ARK Investment Management LLC’s winning bets on disruptive technology companies cemented Cathie Wood’s status as the hottest fund manager on Wall Street since Peter Lynch or Bill Gross.
Now, these maneuvers threaten to make ARK a high-profile victim of the recent shift in investor sentiment, setting aside technology stocks toward cyclical stocks linked to an economic recovery.
ARK manages five exchange-traded funds that actively invest in companies that Ms. Wood and her team of portfolio managers believe will change the world through what they call “disruptive innovation”. Among ETFs’ biggest holdings is Tesla, a maker of electric cars Inc.,
Square payments company Inc.
and media streaming company Roku Inc.
The stock prices of these three companies have risen at least 195% in the year since the Covid-19 pandemic changed the investment landscape – helping ARK funds more than double in the same period. But stocks fell more than 12% last week amid a broader sale of fast-growing technology stocks, a drop that many attribute to a sharp rise in government bond yields.
They outperformed the Nasdaq Composite Index, which fell 4.9% last week.
Concerns about an environment of rising interest rates were a test for the ARK, exposing the vulnerabilities of its investment approach. Higher yields often make growth stocks, including stocks of large technology companies, less attractive. In addition, some of ARK’s positions are in small and illiquid stocks, with the potential for dramatic fluctuation.
ETFs experienced double-digit percentage drops last week, their biggest deviations since the stock market crash last March, according to FactSet. Additional declines between growth stocks on Tuesday and Wednesday led to even deeper declines among ARK funds, bringing the falls of its main ARK Innovation ETF to 14% last month.
The cascade of red has proved difficult for many investors to swallow. ARK funds collectively lost more than $ 1.8 billion between February 24 and Monday, the largest outflow of all time, according to FactSet. Together, they managed about $ 51 billion at the end of February, making ARK the ninth largest ETF operator. This after attracting $ 36.5 billion in assets last year, more than Invesco Ltd.
, Charles Schwab Corp.
and First Trust – the fourth, fifth and sixth largest ETF issuer in the United States, according to Morningstar Direct.
But recent outflows have triggered sales in ARK’s funds to meet redemptions, while the company has also opted to divest shares of its easier-to-trade stakes, including Apple Inc.
and Snap Inc.,
to load into favorites like Tesla.
With technology stocks continuing to fall, ETF analysts and traders fear that a combination of broad market declines and additional exits could create a snowball effect across the ARK portfolio. This could cause some of its more illiquid and less capitalized holdings to trade sharply.
Tom Staudt, ARK’s chief operating officer, dismissed concerns about any liquidity problems and said that ARK’s ETFs continued to function like any other ETF during the turmoil.
Still, it has been a difficult time for ARK and its best coach, Mrs. Wood.
“What a crazy week or two we had here,” said Wood in a YouTube video posted on Friday that was seen by almost 600,000 people.
Ms. Wood founded ARK in 2014 and now serves as its executive director and investment director after a 12-year term at AllianceBernstein. The attractive performance of his funds, along with his willingness to engage investors through social media, podcasts and videos, has earned him a variety of catchy nicknames from individual investors and Reddit brokers, including “Mamma Cathie”, “Aunt Cathie” and, in South Korea, “Money Tree.”
“ARK funds fit the 2020 secular growth narrative, but now we are seeing a change in that,” said Steven DeSanctis, equity analyst at Jefferies. “It probably won’t be the last time in the short term that she will see outflows,” added DeSanctis, referring to Wood.
In addition to last week’s downturn, ARK returns have been the envy of the asset management industry, reviving some investors’ belief in stock pickers, after more than a decade of dominance by index tracking funds. The ARK Innovation ETF has recorded an average annual return of 36% since it started trading in 2014. This compares to the average return of the S&P 500 of 11% over the past 10 years.
“There have been a lot of customer calls in the past six months as funds have gained assets, and the main conversation has been about what happens when funds are no longer a hot topic,” said William Kartholl, director and chief negotiator for Cowen ETF.
Staudt said that ARK has a flexible limit of around 10% for any action within its funds. Tesla’s shares are at this level of innovation and autonomous funds from ARK, as well as Square in ARK’s fintech innovation pool. As for ARK’s exposure to smaller stocks, Staudt said these concerns are exaggerated and pointed to the fact that about 15% of ARK’s innovation fund is invested in stocks with a market value below $ 5 billion.
At the very least, volatility has created “attractive buying opportunities” for ARK, added Staudt.
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ARK loaded more shares of Tesla, Teladoc Health Inc.
and Square during last week’s settlement, according to ARK’s daily trading records. He also added more Zoom Video Communications actions Inc.
to one of your funds earlier this week.
Amid redemptions among ARK funds, the company also sold shares in some of its most widely traded net shares. The company cut its positions at Apple and Snap last week and sold all of its remaining shares on Salesforce.com Inc.,
he added. ARK also sold Facebook shares Inc.,
Bristol-Myers Squibb Co. and Roche Holding AG
this week.
“It’s almost like having dry powder in your wallet,” said Staudt, referring to how the funds basically create a cash-like reserve to buy other shares.
Not all investors are bothered by ARK’s large approach to investing. Flows to the ARK innovation fund turned positive on Tuesday, raising $ 464.3 million, according to FactSet.
But the most recent stumbling block by the ARK has continued to shake up others.
Paolo Campisi, a 31-year-old businessman from Toronto, bought shares in the ARK innovation fund in early February, but sold his stake last week after the shares fell more than 10%. He decided to place a riskier bet on an eventual recovery, buying out-of-the-money call options that expire at the end of the month. But he sold those options also on Wednesday, when the ARK’s main fund fell 6.3%.
“I think everyone will be challenged in the future,” said Campisi, adding that he is not sure at what level he would consider repurchasing the fund. “And the level of scrutiny from someone like Cathie [Wood] it will get high. “
Write to Michael Wursthorn at [email protected]
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