Cathie Wood was one of the hottest fund managers on Wall Street in 2020, but 2021 was a terrible year for her flagship technology fund.
And the news isn’t much better so far this year.
ARK Investment Management LLC’s Innovation ETF (NYSE: ARKK) with $13.1 billion in assets (currency in US dollars), fell 23% last year. Since the New Year it has fallen another 23%. The ETF has fallen 54% from its peak of $156 share which was almost exactly a year ago. It closed Monday at $72.48.
Nobody would have expected that.
ARK’s selloff is not unique, although its fall is steeper than most. As investors worry about inflation and rising interest rates, they have lost their appetite for fast growing tech stocks with plenty of promise but trading at lofty multiples while barely profitable.
It illustrates the need for patience when investing in new technologies, especially with volatility. While these companies hold promise, they move in fits and starts and mature slowly over time. Many will fail. For every home run like Shopify, there are a hundred strikeouts.
In Canada, ARK actively manages five ETFs as a sub-advisor for Emerge Canada Inc. The flagship is marketed as the Emerge ARK Global Disruptive Innovation ETF (NE: EARK). Its performance has mirrored the US fund.
Ark is in the limelight because Ms. Wood courted publicity on the way up and now faces the same scrutiny on the way down. She hit the headlines in 2020 with her plain-speaking, simply conveyed convictions about the coming wave of innovation that will change our lives. She was an unabashed Tesla cheerleader (NDQ: TSLA) at a time when many believed otherwise. It remains her top holding and it turns out she was right.
She remains convinced about the impact of things like artificial intelligence, electric vehicles, and medical revolutions coming via DNA sequencing and genomics. Her unwavering beliefs and transparency in buying and selling stocks has given her a cult-like following. A younger investing audience follows her every move.
The pandemic helped the ARK cause because stay-at-home trends favoured the internet and communications stocks in the ETF. In 2021, sentiment changed, and everyone wanted to get out of the house again as pandemic conditions improved.
Investors also see the era of cheap money coming to an end with the US Federal Reserve expected to raise rates as many as five times this year. Growth stocks become less attractive in this environment because investors will not pay for such lofty price to earnings (p/e) ratios when faced with slowing growth and higher debt servicing costs.
ARK’s transparency helped bump up the share prices of its holdings. The size of its purchases moved the market. Other players then jumped in adding more upside. This forced passively managed funds, which allocate holdings based on market capitalization, to adjust their positions, pushing prices up even more. On the way down, the same principle applies, only in reverse.
In a mid-January webinar, Wood was unphased.
She said there is no rolling back the changes that have been accelerated by the pandemic and while valuations have declined, she believes the selloff is overdone and is setting the stage for another rise.
“We have a history of going against the grain and our conviction has increased,” she said.
The impact of the tech selloff has been dramatic. After Tesla, the next three holdings account for 19% of the fund. They are down an average 71% from their 2021 highs, as of the time of writing.
Zoom Video (NDQ: ZM), the video conferencing platform, is 67% off its high. Teladoc Health (NDQ: TDOC), which uses mobile apps and videoconferencing software for telehealth services, is 75% off its high. Roku (NDQ: ROKU), which allows you to stream movies and TV shows over the internet, shed 67%.
Ms. Wood said the selloff of these three lumps them in as ‘stay-at-home’ stocks, when they are really ‘stay-connected’ stocks. These are trends she sees accelerating.
She noted that Zoom’s user base has gone up 10-fold since 2019 to 220 million users. Revenue has risen six-fold. Its product is integrated with Microsoft’s Teams, which is making them a dominant force in remote work.
She believes Teladoc will be the backbone of the health care system. Its revenues are up four-fold since 2019 with expanding margins. “This the real deal. These changes are permanent. We are not going back to more expensive, less creative, less productive. We are going to continue moving forward,” she said.