Commentary
Growth investor Cathie Wood, the CEO of ARK Investment Management, has endured a lot of criticism for the investment performance of her funds in 2022 and her unbridled evangelism of technology firms.
Wood’s biggest fund, the ARK Innovation exchange-traded fund (ARKK), declined 67 percent during 2022. Comparatively, that’s twice the negative 33 percent return of the Nasdaq 100 during the year. The fund also recorded the worst performance among its peers in the Mid-Cap Growth category at Morningstar.
The fund, which counts among its portfolio investments Zoom Communications, Tesla, Block, and Teladoc Health, saw net outflows of $600 million during the last five months of last year. While ARKK once was a pandemic darling, more than quadrupling during 2020, many of its holdings have low profits and were hammered during the past year amid high inflation and high interest rates.
Wood has a lot of critics. Many of them believe she is too enamored with tech and growth companies in this environment, while the consensus investment positioning lies in value factors, defensive stocks, and fixed-income strategies. Daniel Loeb, the CEO of hedge fund Third Point, for example, called Wood a “stonk hodler” on Twitter, comparing her to unsophisticated online retail traders following memes and YouTube videos. (The term “stonk hodler” is used to tease online traders who cling to their positions regardless of what is happening in the market.)
Wood, who also is ARK’s chief investment officer, isn’t deterred, though. She’s doubling down on these technology investments, claiming that they are “disrupters” of incumbent industries and are the future. In her view, the companies in ARKK are investing in research and development and new technological innovation instead of paying dividends and making share repurchases today. In other words, they’re sacrificing current earnings for future, exponentially larger earnings potential.
But we think the criticism of Woods is misplaced.
ARK funds shouldn’t be viewed as a one-stop shop, all-weather investment strategy for investors. They should be looked at as existing within a portfolio for what they are: high-growth investments.
“When advisors and others buy into our strategies, they’re looking for pure-play innovation,” Wood told Barron’s magazine, an investment-focused publication.
Looking at ARK Investment’s website, the company offers six actively managed ETFs:
- ARK Innovation ETF
- ARK Next Generation Internet ETF
- ARK Fintech Innovation ETF
- ARK Autonomous Tech. & Robotics ETF
- ARK Genomic Revolution ETF
- ARK Space Exploration & Innovation ETF
Glancing at the holdings of each, it’s obvious that all ARK funds seek to invest in companies engaged in developing innovation, disruption, and future technologies. Very few of them are profit-making or pay dividends. ARK doesn’t manage any funds outside the scope of these technology-focused, technology-adjacent, or technology-servicing companies.
There are different ARK funds with themes for potential investors who are seeking a specific exposure. In a previous column, for example, I wrote that robotics and automation as a thematic investment that can pay off in the future.
But this isn’t a column to shill for ARK funds. The ARK Autonomous Tech. & Robotics ETF (ARKQ) was down more than 40 percent during 2022. Investors in this fund would have lost more money than if they had invested in the Nasdaq Composite or the S&P 500 Index, both of which also suffered losses.
Such losses were more or less unavoidable for ARK. Wood and ARK’s mandate is to invest within the scope of these areas. The critics are off base—Wood shouldn’t suddenly start investing in the energy sector or consumer staples. It’s not ARK’s mandate.
Instead, it’s incumbent on the investor to allocate a lot, a little, or nothing to technology and growth sectors during this period of high interest rates and market volatility (right now, the answer may be a little or nothing).
Growth factor and innovation are simply a tool—a tool in an investor’s toolbox. In the current environment, it may not be the right tool for the job, but that doesn’t mean it never will be, or that it’s useless. When valuations decline enough, these growth companies could see their stock price increase again.
An investment in high-growth firms should be looked at with a five to ten-year horizon. When valuations are normalized, ARK funds may be back in favor. After all, why aren’t we criticizing venture capital firms for continuing to invest in speculative startups in this environment?
