ARK Investment Management, the upstart firm run by Cathie Wood, has had a stellar run in recent years, but as the landscape for stocks has shifted and ARK’s funds have taken a hit, naysayers are coming out of the woodwork, raising concerns about Wood’s abilities, ARK’s approach, and how appropriate the funds are for investors.
One research group has a more favorable view of ARK’s flagship fund, the ARK Innovation ETF ARKK, +0.75%, which may spring from its more quantitative methodology. MarketWatch spoke with CFRA’s head of research, Todd Rosenbluth, one day after research powerhouse Morningstar published a critical analysis of the fund and its management.
“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,” Morningstar analyst Robby Greengold wrote.
In contrast, CFRA’s research team wrote that the fund “is concentrated on fast growing, innovative companies, such as Tesla TSLA, -0.93% and Spotify Technology SPOT, +1.92%, but many of the positions have favorable earnings quality scores, reducing ARKK’s risk profile. CFRA thinks ARKK has a high likelihood of outperforming its global equities ETF category in the next nine months based on our multi-faceted ratings approach,” they said, concluding, “stick with this top performing ARK ETF.”
Morningstar’s rating “seems negative for reasons that are less quantifiable to me,” Rosenbluth told MarketWatch. “They’re offering a qualitative assessment, which means there’s room for subjectivity.”
To the extent that CFRA’s analysis takes a view of management, it mostly focuses on whether those individuals have been in place for three years. Wood founded ARK in 2014 and has been in charge since then. While Greengold notes that ARK’s supporting analysts “lack deep industry experience” and have only bachelor’s degrees, Rosenbluth says CFRA looks at “the output of their work,” not their experience.
Morningstar “is taking a stand on whether or not this team is experienced enough to continue doing what it’s doing past 2020” – that is, as growth stocks may be less in favor than cyclical ones – “but this is the team that got the fund this far in the first place,” Rosenbluth said.
In recent weeks, there’s been a fair amount of armchair quarterbacking of Wood and ARK’s ability to manage a fund that has exploded in size — to $23 billion now, with roughly $16 billion of that coming in over the past 12 months, according to FactSet data. That’s important because many of the companies ARK invests in have traditionally been smaller and newer.
“There was extremely strong demand in 2020 and into 2021 that has made the fund less nimble than it was before,” Rosenbluth acknowledged. “When we see what’s inside the fund we have confidence that management can handle it. The fund has added in some larger-cap, more liquid companies. Because it is actively managed the team is able to trade in and around stocks that are most appealing to them.”
That’s exactly how ARK managed through the market turbulence of 2020, according to Wood. A MarketWatch extended interview with her on that topic is here.
Rosenbluth also acknowledges that for investors who saw ARKK’s returns soar 153% in 2020 there may be some risk in expecting such a stellar performance to repeat itself.
“We believe the fund will outperform the broader category of ETFs but it’s reasonable to look to the downside of something that has climbed so high, in part because so many more investors have recently discovered this fund,” he said. “But I think it compensates investors with reward potential.”
Wood’s gender — and some of her personal preferences — can make her seem like a Rorschach test of the investing world, with observers projecting their own interests and biases onto her. That’s why Rosenbluth prefers to focus on fund performance.
Still, he has an intriguing view on why Wood and ARK are grabbing so much attention.
ARK is an independent asset manager, and until last year one that had a relatively modest amount of money under management, he pointed out. It’s also somewhat unusual for being an active, fully transparent manager of ETFs. All that means Wood and ARK don’t fit neatly into industry conceptions of what “ETF management” should look like, just as the Innovation ETF doesn’t fit neatly into Morningstar’s traditional style boxes.
In fact, the love-hate relationship that the public seems to have with Wood reminds Rosenbluth of another newsmaker from a different world. “Everyone, not just football fans, has a view on Tom Brady and many people root against him because of the past success he’s had.,” he said.