ARK Invest is ill-prepared for downturn on analyst inexperience, lax risk controls, bloated asset base, strategist says

cathie wood ceo ark invest profile 2x1
  • ARK Invest is ill-prepared for a market downturn, according to Robby Greengold, CFA.
  • Wood’s ARK Innovation ETF is backed by research from inexperienced analysts with “lax risk controls.”
  • The ETF’s size and concentrated holdings could make it difficult for Wood to sell in a downturn.
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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.

Inexperienced analysts

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.

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Cathie Wood’s Ark Innovation ETF added 1.2 million shares of Palantir as the stock slipped to its lowest price in nearly 4 months

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Cathie Wood’s flagship fund bought the dip in Palantir on Wednesday, ETF records show.

Wood’s Ark Innovation ETF added roughly 1.2 million shares of Palantir as the stock sank to $21.88, its lowest closing price since November 23.

As of Wednesday’s close, the exchange-traded fund holds 10.8 million shares of Palantir worth $251 million. The data surveillance company makes up 1.07% of the Ark Innovation ETF.

Shares of Palantir closed down nearly 6% on Wednesday and continued to slide in premarket trading Thursday but reversed course after the opening bell. Palantir jumped as high as 1.9% to $22.30 Thursday morning.

The data company has fallen 17% in the last month amid a lockup expiration that’s prompted profit-taking from company insiders.

In a CNBC interview in February, Wood explained that her Palantir trade is a long-term bet. She also praised CEO Alex Karp’s plan to forfeit short-term profits and invest aggressively in the future.

“It’s exactly how we invest. We want our companies to invest aggressively. We don’t want profits now,” the investing titan told CNBC.

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Cathie Wood’s ARK ETFs load up on Teladoc after the stock dips following Amazon threat

Cathie Wood
Cathie Wood is the founder, CEO, and CIO of ARK Investment Management.

Three of Cathie Wood’s ARK Invest ETFs loaded up on 305,457 shares of Teladoc on Wednesday following a sharp fall in the share price.

Specifically, the ARK Innovation ETF added 174,957 shares, while ARK Genomic Revolution ETF and the ARK Next Generation Internet ETF added 78,371 and 52,148 shares, respectively.

Teladoc is now the largest holding in the ARK Genomic Revolution ETF and is tied for the third-largest holding in the ARK Innovation ETF with Roku.

As of market close on March 17, the combined shares bought by Wood’s ETFs were worth approximately $58 million.

Teladoc has been under pressure of late after Amazon announced it’s launching a rival telehealth business called Amazon Care. The service had previously only been available to Amazon employees in the state of Washington.

Now, as Insider reported back in December, Amazon Care is undertaking a national expansion with the goal of serving workers at other major companies in all 50 states.

Teladoc stock fell nearly 8% in a gap down move before Wednesday’s opening after the Amazon Care expansion was confirmed, perhaps signaling to Wood and co. that time was right for a buy.

Shares of the multinational telemedicine and virtual healthcare company have fallen over 36% from mid-February highs. While some investors fear Teladoc may have more downside ahead of it, many experts argue Amazon won’t be able to take over from the Harrison, New York-based firm so easily.

David Larsen, CFA, a managing director at BTIG, told Bloomberg, “the threat is overstated because Teladoc and American Well have contracts with many of the large health plans. Amazon has been very successful in taking market share from your traditional retail storefronts in many areas. But health care is different.”

Teladoc traded down 3% as of 3:49 p.m. ET on Thursday.

Teladoc chart
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A small innovation ETF inspired by Cathie Wood is returning 10 times Ark Invest’s flagship fund this year

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  • The Direxion Moonshot Innovators ETF (MOON) has returned 39% year-to-date, beating Cathie Wood’s flagship fund, the Ark Innovation ETF (ARKK), by roughly 10-fold.
  • ARKK has gained 3.5% over the same period.
  • The Direxion fund is much smaller than Ark, and is more heavily concentrated in biotechnology stocks.
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A small ETF that aims to give investors exposure to the most innovative companies in the US has outperformed the flagship fund of Cathie Wood’s Ark Invest by 10-fold this year.

The Direxion Moonshot Innovators ETF (MOON) tracks 50 US companies that pursue innovative technologies, similar to the stated goal of the Ark Innovation ETF (ARKK). But MOON has gained roughly 39% in 2021, far outpacing ARKK’s 3.5% rise. Bloomberg first reported on the fund’s outperformance.

After a stellar 2020, this year has been shaky for Wood’s ETF as investors take profits from highly valued technology stocks and bet on cyclical names against the backdrop of rising yields and an economic reopening.

Yet Direxion’s technology stocks have fared well so far. Moon’s top stock holding by percentage is Vuzix, a $1 billion market-cap company that supplies wearable display technology and virtual reality devices. That stock has returned nearly 140% year-to-date. Meanwhile ARKK’s top holding, Tesla, has remained relatively flat in 2021.

According to the Direxion website, the ETF’s top sub themes consist of genetic engineering (19.44%), cyber security (16.79%), and clean technology (9.74%).

As of Dec 31, 2020, the ARKK’s largest themes were e-commerce (12%), digital media (9.7%), and cloud computing (9.4%).

The Direxion ETF tracks the S&P Kensho Moonshots Index, an index of 50 US companies that pursue innovative technologies that have the potential to disrupt existing industries and have the highest “early-stage composite innovation scores.”

That innovation score is determined by “a natural language processing review,” of each company’s latest regulatory filing for the use of “words and phrases that are related to innovation,” according to the Direxion website.

The fund has gained 70% since its inception in November 2020, but has under $200 million in assets under management, compared to Ark’s $24 billion.

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Cathie Wood says digital wallets will ‘gut’ traditional banks – and expects bitcoin to rise by as much as $400,000

cathie wood ceo ark invest profile 2x1

Ark Invest’s Cathie Wood said on Benzinga’s “Raz Report” show Wednesday that the growth of digital wallets will “gut” traditional banks, and she remains bullish on bitcoin and Tesla.

Wood, who is known for her strategy of investing in highly disruptive companies, counts Tesla as one of the major stock picks in her $24.4 billion ARK Innovation exchange-traded fund. The automaker accounts for roughly 10% of the fund’s portfolio. Earlier this month, Tesla pulled off its biggest bitcoin endorsement yet by revealing a $1.5 billion investment in the digital asset.  

Jack Dorsey’s payments firm Square also disclosed an additional $170 million investment, bringing its total bitcoin holdings to 5% of its balance sheet. If other US companies follow this trend, the price of bitcoin could rise by between $40,000 and $400,000, according to Wood.

Bitcoin fell 2%, to $49.311, on Thursday, but its price is up 70% year-to-date.

Wood is convinced Tesla’s head-start in autonomous driving remains attractive. Companies that outperformed in the stay-at-home environment during the pandemic, such as Roku and Zoom, are other attractive stocks, owing to their expected growth rate over the next five years, she said. 

She said shares in Zoom are “probably undervalued” and that Roku and Amazon “will take the lion’s share of the connected TV market.”

Wood said her fund remains “opportunistic” despite recent decline in the S&P 500 that has been driven by  concerns about lofty valuations and chances of higher inflation. “The benchmarks are filling up with value traps” due to growing innovation in fields including artificial intelligence and robotics, she said. “We think the big risk is in the benchmarks, not what we’re doing.” 

The Nasdaq Compose closed 2.7% lower on Wednesday as tech stocks plummeted after disappointing labor-market data and a rise in Treasury yields, while the S&P 500 fell 1.3%.

Reuters first reported Wood’s comments from the show.

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Cathie Wood’s Ark ETFs added over 2.6 million shares of Palantir on Wednesday amid falling share prices

Cathie Wood
Cathie Wood is the CEO and chief investment officer of ARK Invest, which runs three of the highest-returning stock ETFs of the last three years.

  • Cathie Wood’s ARK Innovation ETF and ARK Next Generation Internet ETF added 2.6 million shares of Palantir on Wednesday.
  • At Wednesday’s closing price the shares were worth over $62.7 million.
  • The move continues a trend of buying the dip in big tech names for ETFs run by the famed fund manager.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Cathie Wood’s ARK Innovation ETF (ARKK) and ARK Next Generation Internet ETF (ARKW) picked up a combined 2,658,800 shares of Palantir on Wednesday amid falling share prices.

At Wednesday’s closing price of $23.59, the shares were worth roughly $62.7 million.

The move made Palantir the 37th largest holding of the ARK Innovation ETF and the 20th largest holding of the ARK Next Generation Internet ETF.

Palantir’s stock has slumped in recent week, after a lockup expiration and a surprise quarterly loss led to considerable insider profit taking at the big data firm. Share prices have fallen over 26% in the past month and a recent tech stock pullback hasn’t helped.

The Invesco QQQ Trust Series 1 ETF, which tracks tech names in the Nasdaq, has fallen nearly 10% since the beginning of February. Much of the move down was caused by a bond sell-off that rocked markets last week, something Cathie Wood said she was “very comfortable” with given her funds’ long-term bias.

Wood has been using the recent tech rout to ‘buy the dip’ in many of her favorite names. The fund manager known as ‘money tree’ doubled down on her Tesla bet (1) (2) amid falling share prices at the EV maker, and now she’s taking another bite at Palantir.

Wood’s big Palantir buy follows a trend for the ARK Innovation ETF and ARK Next Generation Internet ETF which acquired a combined 6.8 million shares of Palantir in February.

Despite Palantir’s recent slide, a number of analysts still believe in the company’s prospects. Goldman Sachs analysts last month upgraded Palantir to a buy and placed a $34 price target on the firm after earnings.

Analysts, led by Christopher D. Merwin, CFA, argued Palantir now has a clear path to “sustainable growth” as the company continues to win contracts for their Foundry, Gotham, and Apollo software.

Palantir traded up 4.87% during premarket hours on Thursday.

PLTR chart
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