Cathie Wood’s ARK funds are experiencing a rapid decline

Tue Apr 23 2024
Jim Andrews (515 articles)
Cathie Wood’s ARK funds are experiencing a rapid decline

Investors in Cathie Wood’s fund are abandoning ship. They quickly invested in her funds and achieved significant success during the pandemic. The star fund manager gained popularity on social media for her daring investments in disruptive technology stocks like Tesla, Zoom Video Communications, and Roku. They remained loyal to her even when the funds’ fortunes took a turn for the worse following the Federal Reserve’s decision to increase interest rates. Now, after enduring years of significant losses, a considerable number of individuals have reached their limit.

Investors have withdrawn a significant $2.2 billion from the six actively managed exchange-traded funds at her ARK Investment Management this year, surpassing the outflows seen in all of 2023. The funds’ total assets have experienced a significant decline of 30% in less than four months, now standing at $11.1 billion. This comes after reaching a peak of $59 billion in early 2021, during ARK’s tenure as the world’s largest active ETF manager.

According to Todd Rosenbluth, head of research at data provider VettaFi, the loyal shareholders are expressing their frustration. This year is expected to bring better prospects for the ARK style of investing in growth and disruptive technology. However, it is worth noting that these investments are primarily focused on companies that have not performed as well as anticipated.

The anticipation of a potential interest rate reduction by the Federal Reserve, coupled with the enthusiasm surrounding the advancements in generative artificial-intelligence technology, has resulted in a 5% increase in the S&P 500 in 2024. Those bets could also prove advantageous for the ARK funds. On the contrary, the shares of the flagship ARK Innovation fund have experienced a significant decline of 19%.

This is primarily due to the significant concentration of Wood’s funds in just a few stocks. Seven stocks, for example, account for approximately 50% of the innovation fund. Shares of Tesla, the largest holding, have experienced a significant decline of nearly 45% this year and are currently trading around $142. Wood has been strategically investing during market downturns and confidently restated her ambitious five-year price target of $2,000 in a recent CNBC interview. Additional major holdings like Roku, which has experienced a 36% decline, and Unity Software, which has seen a 44% drop, have contributed to the fund’s overall decrease.

Mark Hadden, a 63-year-old corporate accountant in Virginia Beach, Va., is among the investors who recently decided to divest from two ARK funds, incurring significant losses. Hadden purchased 200 shares during the summer of 2021 after receiving a recommendation from a friend regarding Wood. He mentions that his main investment strategy revolves around inexpensive index funds, but he also expresses curiosity about ARK and decides to allocate a portion of his “speculative” funds towards a small position in his portfolio.

I believed it showed great potential. However, the funds were experiencing financial losses. A substantial amount of funds. Hadden mentioned that he could earn a 5% return on the cash in his Schwab account. I hope [Wood] does well. However, in my opinion, those funds do not align with the objectives of an investment portfolio.

In 2020, ARK gained immense popularity as the innovation fund delivered impressive returns. Cathie Wood, the fund’s manager, made frequent television appearances, confidently sharing her optimistic predictions about the fund’s top holdings. ARK’s active funds attracted an impressive $20 billion in new investor funds that year, a remarkable achievement for a small asset manager that earned it widespread acclaim in the asset-management industry.

Investors closely monitored ARK’s daily trade disclosures to replicate Wood’s investment decisions. She gained a substantial following on social media, with many fans affectionately calling her “Mamma Cathie” and even creating merchandise featuring her image in a similar style to the iconic Barack Obama “Hope” poster.

Experts argue that the funds have always carried a certain level of risk due to various factors. They experienced a significant rise when interest rates were close to zero, only to suffer a dramatic decline when rates increased. Increased interest rates have a negative impact on the perceived value of companies that may not generate profits until a distant future, causing a significant decline in the stock prices of many of the unprofitable stocks favored by Wood.

According to Morningstar, ARK funds incurred a significant loss of $14.3 billion by the end of last year, making it the asset manager that had the highest negative impact on investors’ wealth over the past decade. ARK experienced significant inflows during the months surrounding the innovation fund’s peak in February 2021, which proved to be unfortunate timing for many investors.

A spokesperson highlighted the strong value creation of ARK, pointing to the flagship fund’s impressive 109% return since it was established in 2014.

Investing forums on Reddit are filled with anecdotes from individuals who invested in ARK during its peak and are now grappling with the decision of whether to cut their losses or hold on.

One Reddit user shared their experience of reallocating their retirement accounts during the pandemic. They decided to move their 401(k) and Roth IRA into ARK funds after witnessing significant gains in another account.

He mentioned that he is currently experiencing a decrease of around 50-60% in all of his accounts. I’m uncertain about how to progress three years later.

Some critics argue that ARK funds within the asset management industry rely too heavily on Wood’s intuition. At the age of 68, she established ARK in 2014 with the aim of introducing thematic, big-idea investing to everyday investors, with a particular emphasis on emerging companies.

Nvidia’s absence in ARK’s flagship fund has been a significant source of frustration. The innovation fund divested its position in January 2023, right before the stock’s impressive surge commenced. The shares of the graphics-chip maker have increased fourfold since then.

Wood has consistently justified her choice to sell the stock, despite facing significant backlash for not capitalizing on the AI craze that has captivated Wall Street. The spokesperson mentioned that ARK had been invested in Nvidia for a decade, which resulted in substantial gains. However, due to Nvidia’s excessive valuation and the potential for greater returns in other companies within the AI ecosystem, ARK made the decision to divest.

Morningstar, a fund ratings firm, raised concerns about ARK’s capacity to effectively analyze early-stage companies due to significant personnel turnover following the departure of two experienced investment personnel in 2023.

Wood continues to play a crucial role in the firm. According to Morningstar analyst Robby Greengold, relying solely on instincts to construct the portfolio can be seen as a potential liability.

Wood, a staunch supporter of cryptocurrency, has seen great success in her investment in Coinbase Global, with its shares skyrocketing fourfold in the last year. The stock is currently 47% lower than its peak in 2021.

ARK has also been successful in attracting over $2.5 billion of inflows to its new ETF that passively tracks bitcoin prices, offering a significantly lower fee compared to its active stock funds.

Although Wood’s popularity has waned, her funds still have a loyal following.

Eric Lovgren, a 50-year-old consultant in the Milwaukee area, made his initial investment in ARK funds approximately a year ago, attracted by the more affordable entry point. He expresses a keen interest in innovative companies, particularly those involved in genetic-based medicine, which ultimately led him to invest in the ARK Genomic Revolution ETF.

Eventually, Lovgren decided to invest in shares of all six active ARK ETFs, which now account for approximately half of his equity portfolio.

According to the speaker, low interest rates are particularly advantageous for innovation, and they intend to hold onto these investments for the long term.

Jim Andrews

Jim Andrews

Jim Andrews is Desk Correspondent for Global Stock, Currencies, Commodities & Bonds Market . He has been reporting about Global Markets for last 5+ years. He is based in New York