Cathie Wood’s ARK face test as tech rally cools

The stock market’s rapid turn against technology and other growth stocks has presented star stock picker Cathie Wood and her firm, ARK Investment Management LLC, the toughest test yet.

The firm’s five publicly traded funds have fallen more than 20% since early February, hit by a sharp rise in government bond yields. The ARK Innovation flagship ETF has seen the steepest declines, falling 27% from its February 16 high. By comparison, the Nasdaq Composite Index has fallen about 8% over the same period.

Known as “Mamma Cathie” by individual investors on Reddit’s WallStreetBets forum, Ms. Wood touts in videos and podcasts her strategy of investing in what she calls disruptive companies – those that she says are destined to change the world and grow enormously. Their bets range from investor favorites like Apple Inc.

and Tesla Inc.

to pandemic winners like Roku Inc.

and square Inc.

to the little-known 3D printing company Stratasys Limited.

and the Israeli therapeutic company Compugen Limited.

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Those bets paid off last year, when Tesla jumped more than 700%, Square added 325%, and Roku jumped almost 150%, helping ARK ETFs more than double. Ms. Wood garnered widespread acclaim as the top stock picker on Wall Street, but her star has fallen in the past two weeks as long-term interest rates spiked and investors ditched the growth trade in droves .

ARK COO Tom Staudt said Thursday that the company is not overly concerned about the recent recession, seeing it as a short-term market trend rather than the beginning of permanent change. He added that ETFs have performed as expected and the company’s portfolio managers are using volatility to buy stocks that fit their 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 compounding ARK’s pain are a number of highly concentrated positions, including small companies in which Wood’s firm owns a significant portion of the stock. Bearish investors are also taking short positions to bet that ARK funds and some of their holdings will continue to decline.

The following charts help illustrate those dynamics:

Of the 164 stocks held in the five ARK funds, 139 were down over the past month, according to daily holding data compiled by Dow Jones Market Data. That’s far worse than the S&P 500. Less than half of its components have declined over the same period.

ARK held important positions in many companies that were deemed winners during much of the Covid-19 pandemic last year. But some of ARK’s stock generates 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 Goldman Sachs Group Inc.

They have noted that the stocks of unprofitable companies have been some of the hardest hit by the recent selloff and have advised investors to limit their exposure to such stocks. The declines so far have pushed shares in ARK’s flagship fund to their lowest levels since late November.

Tesla counts as ARK’s largest position in three of its funds, with roughly 10% of the assets of those ETFs. ARK has a 10% soft limit on positions within its funds. In the five ETFs, Tesla represents 7% of assets. Square, Roku, Teladoc, and the cryptocurrency bitcoin are among some of its other biggest holdings.

Michael Purves, CEO of Tallbacken Capital Advisors, said he has been warning investors about investing in the innovation fund’s individual holdings, given that many are smaller stocks that can be prone to big swings.

“You don’t have to be in ARKK to be affected by the ARKK situation,” Purves said of the innovation fund.

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

Most of these holdings are in small companies that have market values ​​below $ 5 billion and fewer shares available to trade on the open market.

“You have to think about the impact on the market that it is having with small caps,” said Elisabeth Kashner, director of fund research at FactSet. “When the market prices of some of these less liquid securities have risen quite quickly, they can go down as fast as the funds are flowing.”

Investors are also becoming more bearish on ARK funds, creating a ripple effect across the portfolio, said William Kartholl, director and head of ETF operations at Cowen. Inc.

Short interest as a percentage of ARK’s innovation fund’s total float rose to around 11% as of Thursday, the highest level ever, according to S3 Partners. Investors are also increasingly bearish on ARK’s Genomic Revolution ETF, with short interest increasing to 8% of its overall float from less than 3% at the end of last year.

When investors open an ETF, the shares are created by specialized investment firms known as authorized participants solely for the purpose of granting loans. That process involves authorized participants shorting the fund’s underlying shares, which could increase short interest in some of ARK’s holdings, Kartholl said. That can lead to higher volatility for individual stocks, he added.

ARK positions with significant short interest include Workhorse Group and biotech firm Beam Therapeutics.,

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both by about 20%, according to S3 data. Workhorse stock, which was briefly a target of Reddit daily traders during GameStop Corp.

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saga, are down 66% over the last month, while Beam is down 38%.

Write to Michael Wursthorn at [email protected]

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