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One reason why so many of us enjoy investing is that the endeavor, like politics and sports, delivers clearly defined outcomes.
In fact, investing might be the clearest of those three fields. At the end of the day, market participants are either making or losing money. Perhaps it's those similarities with politics and sports that lead to others in the world of finance, namely hype and criticism directed at star fund managers. ARK Investment Management founder Cathie Wood is on the receiving end of plenty of both, though 2021 has brought about much more in the way of negative vibes than praise.
Much of that has to do with the performance of the ARK Innovation ETF (NYSEARCA:ARKK), the issuers flagship exchange traded fund and the largest actively managed ETF by assets. After returning a staggering 152.8% last year, ARKK is off 4% year-to-date. Obviously, that's a stunning reversal and one that the naysayers believe provides them with fodder for criticism.
Some are boobirds are taking things a bit far. Earlier this month, a fund issuer announced plans for what's essentially an inverse version of ARKK while another famous investor said he's short the fund. One need not possess a CFA or Harvard MBA to see the risks inherent in directly shorting an actively managed fund where the issuer frequently swaps in and out of holdings, potentially limiting the viability of technical analysis in the process.
Understanding What's New Threatens Old Guard
Criticism of ARKK and thereby the broader investing style set forth by Wood and ARK doesn't end there.
Earlier this year, a well-known research firm levied harsh words at ARK while dispensing a sour grade on ARKK with much of that negativity revolving around the issuer's penchant for running concentrated strategies, amassing significant stakes in small- and mid-cap companies and the relative youth and “inexperience” of ARK analysts.
Indeed, the top 10 holdings in ARRK represent about half the ETF's weight. That's also true in the Nasdaq-100 Index, which by the way has a long track record of trouncing the S&P 500.
As for the concerns about about ARK embracing smaller stocks and the younger analysts, those issues should be broken down as follows. First and foremost, decades upon decades of research confirm smaller, often under-followed stocks crush widely followed large-cap counterparts. Second, any growth manager can overweight FAANG stocks, deliver “out-performance” and call it a day. Third, many of the concepts ARK invests in, be it autonomous transportation, cryptocurrency, other elements of fintech and social commerce, just to name a few, are themselves youthful. These are pursuits where younger researchers may actually enhance investor outcomes, not act as detriments.
Time Frame Matters
Obviously, ARK is a growth manager and as is being widely documented amid this year's growth vs. value tug-of-war, factor leadership is fluid, not static. Said another way, there will be times when growth, particularly the disruptive style ARK espouses, falls out of favor.
On that note, it pays to remember something Wood herself often says. That being ARK isn't investing for outcomes today, but rather five years down the road. Think of it as a more immediate though still reasonable approach to Warren Buffett once saying Berkshire Hathaway's preferred holding period is “forever.”
With bitcoin and Tesla (NASDAQ:TSLA) standing out as two primary examples, the strategy has broadly served ARK investors well. Thing is, and advisors know this well, securities don't move up in linear fashion and with disruptive growth stocks, there are sure to be bumps along the way. That should be common sense, but take to Twitter and you'll find folks lamenting the average decline of 30% from 52-week highs for ARKK's top 10 holdings – negative treatment that's rarely, if ever, extended to another fund manager.
Of course, those tweets neglect to mention when ARK bought those stocks, how deep in the money the issuer is on those positions and the aforementioned five-year time horizon.
With ARK, Past is Prologue
Advisors that have been in business in awhile know that with the advent of each new technology, criticism, fear and resistance often follow.
It happened with the cell phone, online shopping and many more examples. And it's happening with five technologies—artificial intelligence, blockchain, DNA sequencing, energy storage, and robotics – that are ARK's areas of focus.
Yet, these concepts are going to disrupt the economy and investing as we know it. Some already are. Genomics companies are working on technologies, including early cancer detection, that will improve patient outcomes. Fintech companies are offering bank accounts and money transfer services (and much more) with economics that are far superior to traditional banks (bank branches are really expensive and fintech companies don't have those).
Virtuous cycles in innovative investing are here and they're still in their nascent stages and that's a reminder it's better to adapt and evolve than it is to critique and risk being left behind.
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