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Ark Is Sinking: Can Cathie Wood Bounce Back?

Ark Invest's flagship fund has wiped out all pre-pandemic gains

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Apr 29, 2022
Summary
  • Cathie Wood's Ark Invest is an investment firm which specializes in disruptive and innovative technology.
  • The fund achieved tremendous returns in 2020, with their flagship fund returning 152%.
  • Ark's ETF has seen substantial declines in 2021 and 2022, mainly driven by the market's turn a way from growth stocks.
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Catherine Wood (Trades, Portfolio) is a growth stock investor who believes disruptive innovation and technology are the keys to great investing returns. Her firm's flagship fund, the Ark Innovation ETF (ARKK, Financial), focuses on four main pillars:

  • DNA Technologies and the “Genomic Revolution”
  • Automation, Robotics, and Energy Storage
  • Artificial Intelligence and the “Next Generation Internet”
  • Fintech Innovation

Below is an overview of Ark Invest's active ETFs from the firm's website:

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Ark Invest rose to stardom in 2020, and Wood was dubbed the “Queen of Growth Stocks” during the low interest rate and liquidity-fueled bull market. Her funds benefited tremendously from having Tesla (

TSLA, Financial) as the largest holding, which represented 10% in Ark Invest's ETFs. Tesla stock experienced astonishing returns and was up 700%+ in 2020 alone, but there were also other great bets such as Block (SQ, Financial), Zoom (ZM, Financial) and Teladoc (TDOC, Financial).

However, in 2021, the situation began to change. Wood's favorite bets began to see substantial declines due to three main factors: skyrocketing inflation, fears of higher interest rates and the turn away from so-called "pandemic stocks," or stocks of companies that benefitted from the pandemic.

Most recently, Teladoc reported a disastrous first quarter 2022 report which resulted in the stock price declining by over 45% in a single day. Now although I believe the market overreacted to a goodwill impairment charge, this was still not good news for Ark Invest. Wood is Teladoc’s largest shareholder with a 12% stake in the company. This is now worth an estimated $652 million, down from $1.1 billion just last week.

As we can see from the chart below, Ark Invest's ARKK ETF has declined substantially, reaching down to pre-pandemic levels.

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The only consolation is Tesla, which is now 9% of Ark Invest's funds, is still up by over 500% since 2020 despite volatility and a recent pullback.

Ark Invest's performance

Ark Invest has had some incredible performances over the past few years. The ARKK ETF returned an astonishing 152% for investors in 2020. Also, in prior years, the performance was fantastic with 35% returns in 2019 and 87% returns in 2017.

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However, since 2021, the share price has declined substantially and the return is now -44% over the past year. In addition, all previous pandemic gains have been wiped out in terms of share price.

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For all of Wood's ETFs, the trend is very clear, a peak in February 2021 and a decline ever since.

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The poor performance led to a mass of outflows over the 2021 period, with the Ark Invest ETF’s receiving outflows alone coming in at $6.2 billion since February 2021. Overall, assets under management fell a whopping 50% from the peak in February 2021. The Ark Disruptive Innovation ETF saw its assets under management grow to a huge peak of $28 billion. This has now fallen to approximately $14 billion (data from Koyfin). These outflows have caused a huge hit to Ark Invest's revenue. As the fund charges an expense ratio of 0.75%, the decline means a $105 million loss!

Why is Ark Invest down?

Record high inflation and rising Treasury yields impact growth stocks vastly more than value stocks. This is because when a company is valued, that is based on the present value of the future cash flows. As growth stocks have their value weighted disproportionally more towards the future, rising Treasury yields mean a higher discount rate, which impacts growth stocks negatively.

Another reason for the declines is the "pandemic stock" selloff. Investors are now getting rid of the stocks they bought due to said stocks benefitting from the pandemic.

If it’s any consolation, Wood’s investments have been performing fantastically as isolated businesses. However, the macro issues are no longer favorable for growth stocks.

Goldman Sach (

GS, Financial) even forecastedfive interest rate hikes by the Fed in 2022. The idea of this is to help curb inflation, which the Fed originally mistook for being transitory.

How long will inflation last?

The inflation of the CPI (Consumer Price Index) recently came in at 8.5% in March 2022 , the highest level since 1981 and vastly higher than the Fed’s 2% target. Now we’ve established that inflation isn’t “transitory,” the Federal Reserve Chairman Jerome Powell has outlined a plan to curb inflation. Powell told Congress:

“We will use our tools to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched.”

A rule of thumb is to expect a two-year time lag between a stricter monetary policy and inflation lowering. According to the International Journal of Central Banking, which conducted an analysis of 67 studies of the time lag, “The average transmission lag is twenty-nine months.” Thus, for investors, the brightest brains on the planet estimate approximately 2.5 years for inflation to subside.

The 1970s inflation boom started to gain traction in 1973 when inflation doubled to 8.8%. By 1980, inflation was 14%! If you are interested to learn more on this topic, on my YouTube channel Motivation2Invest, I interviewed a Wall Street investing veteran who said this situation reminded him of the 1970s.

Will Ark Invest bounce back?

Wood is an extremely smart, forward-thinking and technology-focused investor. Ark Invest’s strategy of growth stock investing has been negatively affected by macroeconomic issues such as high inflation, but someday, the macro situation will eventually favor growth stocks again. Wood states that Ark Invest's strategies have at least a “5 year time horizon." The fate of Ark Invest and all growth stocks will be determined by how long high Inflation and rising interest rates will last.

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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