self-driving cars and space exploration can become successful through robotics.  The next generation of global technology networks will use blockchain. Bank accounts are turning into e-wallets. 

Cathie Wood believes all this, which comes with price efficiency, will add multiple trillions to market values while converting old economy companies into value traps. 

She says managers can’t see what is coming down the line because their data is backward looking. This could spell problems for indexed funds, exposed to fading companies and failing to invest in tomorrow’s innovative companies, because they are relatively small.   

Fair enough, but even Wood concedes a correction is possible. Not least because trends do not travel in straight lines forever.  

 

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