Cathie Wood’s ARK investment faces consideration of technology commercial sites

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

Square payment company Inc.

and streaming media company Roku Inc.

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

The performance of the Nasdaq Composite Index, which fell 4.9% last week, has fallen sharply.

Concerns about a growing interest rate environment have been a test for ARK, which highlights the vulnerabilities of its investment approach. Higher yields generally make growth stocks, including stocks of large technology companies, less attractive. In addition, some of ARK’s positions are in small, illiquid stocks that have the potential to swing sharply.

According to FactSet, ETFs suffered double-digit percentage declines last week, their biggest losses since the stock market crash last March. New falls in growth stocks on Tuesday and Wednesday caused even deeper falls among ARK funds, leading to a 14% drop in its core innovation ETF ARK over the past month.

The red waterfall has been difficult for many investors to stomach. ARK funds collectively lost more than $ 1.8 billion between Feb. 24 and Monday, its largest exit band, according to FactSet. Together, they managed approximately $ 51 billion in late February, making ARK the ninth ETF trader. That’s after attracting $ 36.5 billion in assets over the past year, more than Invesco Ltd.

, Charles Schwab Corp.

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

But recent outflows led to sales among ARK’s funds to deal with amortization, while the firm also opted to dump shares of its easier-to-trade holdings, including Apple Inc.

and Snap Inc.,

to load favorites like Tesla.

With the fall in technology stocks, ETF analysts and traders worry that a combination of major market crashes and additional exits could create a snowball effect on ARK’s portfolio. This could cause some of its most illiquid, small-cap holdings to trade sharply.

Tom Staudt, ARK’s Chief Operating Officer, dismissed concerns about any liquidity issues and said ARK ETFs have continued to function like any other ETF during the riot.

Still, it has been a problem for ARK and its star collector, Mrs. Wood.

“What a roughly crazy week we’ve had here,” Ms. Wood said in a YouTube video posted Friday that was seen by about 600,000 people.

Wood founded ARK in 2014 and now holds the position of CEO and Chief Investment Officer after a 12-year stint at AllianceBernstein. The attractive performance of its funds, along with its willingness to engage investors through social media, podcasts and videos, has earned it a wide variety of attractive monikers from individual investors and Reddit’s day traders, including “Mamma Cathie “,” Aunt Cathie “and, in South Korea,” Money Tree. “

“ARK funds fit the narrative of the secular growth of 2020, but now we see a change in it,” said Steven DeSanctis, Jefferies equity analyst. “It probably won’t be the last time I see exits in the short term,” DeSanctis added, referring to Ms. Wood.

Outside of last week’s downturn, ARK’s returns have been the envy of the asset management industry, which has revived some investors ’belief in stock selectors after more than one decade of dominance of index monitoring funds. The ARK Innovation ETF has recorded an average annual return of 36% since it began trading in 2014. This compares with the average return of 11% of the S&P 500 over the past 10 years.

“There have been a lot of calls with customers over the last six months as funds 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 of ETF trading in Cowen.

Staudt said ARK has a minimum limit of about 10% on any of its fund shares. Tesla shares are at this level in ARK’s innovation and stand-alone funds, as is Square in ARK’s fintech innovation fund. Regarding ARK’s exposure to smaller shares, Staudt said these concerns are excessive and noted the fact that around 15% of ARK’s innovation fund is invested in shares with lower market limits. to $ 5 billion.

If anything, volatility has created “attractive buying opportunities” for ARK, Staudt added.

ARK charged more shares of Tesla, Teladoc Health Inc.

and Square during last week’s sales, according to ARK’s daily trading records. He also added more shares of Zoom Video Communications Inc.

to one of his funds earlier this week.

Amid the amortization of ARK’s funds, the firm also sold shares of some of its most quoted liquid shares. The firm downgraded its positions in Apple and Snap last week and sold all of its remaining shares to Salesforce.com Inc.,

added. ARK also sold Facebook shares Inc.,

Bristol-Myers Squibb Co. and Roche Holding AG

this week.

“It’s almost like having dry powder in your portfolio,” Staudt said, referring to how funds basically accumulate a cash reserve to buy other shares.

Not all investors are baffled by ARK’s large investment approach. According to FactSet, flows to ARK’s innovation fund turned positive on Tuesday and grossed $ 464.3 million.

But ARK’s latest stumble continued to shake others.

Paolo Campisi, a 31-year-old businessman 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 make a riskier bet for a possible rebound by buying options to buy out of money that expire at the end of the month. But it also sold those options on Wednesday, when ARK’s flagship fund fell an additional 6.3%.

“I think everyone will have a challenge moving forward,” Campisi said, adding that he is not sure at what level he would consider buying the fund again. “And the level of scrutiny in someone like Cathie [Wood] it will be high “.

Write to Michael Wursthorn to [email protected]