Cathie Wood’s ARK investment sees the settlement as technical trading 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 ETFs’ main holdings are Tesla, the electric vehicle manufacturer Inc.,

payment company Square Inc.

and streaming media company Roku Inc.

The stock prices of those three companies have risen by at least 195% in the year since the Covid-19 pandemic turned the investment landscape upside down – more than doubling ARK’s funds over the same period. But stocks fell more than 12% last week amid a broader sell-off of high-growth technology stocks, a slump much attributed to a sharp rise in government bond yields.

They performed poorly below the tech-heavy Nasdaq Composite Index, which fell 4.9% last week.

Concerns about a rising interest rate environment have put the ARK to the test and exposed the vulnerabilities of its investment approach. Higher returns generally make growth stocks, including stocks of large technology companies, less attractive. In addition, some of ARK’s holdings are in small, illiquid stocks that have the potential to fluctuate dramatically.

The ETFs saw double-digit percentage declines last week, their biggest drop since the stock market’s decline last March, according to FactSet. Further declines in growth stocks on Tuesday and Wednesday drove even deeper declines in ARK funds, bringing the declines for its flagship ARK Innovation ETF to 14% last month.

The cascade of red has proven difficult for many investors to digest. ARK’s funds collectively lost more than $ 1.8 billion between February 24 and Monday, their largest ever outflow, according to FactSet. Together, they managed approximately $ 51 billion at the end of February, making ARK the ninth largest ETF operator. After raising $ 36.5 billion in assets in the past year, that’s more than Invesco Ltd.

, Charles Schwab Corp.

and First Trust – the fourth, fifth and sixth largest ETF issuers in the US according to Morningstar Direct.

But the recent outflows prompted sales through ARK funds to meet redemptions, while the company also chose to ditch shares of its easier-to-trade holdings, including Apple. Inc.

and Snap Inc.,

to load favorites like Tesla.

As technology stocks continue to fall, ETF analysts and traders are concerned that a combination of broad market declines and additional outflows could snowball the entire ARK portfolio. That could potentially cause some of its more illiquid, small-cap holdings to trade significantly lower.

Tom Staudt, ARK’s Chief Operating Officer, dismissed concerns about any liquidity issues and said ARK’s ETFs will continue to perform like any other ETF during the turmoil.

Still, it was a rough patch for ARK and its star stock picker, Mrs. Wood.

“What a crazy week or two we’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 Chief Investment Officer after 12 years at AllianceBernstein. The standout performance of her funds, coupled with her willingness to engage investors through social media, podcasts and videos, has earned her a variety of engaging monikers from individual investors and Reddit’s day traders, including ‘Mamma Cathie’, ‘Aunt Cathie ‘and, in South Korea,’ Money Tree ‘.

“ARK’s funds fit into the 2020 story of secular growth, but we’re seeing a shift in that now,” said Steven DeSanctis, an equity analyst at Jefferies. “It probably won’t be the last time she sees outflows anytime soon,” added Mr. DeSanctis, referring to Ms. Wood.

Aside from last week’s downturn, ARK returns were the envy of the asset management industry, reviving some investors’ belief in stock selection after more than a decade of index-tracking fund dominance. The ARK Innovation ETF has delivered an average annual return of 36% since it began trading in 2014. That is comparable to the S&P 500’s average return of 11% over the past 10 years.

“There have been a lot of phone calls to customers over the past six months as the money has grown, and the main conversation has been about what happens when money is no longer a hot topic,” said William Kartholl, director and head of ETF trading at Cowen.

Mr. Staudt said ARK has a soft limit of about 10% on every share within its funds. Tesla’s stake at that level is in ARK’s innovation and autonomous funds, as is Square in ARK’s fintech innovation pool. As for ARK’s exposure to smaller stocks, Mr. Staudt said those concerns are exaggerated, pointing out that about 15% of ARK’s innovation fund is invested in stocks with a market capitalization of less than $ 5 billion.

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

ARK loaded on more shares of Tesla, Teladoc Health Inc.

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

to one of his funds earlier this week.

Amid redemptions in ARK’s funds, the company also sold shares in some of its more traded liquid stocks. The company scrapped its positions in Apple and Snap last week and sold all of its remaining stock in Salesforce.com Inc.,

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

Bristol-Myers Squibb Co. and Roche Holding AG

this week.

“It’s almost like having dry powder in the portfolio,” said Mr. Staudt, referring to how the funds actually build up a cash-like reserve to buy other stocks.

Not all investors are surprised by ARK’s grand approach to investing. Flow to ARK’s innovation fund turned positive Tuesday, raising $ 464.3 million, according to FactSet.

But ARK’s most recent stumbling block continued to shake others.

Paolo Campisi, a 31-year-old Toronto-based entrepreneur, 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 take a riskier bet on a possible rebound 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 another 6.3%.

“I think everyone will be challenged to move forward,” said Mr Campisi, adding that he is not sure at what level he would consider buying back into the fund. And the degree of control over someone like Cathie [Wood] gets high. “

Write to Michael Wursthorn at [email protected]