👩 Can ARKK Emerge From The Woods?

Morgan Stanley outperforms rivals.

Hey Global Investor! Here’s what you need to know before the US markets open.

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👩 ARKK: No Gain Without Pain?

One of the pioneers of actively managed Exchange Traded Funds (ETFs), Catherine (Cathie) Wood, has had a tough last 12 months. How did times change so quickly for someone voted the best stock picker of 2020? 40 out of the 43 stocks held in her flagship Innovation ETF (ARKK) are down anywhere between 20% – 90% over the last 12 months. That’s why! (Tweet This)

Daring To Be Different

Cathie Wood began her career as an assistant economist at Capital Group in the late 70s; she moved to Jennison Associates and worked her way up to managing director. In 1998, Wood and Lulu C. Wang co-founded Tupelo Capital Management, a hedge fund based out of NYC, where she managed ~$800M in global thematic strategies.

Harvard Business School professor Clayton Christensen’s concept, “Disruptive Innovation” – the idea that innovative ideas will displace incumbent market leaders while creating new value – caught Wood’s fancy. So she went all out on it on the professional front.

She moved to AllianceBernstein as CIO of global thematic strategies and was managing a portfolio of nearly $5B. In 2014, Wood floated the idea of an actively managed Exchange Traded Fund (ETF). ETFs are, by definition, passively managed, so her vision didn’t find traction with her employer.

That was the trigger for her to go alone, and she founded ARK Investment Management LLC. ARK is an acronym for Active Research Knowledge and also stands for the Ark of the Covenant, the holy relic of the Jewish people.

ARK’s efforts are centered around identifying innovative companies in robotics, energy storage, DNA sequencing, AI, and blockchain technology. ARK trims or exits a position if any of its holdings has been disrupted by a competitor or isn’t leading innovation in the space. Wood invested $5M of her savings into ARK, which took three years to break even.

Wood launched four active funds in October 2014 – the Innovation ETF (ARKK), the Genomic Revolution ETF (ARKG), the Next Generation Internet ETF (ARKW), and the Autonomous Technology & Robotics ETF (ARKQ). The Fintech Innovation ETF (ARKF) started in 2019, and the Space Exploration & Innovation ETF (ARKX) started in 2021. Apart from the ETFs, ARK also has three index funds.

Short-Term Pain or a Ticking Time Bomb?

Today’s story is focused on ARK’s flagship Innovation ETF, which holds companies like Tesla, Zoom, and 41 others with different weights. The fund invests at least 65% of its assets in domestic and foreign companies disrupting their respective industries. ARKK came into the limelight in 2020 as its holdings surged just as the pandemic took a worldwide hold.

ARKK rose 150% in 2020 and was named the best stock picker of 2020 by Bloomberg. ARKK hit a peak of $159.7 in Net Asset Value (NAV) for the week ending February 8, 2021, with an AUM of $28B and over 201M shares outstanding. That’s when mean reversion started showing up unmistakably.

As people began to get vaccinated and economies opened up, investors began shifting from growth/momentum stocks to value stocks. With the specter of inflation and the prospects of higher interest rates becoming more apparent, share prices retreated further. As a result, the impact on ARKK was profound and immediate.

Over the last 12 months, out of ARKK’s 43 holdings, only three are in the green. Tesla (TSLA) (up 24%). Biotech company Intella Therapeutics (NTLA) (up 9%). Technology services company Trimble (TRMB) (up 9%). 18 out of the remaining 40 are down 50+% in the last 12 months (some are down 90%). Others are down anywhere between 20% to 50%. ARKK is down 45% as a result, with the NAV halving from the Feb 2021 peak. Thus far, in 2022, ARKK is down 17.3%.

As investors head for the exit, ARKK is seeing significant outflows. Last Wednesday, $352M flowed out, the biggest since March 2020 and the third-highest outflow for ARKK. The ETF’s AUM has halved to nearly $14B from last February’s $28B peak. From being the best stock picker in 2020, Wood has now come to symbolize “all that you should not have been investing in.”

Wood, nevertheless, avers that her strategy is sound and has a five-year investment horizon. She dismissed the recent turn of events as “irrational.” She insists the potential of companies that are part of ARK’s funds is huge.

Is it simply a loss of momentum, hyped-up valuations, or something more fundamental? Whatever the actual reason, the same word of mouth that helped her in 2020 has become Wood’s Achilles heel. It remains to be seen whether the pendulum swings back, and if so, how soon, and for how long.

Market Reaction
ARKK ended at $75.75, down 1.51%.

Company Snapshot 📈

ARKK $75.75 -1.16 (1.51%)

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Later Today 🕒

  • Netflix Inc. Earnings (NFLX)
  • Costco Wholesale Corp. Earnings (COST)
  • Union Pacific Corp. Earnings (UNP)
  • Intuit Inc. Earnings (INTU)
  • Intuitive Surgical Inc. Earnings (ISRG)
  • Baker Hughes Co. Earnings (BKR)
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  • Jabil Circuit Inc. Earnings (JBL)
  • CSX Corporation Earnings (CSX)
  • Travelers Companies Inc. Earnings (TRV)
  • PPG Industries Inc. Earnings (PPG)
  • Webster Financial Corporation Earnings (WBS)
  • BankUnited Inc. Earnings (BKU)
  • 7:00 PM IST: Initial Jobless Claims

Today’s Market Terminology: Tail Risk

Tail risk refers to the kind of probability distribution which represents extreme negative events. Purchasing a put option reduces tail risk

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