ARK Investment Management LLC’s bets on disruptive technology companies have confirmed Cathie Wood’s status as Wall Street’s hottest fund manager since Peter Lynch or Bill Gross.
The opportunity threatens to make ARK a high profile of the recent shift in investor sentiment away from technological stocks and towards cyclical stocks associated with an economic upswing.
ARK operates five exchange-traded funds that actively invest in companies. Wood and her team of portfolio managers believe the world will change by what they call ‘disruptive innovation’. Among the ETFs’ largest businesses is Tesla Inc.,
payment company Square Inc.
a streaming media company Roku Inc.
The share prices of the three companies have risen by 195% in the past year since the Covid-19 pandemic increased the investment landscape, more than doubling ARK’s funds over the same period. But equities fell more than 12% last week amid wider sales of fast-growing technology stocks, which attributed a slump in many to a sharp rise in government bond yields.
They underperformed the Nasdaq Composite Index, which fell 4.9% last week.
Concerns about a rising interest rate environment have put the ARK to the test, exposing the vulnerability of its investment approach. Higher returns generally make growth stocks, including those of large technology companies, less attractive. On top of that, some of ARK’s positions are in small, non-liquid stocks that can swing dramatically.
The ETFs suffered a double-digit percentage drop last week, which according to FactSet is their biggest rate since the stock market crash last year. Further declines in growth stocks on Tuesday and Wednesday led to deeper declines in ARK’s funds, bringing the declines for its flagship ARK Innovation ETF to 14% over the past month.
The waterfall of red is very difficult for many investors. ARK’s funds lost more than $ 1.8 billion in total between February 24 and Monday, according to FactSet, their largest outflow ever. Together, they managed about $ 51 billion at the end of February, making ARK the ninth largest ETF operator. This is after attracting more than $ 36.5 billion in assets from Invesco in the past year Ltd.
, Charles Schwab Corp.
and First Trust – according to Morningstar Direct – the fourth, fifth and sixth largest ETF issuers in the US.
But the recent outflow has led to sales of ARK’s funds reaching redemptions, while the company has also chosen to dump shares of its easier-to-trade stocks, including Apple. Inc.
a Snap Inc.,
to upload favorites like Tesla.
As technology stocks continue to decline, ETF analysts and traders are concerned that a combination of broad market declines and additional outflows could cause a snowball effect in ARK’s portfolio. This could potentially cause some of the more illiquid small-cap interests to trade sharply.
Tom Staudt, chief operating officer of ARK, dismissed concerns about any liquidity issues, saying ARK’s ETFs continued to perform as any other ETF would during the turmoil.
Still, it was a rough patch for ARK and its star stock selector, Mrs. Wood.
“What a crazy week or two we’ve had here,” she said. Wood said in a YouTube video posted Friday that was watched by nearly 600,000 people.
Mrs. Wood founded ARK in 2014 and now serves as CEO and Chief Investment Officer after a 12-year stint at AllianceBernstein. Her outstanding performance of her funds, coupled with her willingness to engage investors via social media, podcasts and videos, has garnered her a variety of engaging monikers from individual investors and Reddit’s day traders, including ‘Mamma Cathie’, ‘Aunt Cathie’ and , in South Korea, “Money Tree.”
“ARK’s funds fit into 2020’s story of secular growth, but we’re now seeing a shift in that,” said Steven DeSanctis, a stock analyst at Jefferies. “It is unlikely to see the outflow in the short term for the last time,” he said. DeSanctis added, referring to Mrs. Wood.
In addition to last week’s downturn, ARK’s returns were the envy of the asset management industry, reviving investors’ confidence in stock voters after more than a decade of dominance by index-linked funds. The ARK Innovation ETF has recorded an average annual return of 36% since it started trading in 2014. This compares with the S&P 500’s average return of 11% over the past ten years.
“Over the past six months, there have been a lot of calls with clients as the funds have acquired assets, and the primary discussion has been about what happens when the funds are no longer a major topic,” said William Kartholl, director and head of ETFs. trade at Cowen.
Mr Staudt said ARK has a soft limit of around 10% on any share in its funds. Tesla’s share is at that level in ARK’s innovation and autonomous funds, just like Square’s in ARK’s fintech innovation pool. As for ARK’s exposure to smaller shares, Mr. Staudt said the concerns were overshadowed, pointing out that about 15% of ARK’s innovation fund is invested in equities with a market capitalization of less than $ 5 billion.
The volatility has created ARK an attractive buying opportunity, said Mr. Staudt added.
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ARK loaded more shares of Tesla, Teladoc Health Inc.
and Square during the sale last week, according to ARK’s daily trading logs. It also added more shares of Zoom Video Communications Inc.
to one of its funds earlier this week.
Amid the redemptions in ARK’s funds, the firm also sold shares in some of its more liquid shares. The firm cut its positions in Apple and Snap last week and sold all of its remaining shares in Salesforce.com Inc.,
he added. ARK also sold shares of Facebook Inc.,
Bristol-Myers Squibb Co. and Roche Holding AG
this week.
“It’s almost like having dry powder in the portfolio,” he said. Staudt said, referring to how the funds basically build up a cash-like reserve to buy other shares.
Not all investors are amazed at ARK’s big-footed approach to investing. The flow to ARK’s innovation fund turned positive on Tuesday and raised $ 464.3 million, according to FactSet.
But the last obstacle of ARK continued to shake others out.
Paolo Campisi, a 31-year-old entrepreneur in Toronto, bought shares of ARK’s innovation fund in early February, but sold his stake last week after shares fell more than 10%. He decided to take a riskier bet on an eventual setback by buying options outside of the money that expires at the end of the month. But he also sold the options on Wednesday when ARK’s flagship fund fell 6.3%.
“I think everyone will be challenged to move forward,” he said. Campisi said, adding that he is not sure at what level he would like to buy back into the fund. ‘And the level of investigation into someone like Cathie [Wood] going to be high. ”
Write to Michael Wursthorn by [email protected]
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