Investors Drop Another $168 Million Into ARKK Last Week As Cathie Wood’s ETF Faces A “Loyalty Test”

There’s been no doubt that the last 3 months have not been friendly to Cathie Wood’s flagship ARK Innovation Fund (ARKK). We have covered the fund’s historic drawdown and noted at the beginning of this year that a lot of its success (or failure) in the new year will likely hinge on the performance of Tesla.

But so far – despite the fund falling more than 50% from its all-time highs and 27% this month – the ARKK “loyalty test”, as the Wall Street Journal called it this weekend, seems to still be working in favor of Wood. In the past week, investors have put about $168 million into the fund, boosting its net assets to $11.8 billion, the Journal wrote on Sunday.

As we have continually noted, ARKK’s components appears to be a “Who’s Who” list of overvalued stocks at the dead center of the crosshairs for the current market volatility. These include names like Zoom, Block, Teladoc, Roku and Spotify. 

“After correcting for nearly 11 months, innovation stocks seem to have entered deep value territory, their valuations a fraction of peak levels,” Wood wrote last month, defending her “strategy” in the face of unrelenting red days. Meanwhile, a lot of the $16 billion that flowed into ARK Innovation from the second quarter of 2020 is at risk of now being underwater. 

The WSJ pointed out Larry Carroll, a financial adviser at advisory firm Wealth Enhancement Group in Rock Hill, S.C., who has $18 million of his clients’ money in ARK funds after first buying shares in 2018. He commented: “The real question has been should we be buying more. I’ve resisted the urge mainly because I don’t think you’ll see ARK and the disruption stocks do well in this environment.”

Client-portfolio manager at ARK, Renato Leggi, said that “some investors have started to agree with Ms. Wood’s assessment over the past week and are buying shares”.

Yes, Renato; and some have been buying the inverse ARKK ETF (SARK) and have doubled their money in less than six months…

Klaus Derendorf, a 50-year-old business-development executive from Los Angeles told the WSJ he sold his shares in November after losing about 20%. He commented: “I gotta go back to real fundamentals.”

Joe Seid, a 58-year-old sales director from Chicago, said he bought ARK shares after seeing Wood on TV. He sold last year after losing 10% and told the WSJ: “For me, these were way too speculative. It didn’t really jibe with more core financial beliefs.”

Meanwhile, Cathie Wood has been under scrutiny for how she presents the performance of her hallmark fund. This month, Zero Hedge contributor Quoth the Raven wrote that Wood had changed how ARK’s website was displaying its returns for ARKK – from a YTD return period to a 5 year return period.

He also wrote back on December 21 that Wood had backtracked on estimates of returning 40% per year, for the next 5 years. She said in mid December that “innovation stocks” were in “deep value territory” and she estimated specifically that her “flagship strategy” could deliver “a 40% compound annual rate of return during the next five years”.

Then, she changed the language in her blog post and realigned her expectations from “40%” to “30-40%” and added a lot of qualifier language, not the least of which was directing the return expectation away from their “flagship strategy” and onto a vague benchmark of ARK Invest, in general.

“If the luster wears out for ARKK names or we see a tech wreck, as I have predicted might happen, there’s no doubt that Wood’s “Innovation Fund” will wind up facing more volatility, possibly disproportionately,” we wrote in December.

It looks like that is the case, at least for the start of 2022 thus far. Let’s see if her investors continue to hang tough…