The black year of ARKK ETF, which fell by 45% in 12 months (data at the end of February 2022), did not go unnoticed in the eyes of Morningstar who decided to downgrade its position on the market from neutral to negative.ARK Innovation ETF (ARKK) reporting as the fund created by Cathie Wood and which in 2020 had been in the headlines as the big winner in the first pandemic year. Morningstar analyst Robby Greengold notes that in addition to the weak performance of the last year, significantly greater than the average loss of 7.9% recorded by the broader category of technology funds of Morningstar over the same period, the main concerns are ” few signs of improving his risk management or his ability to successfully navigate the difficult territory he explores ”.
ARK Investment Management founder and CEO “doubled down on his dangerous approach” nearly halving the size of ARKK’s basket from 60 constituents less than a year ago to 35 today. A move that Greengold said amplifies both the ETF’s specific risk by increasing aggregate exposure to companies in which its parent company has large holdings. When ARKK’s portfolio comprised 55 stocks, Morningstar data showed that the ETF owned at least 5% of the publicly traded shares in more than a third of its constituents and at least 10% of the free float in 10 of the companies in its portfolio. At such high levels of ownership, there is a real risk that changes in the ETF’s assets will become a driver of the performance of the underlying securities.
“Wood’s dependence on his instinct to build the portfolio is a responsibility – reads the Morningstar report -. It is a high-risk, benchmark-independent portfolio that invests in technology platforms that the team believes will revolutionize the way industries around the world operate. The firm favors companies that are often unprofitable and whose stock prices are highly correlated. Rather than measuring the portfolio’s aggregate risk exposures and simulating their effects during a variety of market conditions, the firm uses its past as a guide for the future and sees risk almost exclusively through the lens of its bottom-up research on individual companies “.
Morningstar also highlights the fact that ARK has a poor succession plan with Wood (66) which is essential as the company’s majority owner and sole portfolio manager. Research director Brett Winton would succeed her if needed, but her 15 years of industry experience includes no one as a manager. “Compounding the risk is the company’s inability to develop and retain talent: many of its analysts have come and gone, and most of the remaining nine do not have deep industry experience.”
Wood suggested that risk management is not up to her but to those who invest in ARK’s funds. It’s hard to see why it should be like this. ARK could do more to avoid serious withdrawals of wealth and its neglect on the subject has hurt many investors in recent times, ”adds Greengold.
Morningstar is hardly the first to point out the shortcomings in ARK’s core ETF. Last year Michael Burry – investor made famous by the film ‘The Big Short‘- he bet short on ARKK.
Looking at the data since the beginning of the year, the ARKK ETF has recorded a decline of 28%.