Armed with messianic conviction and social media savvy, Cathie Wood has built a lucrative career pitching disruptive companies to US retail investors.
But even the 67-year-old acknowledges that her quest to bring Ark Investment Management, the firm she set up in 2014 and that is headquartered in the Florida beachside town of St Petersburg, to Europe is a daunting one.
Europe is a “tough nut to crack,” Wood told the Financial Times. “We knew, as an American company, that Europe and the UK is the most complicated region in the world. We needed local talent and local leadership.”
Wood has long harboured ambitions to break into the $1.5tn European exchange traded fund market, but it was only last month that Ark took its first step with the acquisition of Rize ETF, a London-based company that manages more than $450mn across 11 ETFs. Rize will be renamed Ark Invest Europe.
With ETFs built around concepts such as the future of food, Rize mimics the beguiling investment themes that attracted legions of US retail investors to Ark and, at its peak in early 2021, turned it into a company with $60bn in assets.
But for many of the incumbents in Europe’s still embryonic ETF industry that is where the similarities with the older and much larger US market end.
“The US is one market with one currency, one language and one tax system,” said Deborah Fuhr, founder of the ETFGI consultancy, drawing a contrast with the far more fragmented picture in Europe.
European countries are marked by their own distinct dynamics that are vital for a new entrant to understand, according to Howie Li, the head Legal & General Investment Management’s $15bn ETF arm.
None of which has stopped BlackRock, Vanguard, State Street and Invesco, the powerhouses in the $7.5tn US market, from tapping demand in Europe for low-cost index-tracking funds. The US companies now go head-to-head with big European players such as Amundi, DWS, an asset manager majority owned by Deutsche Bank, and UBS in their own backyard.
Ark’s European ambitions are more modest and its outlay smaller. The group paid just £5.5mn for a 70 per cent stake in Rize, acquiring the business from AssetCo, an investment firm founded by Martin Gilbert, an asset management industry veteran.
AssetCo has admitted that Rize’s path to profitability has proved “slower” than hoped. The company reported a £2.5mn pre-tax loss in the 12 months to September 2022.
Wood believes she can turn that performance around. Roughly a quarter of the subscriptions to the research published by Ark on its website are from Europe, according to her. Ark’s founder believes this is evidence of underlying demand from investors in the region.
“The top question we have [received] from investors is ‘why can’t we access your strategies in Europe’,” said Wood. Ark specialises in actively managed ETFs, which aim to pick stocks rather than simply track an index.
Actively managed ETFs are a niche within the nascent European market. Assets in such funds hit $28.4bn at the end of September after inflows of $6bn in the first nine months of the year, according to ETFGI. That is up from $2.8bn of inflows for the whole of 2022.
Ark is seeking regulatory approval to roll out European versions of its range of ETFs, spanning themes from artificial intelligence to genomics, before the end of the year.
Simon Klein, global head of Xtrackers sales at DWS, Germany’s largest asset manager, said that the continued appeal of thematic ETFs was attracting more providers in the US and Europe.
“Financial advisers and self-directed retail investors are finding thematic ETFs can provide them with access to ideas that cut across traditional sectors,” said Klein.
Providers of such ETFs, including Ark, fill the fund with companies they say reflect the theme. Unlike mutual funds, the ETFs disclose all the companies they hold.
But even if European investors do want more exposure to companies promising disruption and innovation, that is no guarantee of success for Wood, according to analysts and industry executives.
Kenneth Lamont, a senior analyst at data provider Morningstar, said that Ark’s sales pitch was perfectly crafted for US millennial investors eager to take a punt on companies that might develop into the next Tesla or Amazon.
The approach paid off handsomely for Ark in the final throes of the US bull market in 2021 when sober financial analysis of companies’ valuations were discarded in a trading frenzy driven by central bank stimulus.
In Europe, however, the growth of the ETF market has been driven by big institutional investors, with retail investors playing a much smaller role than in the US.
“You can’t just pitch up from the US and expect it will work in Europe,” said Lamont. The move into Europe “smacks a little bit of desperation”.
Despite an improved performance during the past 12 months thanks to a resurgence in tech shares, Ark’s performance over the past three years has been painful for investors. Seven of the eight funds in Ark’s US-listed ETF range have recorded losses in the period.
Investors have pulled more than $1.3bn from Ark’s US listed ETFs this year, reducing the firm’s overall assets to $25bn, according to ETFGI.
Ark’s funds have a negative rating from Morningstar, which cites concerns over performance, risk management and the outsized role of Wood, who is chief executive and chief investment officer. “Everything goes through Cathie Wood,” said Lamont.
Wood has been characteristically defiant, using television appearances and social media to promote her credentials as an investor. “Ark’s platform is full of Amazon-like names,” Wood said in October, referring to companies that she claims have the same disruptive potential to the online retailer.
Alongside questions over whether her evangelism could misfire in Europe, Wood and Ark will need to overcome several hurdles.
In many European countries, asset managers can pay financial advisers a commission to recommend an actively managed mutual fund. ETF providers do not pay any similar incentives, which has slowed their adoption by financial advisers in Europe.
ETF trading in Europe is conducted across multiple exchanges, dividing liquidity and increasing transaction costs. Meanwhile, distribution channels for selling ETFs also vary across the continent, which will require Ark’s salesforce to win orders from a mix of fund supermarkets, banks, brokers, wealth managers and financial advisers, alongside individual retail investors.
Unlike in the US, ETFs do not offer tax advantages in Europe. Ark has recently highlighted to its US investors the expected capital gains tax write-offs given the losses its funds have accumulated.
Despite Europe presenting multiple challenges to Ark, MJ Lytle, co-founder of two European ETF businesses, said choosing to enter the region through an acquisition was a sensible move.
“The deal will allow Ark to leapfrog into Europe’s ETF market without spending years trying to build a meaningful presence from scratch,” said Lytle, chief executive of Tabula Investment Management.
Since acquiring Rise, Ark has remained tight-lipped over which European countries it will target. In a sign of the dangers of expanding too quickly, Vanguard, the world’s second-largest asset manager, has concentrated its push on the UK, Germany and Switzerland — a move that keeps its costs as low as possible.
Indeed, Gilbert’s decision to sell Rize barely two years after acquiring the company points to the obstacles in breaking the dominance of the 10 players who control more than 90 per cent of the ETF market in Europe.
Amin Rajan, chief executive of the consultancy Create Research, cautioned that almost every small ETF manager had failed to gain critical mass in Europe, before adding that “if there is anyone that can, then it is Cathie Wood”.
