The stock market’s rapid turnaround against technology and other growing stocks has given the select stock selection Cathie Wood and her company, ARK Investment Management LLC, its most difficult test.
All five of the company’s publicly traded funds have fallen by more than 20% since the beginning of February, affected by a sharp increase in government bond yields. The flagship ARK Innovation ETF suffered the sharpest declines, falling 27% from its February 16 high. In comparison, the Nasdaq Composite Index fell about 8% in the same period.
Known as “Mamma Cathie” by individual investors on Reddit’s WallStreetBets forum, Ms. Wood touts her strategy of investing in what she calls disruptive companies in videos and podcasts – those she says are destined to change the world and grow tremendously. Your bets vary from investor favorites, like Apple Inc.
and Tesla Inc.
for pandemic winners like Roku Inc.
and square Inc.
the little-known 3D printing company Stratasys Ltd.
and the Israeli drug company Compugen Ltd.
CGEN 1.65%
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Those bets paid off last year, when Tesla jumped more than 700%, Square added 325% and Roku rose almost 150%, helping ARK ETFs more than double. Wood was widely hailed as the best stock picker on Wall Street, but its star has fallen in the past two weeks when long-term interest rates have suddenly risen and investors have abandoned mass-growth trading.
ARK’s chief operating officer, Tom Staudt, said on Thursday that the company is not overly concerned with the recent crisis, seeing it as a short-term market trend rather than the beginning of permanent change. He added that ETFs have been working as expected and the company’s portfolio managers are using volatility to buy stocks that fit his philosophy and appear to be oversold.
Cathie Wood in videos and podcasts touts her strategy of investing in what she calls disruptive companies.
Among the factors that aggravate the pain for ARK are a series of highly concentrated positions, including small companies in which Wood’s firm has a significant share of the shares. Bearish investors are also taking short positions to bet that ARK’s funds and some of its holdings will fall further.
The following graphics help to illustrate these dynamics:
Of the 164 shares held by the five ARK funds, 139 fell last month, according to daily share data compiled by Dow Jones Market Data. This is much worse than the S&P 500. Less than half of its constituents declined over the same period.
ARK has taken considerable positions in many companies that were considered winners during much of the Covid-19 pandemic last year. But a number of shares held by ARK generate little or no profit, including Roku and Teladoc Health Services Inc., as well as electric vehicle maker Workhorse Group. Inc.
and Stratasys.
Analysts, including those at the Goldman Sachs Group Inc.
noted that the shares of non-profit companies were some of the hardest hit by the recent sale and investors recommended that they limit their exposure to such shares. The declines so far have brought the stock of the ARK’s main fund to its lowest levels since the end of November.
Tesla is ARK’s largest position in three of its funds, reaching about 10% of the assets of these ETFs. ARK has a flexible limit of 10% on its fund positions. In all five ETFs, Tesla accounts for 7% of the assets. Square, Roku, Teladoc and the bitcoin cryptocurrency are among some of its other biggest stakes.
Michael Purves, chief executive of Tallbacken Capital Advisors, said he has warned investors about investing in individual shares in the innovation fund, as many are smaller stocks that may be subject to large fluctuations.
“You don’t have to be at ARKK to be harmed by the ARKK situation,” said Purves of the innovation fund.
Among ARK’s five funds, 26 of its positions are in companies in which the company holds more than 10% of all outstanding shares, according to company data, FactSet and Dow Jones Markets Data.
Most of these holdings are in small companies with market values below $ 5 billion and fewer shares available for trading on the open market.
“You have to think about the market impact it is having on small businesses,” said Elisabeth Kashner, director of fund research at FactSet. “Where the market prices of some of these less liquid securities have risen rapidly, they can then fall at the same rate as the funds flow out.”
Investors are also becoming more pessimistic about ARK funds, creating a felt ripple effect across the portfolio, said William Kartholl, director and head of ETF trading at Cowen Inc.
Interest sold as a percentage of the overall float of the ARK innovation fund rose to about 11% on Thursday, the highest level ever, according to S3 Partners. Investors are also increasingly pessimistic at ARK’s Genomic Revolution ETF, with interest rates rising to 8% of their total float, down from less than 3% at the end of last year.
When investors sell an ETF, the shares are created by specialized investment firms, known as authorized participants, exclusively for lending purposes. This process involves authorized participants selling underlying shares in the fund, which can increase short interest in some ARK holdings, said Kartholl. This could lead to increased volatility for individual stocks, he added.
Among the ARK positions with significant short-term interest are Workhorse Group and biotechnology company Beam Therapeutics,
BEAM -1.21%
both by about 20%, according to S3 data. Shares of Workhorse, which was briefly a target of Reddit’s day traders during GameStop Corp.
GME 4.07%
saga, fell 66% last month, while Beam fell 38%.
—Ken Jimenez and Gunjan Banerji contributed to this article.
Write to Michael Wursthorn at [email protected]
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