Cathie Wood’s ARK investment faces consideration as technical commercial stalls

ARK manages five exchange-traded funds that actively invest in companies, Ms. Wood and her team of portfolio managers believe they will change the world through what they call “disruptive innovation.” Among the largest holdings of ETFs is the electric car manufacturer Tesla Inc.,

Square payment company Inc.

and streaming company Roku Inc.

The stock prices of these three companies have risen by at least 195% in the year since the Covid-19 pandemic revolutionized the investment landscape – helping ARK funds more than double in the same period. But equities fell more than 12 percent last week amid broader sales of fast-growing technology stocks, which many attribute to a sharp rise in government bond yields.

They strongly underperformed the Nasdaq composite index, which fell 4.9% last week.

Concerns about raising the interest rate environment have put ARK to the test, exposing the vulnerabilities of its investment approach. Higher yields generally make growing stocks, including the shares of large technology companies, less attractive. In addition, some of the ARK positions are in small, illiquid stocks that have the potential to swing dramatically.

ETFs suffered double-digit percentage declines last week, their biggest routes since the stock market crash last March, according to FactSet. Subsequent declines in growth stocks on Tuesday and Wednesday led to even deeper declines among ARK funds, bringing the declines for its flagship ARK Innovation ETF to 14% in the last month.

The red waterfall has proved difficult for many investors. ARK funds collectively lost more than $ 1.8 billion between February 24 and Monday, most of their outflows ever, according to FactSet. Together, they raised about $ 51 billion at the end of February, making ARK the ninth largest ETF operator. That’s after attracting $ 36.5 billion in assets in the last year, more than Invesco Ltd.

, Charles Schwab Body.

and First Trust – the fourth, fifth and sixth largest ETF issuer in the United States, according to Morningstar Direct.

But recent releases have sparked sales of ARK funds to deal with redemptions, while the company has also opted to divest shares of its easier-to-trade holdings, including Apple. Inc.

and Snap Inc.,

to load favorites like Tesla.

As technology stocks continue to decline, ETF analysts and traders worry that a combination of broad market declines and additional exits could create a snowdrop effect in the ARK portfolio. This could cause some of its more illiquid, low-capitalized holdings to trade sharply in decline.

Tom Staudt, ARK’s Chief Operating Officer, dismissed concerns about any liquidity issues and said ARK ETFs continued to operate as any other ETF would do during the riot.

However, it was a tough problem for ARK and its star selector, Mrs. Wood.

“What a crazy week or two I’ve had here,” Ms. Wood said in a YouTube video posted Friday that was viewed by nearly 600,000 people.

Ms. Wood founded ARK in 2014 and is now CEO and Investment Director after a 12-year stint at AllianceBernstein. The attractive performance of its funds, coupled with its willingness to attract investors through social media, podcasts and videos, has brought it a variety of popular pseudonyms from individual investors and Reddit day traders, including “Mamma Cathie”. “Aunt Cathie” and, in South Korea, “The Money Tree.”

“ARK funds fit the narrative of secular growth in 2020, but now we see a change in that,” said Steven DeSanctis, a stock analyst at Jefferies. “It probably won’t be the last time in the near term when he sees exits,” DeSanctis added, referring to Ms Wood.

Aside from last week’s pullback, ARK’s returns have been the envy of the asset management industry, reviving investor confidence in stockholders after more than a decade of index-dominated fund dominance. The ARK Innovation ETF has had an average annual return of 36% since it began trading in 2014. This compares with the average return of the S&P 500 of 11% over the last 10 years.

“There have been numerous customer calls over 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 operating officer. Cowen’s ETF.

Mr Staudt said ARK has a simple limit of around 10% for any action from its funds. Tesla shares are at that level in ARK’s innovation and stand-alone funds, as is Square in ARK’s fintech innovation fund. With regard to ARK’s exposure to smaller shares, Mr Staudt said that these concerns were exaggerated and pointed out that around 15% of ARK’s innovation fund was invested in shares with market ceilings below $ 5 billion.

In any case, volatility has created “attractive buying opportunities” for ARK, Mr Staudt added.

ARK has uploaded several shares of Tesla, Teladoc Health Inc.

and Square during last week’s sale, according to ARK’s daily trading logs. He also added several shares of Zoom Video Communications Inc.

to one of his funds earlier this week.

Against the backlog of ARK funds, the company also sold shares in some of its more traded liquid shares. The company downgraded its positions in Apple and Snap last week and sold all its remaining shares in Salesforce.com Inc.,

he added. ARK also sold shares on Facebook Inc.,

Bristol-Myers Squibb Co. and Roche Holding AG

in this week.

“It’s almost like you have dry powder in your portfolio,” Mr Staudt said, referring to how the funds practically accumulate a reserve of cash to buy other shares.

Not all investors are amazed by ARK’s approach to investing. Flows to the ARK innovation fund turned positive on Tuesday, attracting $ 464.3 million, according to FactSet.

But ARK’s latest stumbling block has continued to shake others.

Paolo Campisi, a 31-year-old entrepreneur from Toronto, bought shares in the ARK innovation fund in early February, but sold his stock last week after shares fell by more than 10%. He decided to take a riskier bet for a possible return, buying call options from money that expires at the end of the month. But it also sold these options on Wednesday, when ARK’s flagship fund fell an additional 6.3%.

“I think everyone will be challenged to move forward,” Mr Campisi said, adding that he was not sure at what level he would consider buying the fund again. “And the level of control over someone like Cathie [Wood] it will be great. “

Write to Michael Wursthorn at [email protected]