The stock market’s swift turn against technology and other growth stocks has handed star stock picker Cathie Wood and her firm, ARK Investment Management LLC, their toughest test yet.
The firm’s five exchange-traded funds all have declined more than 23% since early February, stung by a sharp rise in government-bond yields. The flagship ARK Innovation ETF has suffered the steepest declines, falling 31% from its Feb. 16 high. In comparison, the Nasdaq Composite Index has dropped more than 10% over the same period.
Known as “Mamma Cathie” by individual investors on Reddit’s WallStreetBets forum, Ms. Wood touts in videos and podcasts her strategy of investing in what she calls disruptive companies—ones that she contends are destined to change the world and grow tremendously. Her bets range from investor favorites like
to pandemic winners such as
to little-known 3D-printing firm
and Israeli therapeutics company
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Those gambles paid off handsomely last year, when Tesla jumped more than 700%, Square added 325% and Roku rose nearly 150%, helping ARK’s ETFs more than double. Ms. Wood earned wide acclaim as the hottest stock picker on Wall Street, but her star has fallen over the past two weeks as long-term interest rates suddenly marched higher and investors abandoned the growth trade en masse.
Speaking on CNBC Monday afternoon, Ms. Wood added that the sharp rise in bond yields has shaken up investors, leading to “a lot of confusion and a little bit of paralysis.” A rapid rotation into value stocks out of growth stocks isn’t helping, she added.
“I think that’s been part of the reason for ARK’s setback,” Ms. Wood said.
Among the factors compounding the pain for ARK are a series of highly concentrated positions, including small companies in which Ms. Wood’s firm owns a significant chunk of the stock. Bearish investors also are taking short positions to bet that ARK’s funds and some of its holdings will decline further.
The following charts help illustrate those dynamics:
Of the 164 stocks held across ARK’s five funds, 145 are down over the past month, according to daily holdings data compiled by Dow Jones Market Data. That is far worse than the S&P 500. Fewer than half of its constituents have declined over the same period.
ARK took sizable positions in many companies that were considered winners during much of the Covid-19 pandemic last year. But a number of the stocks held by ARK generate little or no profits, including Roku and Teladoc Health Services Inc., as well as electric-vehicle manufacturer
Workhorse Group Inc.
Analysts including those at Goldman Sachs Group Inc. have noted that shares of unprofitable companies have been some of the hardest hit by the recent selloff and recommended investors limit their exposure to such stocks. The declines so far have knocked shares of ARK’s flagship fund down to their lowest levels since late November.
Tesla counts as ARK’s biggest position in three of its funds, coming in right around 10% of those ETFs’ assets. ARK has a 10% soft cap on positions within its funds. Across all five ETFs, Tesla accounts for 7% of assets. Square, Roku, Teladoc and the cryptocurrency bitcoin are among some of its other biggest holdings.
chief executive of Tallbacken Capital Advisors, said he has been warning investors about investing in the innovation fund’s individual holdings, given that many are smaller stocks that can be prone to big swings.
“You don’t have to be in ARKK to be hurt by the ARKK situation,” Mr. Purves said of the innovation fund.
Among ARK’s five funds, 27 of its positions are in companies in which the firm holds more than 10% of all shares outstanding, according to data from the companies, FactSet and Dow Jones Markets Data.
Most of these stakes are in small companies that have market values below $5 billion and fewer shares available for trading on the open market.
“You have to think about the market impact you’re doing with small-caps,” said
director of funds research at FactSet. “Where the market prices of some of these less liquid securities were driven up rather quickly, they can then be driven down by the same speed as funds flow out.”
Investors are also becoming more bearish on ARK’s funds, creating a knock-on effect felt throughout the portfolio, said
director and head of ETF trading at Cowen Inc.
Short interest as a percentage of the overall float of ARK’s innovation fund rose to about 11% as of Friday, the highest level ever, according to S3 Partners. Investors also are increasingly bearish on ARK’s Genomic Revolution ETF, with short interest rising to nearly 9% of its overall float from less than 3% at the end of last year.
When investors short an ETF, shares are created by specialized investment firms known as authorized participants solely for the purpose of lending. That process involves authorized participants shorting the fund’s underlying stocks, which could be adding to the short interest in some of ARK’s holdings, Mr. Kartholl said. That can lead to increased volatility of the individual shares, he added.
Among the ARK positions with significant short interest are
and biotech firm
coming in at 21% and 18%, respectively, according to S3 data. Shares of Workhorse, which was briefly a target of Reddit’s day traders during the
saga, are down 61% over the past month, while Beam has fallen 41%.
—Ken Jimenez and Gunjan Banerji contributed to this article.
Write to Michael Wursthorn at Michael.Wursthorn@wsj.com
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