Cathie Wood’s ARK Faces Test as Tech Rally Cools

Wood, known to individual investors on Reddit’s WallStreetBets forum as “Mamma Cathie”. In videos and podcasts, she mentions her strategy for investing in what she calls disruptive companies – those she believes are destined to change the world and grow tremendously. Her commitment ranges from investor favorites like Apple Inc.

in Tesla Inc.

to pandemic winners like Roku Inc.

in Square Inc.

to the little known 3D printing company Stratasys Ltd.

and the Israeli therapeutic company Compugen Ltd.

CGEN 1.65%

Gambling paid off well last year, when Tesla jumped more than 700%, Square added 325% and Roku rose almost 150%, more than doubling ARK’s ETFs. Wood has been widely praised as the most popular stock voter on Wall Street, but her star has fallen over the past two weeks as long-term interest rates suddenly soared and investors abandoned the growth trade en masse.

ARK chief operating officer Tom Staudt said on Thursday that the company was not too worried about the recent slump, and saw it as a short-term market trend rather than the start of a permanent shift. He added that the ETFs are expected to function and that the portfolio managers of the company are using the volatility to buy stocks that fit and seem excessive according to their philosophy.

Among the factors exacerbating the pain for ARK is a series of highly concentrated positions, including small companies in which Ms. Wood’s firm owns a large portion of the stock. Bearish investors are also taking short positions to bet that ARK’s funds and some of its investments will decline further.

The following maps help to illustrate the dynamics:

Of the 164 shares held in ARK’s five funds, 139 have declined over the past month, according to daily holdings data compiled by Dow Jones Market Data. It is much worse than the S&P 500. Less than half of its ingredients decreased during the same period.

ARK took significant positions in many of the companies that were considered winners during many of the Covid-19 pandemics last year. But a number of the shares owned by ARK make little or no profit, including Roku and Teladoc Health Services Inc., as well as the manufacturer of electric vehicles, Workhorse Group. Inc.

and Stratasys.

Analysts, including those at Goldman Sachs Group Inc.

noted that shares of non-profit companies were hit the hardest by the recent sell-off, and the recommended investors limit their exposure to such shares. The declines so far have pushed the shares of ARK’s flagship fund to the lowest levels since the end of November.

Tesla counts ARK’s largest position in three of its funds, accounting for about 10% of ETFs’ assets. ARK has a soft cap of 10% on positions within its funds. In all five ETFs, Tesla accounts for 7% of the assets. Square, Roku, Teladoc and the bitcoin bitcoin are among the other biggest businesses.

Michael Purves, CEO of Tallbacken Capital Advisors, said he had warned investors about investing in the innovation fund’s individual investments, as many smaller stocks are prone to big swings.

“You do not have to be in the ARKK to be injured by the ARKK situation,” he said. Purves said about the innovation fund.

Among ARK’s five funds are 26 of its positions in companies in which the company owns more than 10% of all outstanding shares, according to data from the companies, FactSet and Dow Jones Markets Data.

Most of these interests are in small businesses with a market value of less than $ 5 billion and fewer shares that can be traded on the open market.

“You need to think about the impact on the market you are making with small-cap,” said Elisabeth Kashner, director of fund research at FactSet. “Where the market prices of some of these less liquid securities have risen fairly rapidly, they can be driven at the same rate as funds are flowing out.”

Investors are also clumsy on ARK’s funds, which is having an impact on the entire portfolio, says William Kartholl, director and head of ETF trading at Cowen. Inc.

The short-term interest rate as a percentage of the overall fleet of ARK’s innovation fund rose to about 11% from Thursday, according to S3 Partners, the highest level ever. Investors are also increasingly clumsy for ARK’s Genomic Revolution ETF, with short-term interest rates rising to 8% of its total momentum from less than 3% by the end of last year.

If investors are short of an ETF, shares are only created for the loan by the specialized investment firms known as authorized participants. The process involves authorized participants shorting the underlying shares of the fund, which may contribute the short stake in some of ARK’s shares, Mr. Kartholl said. This could lead to increased volatility of the individual stocks, he added.

Among the ARK positions with a significant short interest rate are Workhorse Group and the biotechnology firm Beam Therapeutics,

BEEL -1.21%

both at about 20%, according to S3 data. Shares of Workhorse, which was briefly a target of Reddit’s day traders during the GameStop Corp.

GME 4.07%

sage, has fallen 66% in the past month, while Beam has fallen 38%.

—Ken Jimenez and Gunjan Banerji contributed to this article.

Write to Michael Wursthorn by [email protected]