Cathie Wood bought more than 3 million shares of the self-driving truck company TuSimple Holdings on its public debut Thursday.
The San Diego, California-based firm saw its stock struggle in its first day on the open market, trading down as much as 19% before recovering to break even at $40 for the day. Shares debuted on the Nasdaq under the ticker “TSP,” and traded down as much as 9% on Friday before mounting a recovery.
Wood’s flagship fund, the ARK Innovation ETF, picked up 2,350,496 million shares of the self-driving truck maker during the volatile day of trading.
The combined holdings of both ETFs were worth over $123 million as of Thursday’s closing price.
TuSimple raised $1.35 billion in its IPO this week, selling almost 34 million shares for $40 each. At that price, the firm is valued at nearly $8.5 billion.
TuSimple is the perfect thematic addition to Cathie Wood’s active exchange-traded funds due to its focus on autonomous driving, but the company is yet another unprofitable holding for Ark Invest.
Last year, TuSimple posted a net loss of $178 million on revenue of just $1.8 million, according to the firm’s S-1 prospectus.
TuSimple was founded by Dr. Xiaodi Hou, a renowned expert in computer vision software from the California Institute of Technology, in 2015.
The company raised over $648 million in seed funding before going public from big-name investors like Volkwagen Group, Goodyear Ventures, and Navistar, per Crunchbase.
The firm also counts UPS and the US Postal Service as backers.
The release of TuSimple’s self-driving trucks isn’t expected until 2024, however, meaning losses at the firm will likely continue in the neat term.
TuSimple uses lidar technology supplied by Aeva Technologies, which went public on March 15. The company hopes to improve efficiency and safety in trucking while lowering costs and reducing the carbon footprint of the industry.
It has created an “Autonomous Freight Network (AFN)” that stretches from Phoenix to Houston with the goal of “allowing freight to be moved from point to point safely and reliably using autonomous trucks.”
Shares of the autonomous trucking company fell 3.9% to $38.44 on Friday as of 10:54 a.m. ET.
Strategist Robby Greengold, CFA broke down why Cathie Wood’s ARK Invest could be in for some serious trouble during a market downturn in a Morningstar article on Wednesday.
The analyst illustrated key potential weaknesses in Wood’s flagship exchange-traded fund, the ARK Innovation ETF, including inexperienced analysts, lax risk controls, and an illiquid, bloated asset base.
“Thematic-investing specialist ARK Investment Management has been in tune with the market’s unfolding narrative in recent years, but its lone portfolio manager, inexperienced team, and lax risk controls make it ill-prepared to grapple with a major plot twist,” Greengold wrote.
A one-woman show
It’s no secret Cathie Wood’s active exchange-traded-fund investing strategy has been immensely successful since ARK Innovation’s inception in 2014. Her fund has returned 495% to first-day investors since it began trading on October 31, 2014, and it’s up 183% in the past year alone.
Still, as Greengold pointed out in his article, Wood is the lone portfolio manager at her firm, and there isn’t a deep bench to replace her when she steps down. Greengold questioned whether having only one portfolio manager at ARK could lead to problems in the future, especially given the fund’s struggle to retain talent.
Additionally, Greengold notes that during Wood’s 2001 to 2013 tenure at AllianceBernstein, she “ran several strategies similar to this one that had high volatility, poor downside performance, and underwhelming long-term results.”
ARK Invest did not immediately respond to a request for comment.
Greengold was especially critical about the fund’s inexperienced analysts.
Very few ARK analysts have experience beyond an undergraduate degree and only about half of the current team signed on with any work experience, Greengold said. He noted this contrasts with the norm for equity analysts who typically have an undergraduate degree, some internship or entry-level work experience, and at least some progress towards investment credentials like a CFA.
While Wood sees this as a benefit that allows her analysts to have unique perspectives, Greengold questioned their lack of experience. Although he did note Wood’s team is more diverse than much of the competition, and prior research has shown that this leads to more creativity, innovation, and even profits.
Inexperience leads ARK to outsource much of its more technical analysis to what the fund calls “theme developers.” The firm says these include academics, entrepreneurs, and former ARK analysts. According to Greengold, ARK’s “analytical edge remains unclear” given its strategy of hiring such outsiders for technical analysis,
Analysts at ARK also operate differently. Unlike other firms who break up their analysts by sector, ARK analysts are given one or more technological specialties, like DNA sequencing or robotics, and then asked to become experts in their field. Greengold argues this setup “could lead to ultra-specialization and potential blind spots that better-resourced firms wouldn’t miss.”
A lack of risk controls
Greengold also expressed concern about risk management at ARK Invest, citing how Cathie Wood doesn’t employ risk management personnel. The firm also has very few portfolio construction parameters that other firms use to stay within acceptable risk limits.
And on March 29, 2021, “the fund removed prospectus language limiting the size of its top positions and its ownership percentage of individual companies’ shares outstanding.”
Greengold worries this could lead to issues in a market downturn.
“Even a high-octane strategy like this one should be cognizant of the risks embedded in its portfolio and manage to a definable risk tolerance. It seems not to,” the strategist said.
“Without risk-management professionals to stress-test the portfolio’s risk exposures, estimate its potential losses during historical or hypothetical market environments, and gauge worst-case scenarios, the team is poorly positioned to prepare and react,” Greengold concluded.
A less than liquid portfolio
Finally, ARK Innovation’s portfolio has become less liquid and “more vulnerable to severe losses as its size has swelled,” according to Greengold.
Assets under management grew to over $23 billion in February. Additionally, the ETF has more positions in companies in which it holds at least a 10% stake than any other ETF.
Retaining stakes in small companies makes it difficult to sell without materially impacting their stock prices. This forces Wood’s ETF to exit and enter positions slowly over time, which, again, could be a problem in a downturn.
Wood overcomes the lack of liquidity in her portfolio by holding what she calls “cashlike” large-cap names. That way, in a downturn, Wood could sell those stocks and concentrate her holdings in top conviction plays.
The problem is, according to Greengold, that Wood followed a similar gameplan in 2008 at AllianceBernstein and her “large-growth-oriented separate account lost 45% before fees – substantially worse than the Russell 1000 Growth Index’s 38% decline.”
Wood’s ARK Innovation ETF is down 11% this month as a rotation away from highly valued tech names and into value plays continues to drag on results.