Ark Investment Management founder Cathie Wood has achieved superstar status in the staid world of fund management. Her flagship $20bn Ark Innovation ETF (ARKK) returned 152 per cent last year thanks to bold, concentrated bets on Tesla and other hot tech names. It is now the largest actively managed ETF in the world after overtaking JPMorgan’s Ultra Short Income ETF last year.
But what goes up must come down. Rising optimism over vaccine rollouts and US stimulus spending has triggered a sharp run-up in Treasury yields. That is undermining the case for shelling out top dollars for hyped-up stocks and their lofty earnings growth projections.
ARKK’s fall has been swift. The shares are down 23 per cent since mid-February, putting it in a bear market and wiping out its gains for this year. During this period, the 10-year Treasury rate rose from 1.2 per cent to as high as 1.62 per cent. The Russell 2000 index of small-cap shares is hovering near record highs.
A look at some of ARKK’s biggest holdings helps explain the fund’s current woes: Tesla, its top bet with a 10 per cent weighting, has fallen by more than a fifth since mid-Feb, while Square, the second biggest holding, is down almost 19 per cent. Tesla also has a 9.7 per cent weighting in Ark’s Autonomous Tech ETF, and tops the bill in Ark’s Next Generation Internet ETF at 9.9 per cent.
For investors, the nagging question is not just whether the rotation out of growth stocks and into value shares will last this time around. After all, there have been many false dawns.
A more immediate concern is how Ark handles its growth. Over a one-year period, assets under management have swelled from $3.6bn to nearly $53bn last week. Its current strategy of pouring fresh capital into its existing holdings is not sustainable.
There is nothing wrong with Wood’s thematic approach to investing in innovative and disruptive companies. The danger is when a fund becomes too concentrated in a handful of holdings that are losing money and have high valuation multiples. The bigger you get, the greater the rationale to diversify.
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