If there was a poster child for the active ETF movement, it would have to be Cathie Wood and her Ark Invest funds. Her six Ark ETFs—including her flagship ARK Innovation (ARKK) —have gathered billions in assets as the market took off over the last few years. ARKK’s success could have been the lynchpin on why active ETFs are now a popular vehicle for guru managers.
However, sometimes gurus can get it wrong. And in the case of Wood and ARKK, that meant investors have fled to value.
But now, Wood is trying to argue that her fund is indeed a -value-oriented investment. Is she right? Or is this a case where investors need to be wary of what they are buying and how we shouldn’t just blindly trust the word of superstar fund managers?
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ARKK Sinks Hard
It seemed that Wood and her team at Ark Invest had the magic touch during the pandemic. ARKK managed to return a staggering 156.6% in 2020. This market-crushing return followed a 35% return in 2019. This huge surge supported active management and really gave birth to the active ETF movement.
Lately, ARKK’s returns haven’t been so great. Thanks to the shift from growth to value, the rise in interest rates, and other conflicts putting the brakes on torrid growth, ARKK and its sister funds have dwindled. The majority of the stocks contained within ARKK are now considered in bear markets. In fact, nearly 90% of its holdings are down by 40% or more. Some like Zoom and Teladoc (TDOC) are down by more than 70%.
To that end, Cathie Wood has started to argue her funds are now considered ‘value’ investments. Because of the decline, Wood feels her portfolios are now trading at a discount. She’s made this assertion in several interviews in print and television media. In a recent CNBC interview, Wood stated, “We do believe innovation is in the bargain basement territory. Our technology stocks are way undervalued relative to their potential. Give us five years, we’re running a deep value portfolio.”
Some investors seem to be ‘buying the dip’ and sticking with Wood and ARKK.
Is it a Value?
The question now on investors’ minds is whether ARKK is actually a value or is this simply a marketing gimmick by Wood’s to keep the fund from sinking further. The answer may lie with the second point of that question.
There’s nothing but growth in ARKK. In fact, it’s one of the most growth-oriented funds when looking at style boxes. According to Morningstar data, ARKK’s portfolio ranks 22nd out of 2,642 in terms of ‘growth’ when looking at U.S. equity funds. Morningstar’s director of manager research, Russel Kinnel, reports, “At the fund level, it would take a large shift for ARKK to enter value territory.”
Cathie Wood’s deep-value assertion may come from price targets that seem unreasonable in the first place. Wood often takes a very long-term approach to investing. But the reality is that even predicting a year is hard to do. For example, Wood has a $3,000 per share price target for Tesla (TSLA) —about double the next closest analyst estimate. A $900 current share price does seem like a ‘value’ when you’re predicting such a high future target. ARKK’s team has predicted they can score an annualized 40% return over the next five years.
The stocks paint an interesting picture as well. The MSCI ACWI IMI Innovation Index—which was developed with Ark Invest and Wood—managed to gain 7% in 2021 when ARKK lost money.
At the same time, Wood has sold many of the leading stocks driving the previously mentioned innovation index. ARKK sold out of NVIDIA (NVDA) just before it doubled, Amazon (AMZN), and even Apple (AAPL) before it surged by more than 35%.
So, it’s not those investors who have sold innovation, it’s that Wood might have chosen the wrong horses to bet on. The reason for their fall was that they were simply too richly valued in a market that was OK with owning expensive stocks. And they remain expensive today. Only one of ARKK’s holdings— Crispr Therapeutics (CRSP fallen by enough for Morningstar to consider it to be a value stock.
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The Lesson for Investors
Overall, guru fund managers tend to have a hard time repeating their past results. Morningstar again shows that less than 2% of U.S. funds have achieved 40% annual returns for five years. Most of those that did were high-growth funds during the 1990s dotcom boom. But by the bust, they were dead and gone.
In the end, it looks like Wood isn’t running a deep-value portfolio, but a portfolio of busted stocks that were trading too richly to begin with. It’s a tale that we’ve seen time and time again.
Take a look at our recently launched Model Portfolios to see how you can rebalance your portfolio.
