Cathie Wood’s ARK faces the test when the Technology Rally cools down

Known as “Mamma Cathie” by individual investors on the Reddit WallStreetBets forum, Ms. Wood announces in videos and podcasts her strategy of investing in what she calls disruptive companies, which she claims are destined to change the world and grow tremendously. Their bets range from favorites of investors like Apple Inc.

and Tesla Inc.

to pandemic winners like Roku Inc.

and Square Inc.

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

and the Israeli therapy company Compugen Ltd.

CGEN 1.65%

Those bets paid off last year, when Tesla jumped more than 700%, Square added 325% and Roku rose nearly 150%, helping ARK ETFs more than double. Wood gained widespread acclaim as Wall Street’s hottest stock collector, but its star has fallen in the past two weeks as long-term interest rates rose sharply and investors abandoned trading. of mass growth.

Tom Staudt, chief operating officer of ARK, said Thursday that the firm is not too concerned about the recent recession, as it sees it as a short-term market trend rather than the start of permanent change. He added that ETFs have performed as expected and that the company’s portfolio managers use volatility to buy stocks that fit their philosophy and appear to be oversold.

Factors that aggravate ARK pain include a number of highly concentrated positions, including small businesses in which Mrs Wood’s firm owns a significant share of the shares. Bearish investors are also taking short positions to bet that ARK’s funds and some of its holdings will decline further.

The following graphics help illustrate these dynamics:

Of the 164 shares held in ARK’s five funds, 139 have fallen over the past month, according to daily holding data collected by Dow Jones Market Data. This is much worse than the S&P 500. Less than half of its components have declined over the same period.

ARK took considerable positions in many companies that were considered winners during much of the Covid-19 pandemic last year. But some of ARK’s shares generate little or no profit, including Roku and Teladoc Health Services Inc., as well as electric vehicle manufacturer Workhorse Group. Inc.

and Stratasys.

Analysts including those of Goldman Sachs Group Inc.

have pointed out that the shares of unprofitable companies have been some of the hardest hit by the recent sale and have recommended investors limit their exposure to these shares. The falls so far have brought ARK’s flagship fund shares to their lowest levels since late November.

Tesla has the largest ARK position in three of its funds, with approximately 10% of the assets of these ETFs. ARK has a 10% limit on positions within its funds. In the five ETFs, Tesla accounts for 7% of assets. Square, Roku, Teladoc and the bitcoin cryptocurrency are among its most important holdings.

Michael Purves, CEO of Tallbacken Capital Advisors, said he has warned investors about investing in individual holdings in the innovation fund, as many are smaller stocks that can tip into large swings.

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

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

Most of these holdings are in small firms that have market values ​​of less than $ 5 billion and have fewer shares available for trading on the open market.

“You have to think about the market impact you’re making with capital letters,” said Elisabeth Kashner, director of fund research at FactSet. “When the market prices of some of these less liquid securities rose quite rapidly, they can be reduced at the same rate as funds come out.”

Investors are also getting lower in ARK funds, creating a knock-on effect felt throughout the portfolio, said William Kartholl, director and head of trading at Cowen’s ETF Inc.

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

When investors do not have an ETF, the shares are created by specialized investment firms known as authorized participants solely for the purpose of lending. This process involves authorized participants having a short scope of the fund’s underlying shares, which could add to the short interest of some of ARK’s holdings, Kartholl said. This may lead to increased volatility of individual stocks, he added.

ARK positions with significant short interest include the Workhorse group and the biotech firm Beam Therapeutics,

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both around 20%, according to S3 data. Shares of Workhorse, which was briefly a target for Reddit marketers during GameStop Corp.

GME 4.07%

saga, have fallen 66% in the last month, while Beam has fallen 38%.

—Ken Jiménez and Gunjan Banerji contributed to this article.

Write to Michael Wursthorn to [email protected]