ARK Investment Management LLC’s winning bets on disruptive technology companies cemented Cathie Wood’s status as Wall Street’s most popular fund manager since Peter Lynch or Bill Gross.
Now those tactics threaten to turn ARK into a high-profile victim of the recent shift in investor sentiment away from tech stocks and toward cyclical stocks tied to an economic rebound.
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 the largest ETF holdings is electric car maker Tesla. Inc.,
Square payment company Inc.
and streaming media company Roku Inc.
The stock prices of those three companies have soared by at least 195% in the year since the Covid-19 pandemic disrupted the investment landscape, helping ARK funds to double over the same period. But stocks fell more than 12% last week amid a sell-off of fast-growing tech stocks, a drop many attribute to a sharp rise in government bond yields.
They have underperformed the high-tech Nasdaq Composite Index, which fell 4.9% last week.
Concerns about a rising interest rate environment have posed a test for ARK, exposing vulnerabilities in its investment approach. Higher returns generally make growth stocks, including stocks in big tech companies, less attractive. Additionally, some of ARK’s positions are in small, illiquid stocks that have the potential to swing dramatically.
ETFs suffered double-digit percentage declines last week, their biggest losses since the stock market crash last March, according to FactSet. Further declines among growth stocks on Tuesday and Wednesday led to even deeper declines among ARK funds, pushing its flagship ARK Innovation ETF to 14% over the past month.
The red cascade has proven difficult for many investors to bear. ARK funds collectively lost more than $ 1.8 billion between February 24 and Monday, their largest tranche of fund outflows, according to FactSet. Together, they managed approximately $ 51 billion at the end of February, making ARK the ninth largest ETF trader. That’s after attracting $ 36.5 billion in assets last year, more than Invesco. Limited.
, Charles Schwab Corp.
and First Trust, the fourth, fifth and sixth largest ETF issuer in the US, according to Morningstar Direct.
But recent exits prompted sales of all ARK funds to meet redemptions, while the company also opted to ditch the shares of its easier-to-trade holdings, including Apple. Inc.
and Snap Inc.,
to load into favorites like Tesla.
As tech stocks continue to decline, analysts and ETF traders are concerned that a combination of general market declines and additional exits could snowball across the entire ARK portfolio. That could cause some of your less liquid small-cap holdings to trade lower.
Tom Staudt, ARK’s chief operating officer, dismissed concerns about any liquidity issues, saying that ARK ETFs have continued to perform as any other ETF would during the tumult.
Still, it’s been a rough patch for ARK and its star stock picker, Ms. Wood.
“What crazy weeks we’ve had here,” Wood said in a YouTube video posted Friday that was viewed by nearly 600,000 people.
Ms. Wood founded ARK in 2014 and now serves as its CEO and Chief Investment Officer after a 12-year stint at AllianceBernstein. The striking performance of his funds, coupled with his willingness to engage investors through social media, podcasts, and videos, has earned him a variety of endearing nicknames from individual investors and Reddit traders of the day, 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 you see exits,” DeSanctis added, referring to Ms. Wood.
Outside of last week’s pullback, 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 posted an average annual return of 36% since it went public in 2014. That compares with the S&P 500’s average return of 11% over the past 10 years.
“There have been many calls with clients over the past six months as the funds have been gaining assets, and the main conversation has been about what happens when funds are no longer a hot topic,” said William Kartholl, director and chief operating officer of ETFs in Cowen.
Staudt said that ARK has a soft limit of around 10% on any stock within its funds. Tesla shares are at that level in ARK’s innovation and autonomous funds, as is Square in ARK’s fintech innovation group. As for ARK’s exposure to smaller stocks, Staudt said those concerns are overblown, pointing to the fact that about 15% of ARK’s innovation fund is invested in stocks with market capitalizations below $ 5,000. millions.
If anything, the volatility has created “attractive buying opportunities” for ARK, Staudt added.
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ARK charged in more Tesla shares, Teladoc Health Inc.
and Square during last week’s sell-off, according to ARK’s daily business records. Also added more Zoom Video Communications shares Inc.
to one of his funds earlier this week.
Amid redemptions in ARK’s funds, the company also sold shares in some of its most highly traded liquid stocks. The firm cut its positions in Apple and Snap last week and sold all of its remaining shares in Salesforce.com. Inc.,
added. ARK also sold Facebook shares Inc.,
Bristol-Myers Squibb Co. and Roche Holding AG
“It’s almost like having dry powder in your portfolio,” Staudt said, referring to how the funds basically build up a cash-like reserve to buy other stocks.
Not all investors are baffled by ARK’s investment approach. Flows to ARK’s innovation fund turned positive on Tuesday, raising $ 464.3 million, according to FactSet.
But ARK’s most recent stumble continued to shake others.
Paolo Campisi, a 31-year-old businessman from Toronto, bought shares of ARK’s innovation fund in early February, but sold his stake last week after the shares fell more than 10%. He decided to take a riskier bet on an eventual bounce by buying out-of-the-money call options that expire at the end of the month. But he also sold those options on Wednesday when ARK’s flagship fund fell an additional 6.3%.
“I think everyone will be challenged to move on,” Campisi said, adding that he is not sure at what level he would consider buying back into the fund. “And the level of scrutiny of someone like Cathie [Wood] it’s going to be high. “
Write to Michael Wursthorn at [email protected]
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