Why Downgrade ARK Innovation

The ARK Innovation ETF (ARKK) shows few signs of improving risk management and the ability to successfully navigate difficult areas to explore. Morningstar analysts’ ratings fall from neutral to negative, as both human and parent ratings are below average.

Since the surge in 2020, exchange-traded funds with this strategy have been one of the worst performing funds sold in the United States as their fast-growing stocks have returned to Earth. The disastrous 45.5% loss over the last 12 months to February 2022 is far behind the 7.9% decline in the average fund in the Technology Morningstar category and the 4.3% loss in the Russell Midcap Growth Index. rice field. (This strategy behaves more like a tech fund than its own growing category.)

Since then, manager Cathie Wood has doubled the dangerous approach in the hope of repeating 2020, when highly volatile growth stocks were favored. She reduced the number of shares from 60 shares a year ago to 35 shares, thereby amplifying the risk inherent in the shares and increasing the total exposure to companies for which ARK Investment Management is a major shareholder, thereby increasing the risk of the portfolio. I raised it. This strategy is effectively less liquid and more vulnerable to serious losses. Wood operates a variety of exchange-traded funds, and in many cases she makes shared bets on stocks and is unable to approach new investors. An option that open-ended mutual fund rivals can use to maintain liquidity and investment opportunities. The company has no risk management personnel.

Woods, who relies on her instincts to build a portfolio, is responsible. The team believes this is a risky, benchmark-agnostic portfolio that will invest in the entire technology platform and revolutionize the way sectors operate around the world. The company favors companies that are often unprofitable and whose stock prices are highly correlated. Rather than the portfolio aggregating risk exposures and simulating impacts in different market conditions, the company uses the past as a guide to the future and uses risk almost exclusively for bottom-up research into individual companies. I’m looking through the lens.

ARK is the majority owner of the company and is implementing a poor succession plan for the 66-year-old Wood, who is essential as the only portfolio manager. Research director Brett Winton will replace her as needed, but his 15 years of industry experience does not include his experience as a manager. Exacerbating the risk of key persons is the inability of companies to develop and retain talent. Many of the analysts come and go, and most of the remaining nine lack deep industry experience.

Wood suggests that risk management lies not with her, but with those who invest in ARK funding. It’s hard to understand why it should be. ARK can do more to avoid a serious drawdown of wealth, and carelessness on this topic has hurt many investors these days. It may hurt more in the future.

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