There Might Be Value in Disruptive Growth

Admittedly, the concept of disruptive growth investing is recently getting a lot of play in this place. To bottom line the 2021 scenario for this style of investing, it's been trying and performance is abysmal.

Making matters worse for clients is the rapid change in sentiment toward disruptive growth – it was on fire last year – and the facts that the broader market and more traditional growth benchmarks are trading higher in 2021.

All of that is enough to make clients through their hands up in the air in exasperation and abandon innovative growth. That's where advisors come in because failure to keep a level head results in turning temporary losses permanent – a quintessential mistake of the unadvised, impetuous do-it-yourself investor.

Time will tell, but it's not unreasonable to say that after this year's rough sledding, disruptive growth stocks and funds are nearing bottoms, meaning those departing the style today could be committing the mistake of selling low. They might also be missing out on rare value opportunities in stocks that are usually considered richly valued.

Straight From the Source

As advisors and clients know, when it comes to disruptive growth investing, some of the names most synonymous with this style are ARK Investment Management and the firms, chief executive officer and chief investment officer Cathie Wood.

Like any fund issuer and manager when times are good, ARK and Wood were the toast of the town last year. This year, some naysayers seem to be relishing the fact that ARK exchange traded funds are enduring a rough patch. However, penning the obituary of the firm and disruptive growth investing at large is likely to prove foolhardy.

This is an opportunity for advisors because, as noted above, there's certainly temptation among clients to abandon this style today, likely doing so at close-to-bottom pricing. Advisors can impart upon clients nothing moves up in straight line fashion and disruptive growth, while it can rapidly reward, also requires ample patience.

“Our primary message is that innovation solves problems and is expected to transform human lives at an accelerated rate during the next five to ten years,” says Wood in a recent report. “We also reiterate that we take advantage of volatility during corrections and concentrate our portfolios toward our highest conviction stocks.”

Smartly, she also addresses the concentration in ARK ETFs, including the flagship ARK Innovation ETF (NYSEARCA:ARKK). This is another sport of criticism for the old guard that so frequently crow about diversification, old school active management or low-cost beta funds.

“According to our current estimates, our more concentrated flagship strategy today could deliver a 40% compound annual rate of return during the next five years. Only one other time in ARK’s history, at the end of 2018, has the five-year return projection been that high,” notes Wood.

Translation: When disruptive growth rebounds, concentration and conviction will likely work in investors' favor.

Value to Be Had?

Advisors can be forgiven if they don't readily associate the likes of Tesla (NASDAQ:TSLA), Teladoc (NYSE:TDOC) and Zoom (NASDAQ:ZM) – all ARKK components – with value. In the traditional sense, these are not value stocks. No disruptive growth names are.

However, as Wood points out, there is currently a deep value argument for some disruptive growth names – another sign abandoning this style today could result in a turning a temporary bad thing into a major permanent mistake. In fact, another mistake might just be assuming that broader benchmarks are going to cut it as disruption takes hold.

“Unlike many innovation-related stocks, equity benchmarks are selling at record high prices and near record high valuations, 26x for the S&P 500 and 127x for the Nasdaq on a trailing twelve-month basis,” says Wood. “Yet, the five major innovation platforms which involve 14 technologies are likely to transform the existing world order that the benchmarks represent.”

Related: ARK Offers Up New Spin on Virtuous Investing