Not surprisingly, investors have started to apply. Moonshot Innovators posted a new $ 31 million fund last Thursday and another $ 39 million last Friday. While nothing compares to the auction of various ETFs at ARK Investments, it marks the highest one-day inflow in the fund’s four-month history. ARK Innovation, on the other hand, saw $ 70 million and $ 138 million of funds leave the fund on those two days, respectively.
Investors, however, should pause before making any hasty decisions. Despite their similarities in names, Moonshot Innovators and ARK Innovation differ in many ways.
Unlike ARK ETFs, where stocks are actively selected and traded based on human decisions, Moonshot Innovators is a passively managed asset monitoring index. ARK Investment has a team of industry experts and analysts who research emerging strategies and their potential growth. Moonshot Innovators use a different approach, leaving things in the hands of a computer algorithm that reads text.
The team at Direxion and index assistant S&P Dow Jones put together a group of analysts with a set of words such as riotous, revolutionary, and others that companies commonly use to describe efforts and innovative achievements. They then trained on a natural language processing algorithm to find those words in company films and to identify the combinations of terms historically associated with highly innovative companies.
To test the effectiveness of the algorithm, the Direxion team conducted an algorithm review of early-day films of successful companies, such as
Amazon
(AMZN) and
Apple
(AAPL), to see if it returned a good result. After many rounds of feedback and finetuning, the algorithm was used to read recent management films of early modern companies. The top 50 names that the algorithm rated as “most innovative” were included in the index with equal weight.
Such an approach may give some reasonable doubt. While Moonshot Innovators favors companies that spend more on research and development, the fund largely avoids other fundamental and financial analysis. Instead, Moonshot Innovators relies heavily on what the company’s management said in their filing or employment announcements. Critics argue that may seem too simplistic and could be easily manipulated.
David Mazza, managing director at Direxion, is not bothered by such criticism. The sample of innovative terms may look pretty generic, he said, but what matters is how they are used together. The best use of words and combination also varies from industry to business, he says, and the algorithm knows how to recognize these different speech patterns.
“Some mourners of this fund believe that companies could simply fill their financial statements with all these terms, but it’s not that simple,” he says. Barron’s. “If companies just use the word ‘innovation’ for the first time, that doesn’t affect the algorithm. They are very likely to be broken out. “
The passive nature of Moonshot Innovators means the package is not as flexible as ARK Innovation. While the ARK fund changes its positions daily based on market movements, Moonshot rebalances every six months. Between these dates, stocks that outperform a larger portion of the asset and are then cut back to a 2% weighting at the rebalancing wherever the market is. The opposite applies to laggard names.
This means that the fund would see a significant change in shape within a short period of time – particularly given the volatility of some of its holdings. Since last rebalancing in mid-December, Moonshot already has a weight of nearly 10%
Microvision
(MVIS), a tiny tech company in laser scanning, as the stock has risen nearly 250% since then.
Moonshot and ARK Innovation also have different package shapes. Moonshot is specifically targeting small and micro-cap companies in the early stages of development. Any stock with market potential in the top 10th of the market would be automatically excluded. As of last week, that cap is around $ 10 billion, Mazza said. The average market capacity of Moonshot Innovators holdings is just under $ 3 billion, according to
Morningstar.
ARK Innovation, by contrast, is open to stocks up and down the spectrum of the cap. The fund owns only about 40% of assets in smaller names. So the average market potential is much higher, at $ 38 billion. After all,
Tesla
(TSLA), with its huge amount of $ 629 billion, makes up nearly 10% of ARK’s assets.
From a regional perspective, Moonshot has a heavier weight in biotechnology, and ARK Innovation has more internet companies. “Theirs [ARK Innovation] the portfolio is very different from ours, ”says Mazza,“ There is very little overlap, just a few names in both care. ”
While Moonshot has had a good run in its early months, investors should be wary of assets with a short history. ARK Innovation is loved by investors not only because of its benefits in 2020, but also its stable record of outperforming its peers almost every year since its inception. e.
However, ARK has its own problems. Critics have warned that the company could suffer on its own: It has attracted a lot of “hot” money that needs to be invested, perhaps in areas where Wood and the her team so happy. Moonshot, despite the recent funding streams, need not worry about this – for now. But as the fund grows in size, the narrow focus on small-cap stocks means an investment potential challenge could present itself even faster than it did for ARK.
Moonshot is probably riding small-cap momentum and cracking investors for anything that appears new and different. But new doesn’t always mean better. Warren Buffett famously said: “It’s only when the tide goes out that you discover who has swum naked. ”
Will the algorithm select the best innovators? It sounds like a leap of faith, but it still works.
Write to Evie Liu at [email protected]