The last couple of years have been wild for CEO Cathie Wood, her Ark Invest firm, and investors who put money in the company's exchange-traded funds (ETFs).The company's flagship Ark Innovation ETF (ARKK +3.85%) posted gains of roughly 149% across 2020's trading, but its performance has looked drastically different since the beginning of last year.
Ark's ETFs are heavy on the kinds of growth stocks that have gotten crushed amid bearish conditions shaping the broader market, and there's plenty of uncertainty on the horizon. For better or worse, Wood's funds could be at a tipping point. Read on to see what a panel of Motley Fool contributors thinks will happen next.
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Beware of recency bias
Daniel Foelber: On May 11, Cathie Wood's flagship ETF, the Ark Innovation ETF, fell to a fresh 52-week low of $35.10 -- a 78% drawdown from its all-time intraday high of $159.70 on Feb. 16, 2021. Even into the end of 2021, ARK Innovation was handily beating the Nasdaq-100, but has since found itself underperforming the Nasdaq Composite and even the S&P 500 over the last three years with a negative overall return.
Wood and her team put out impeccable content, both through their research reports and podcasts. Yet all investors have their weaknesses. And for Wood, I think it's safe to say it was valuation.
Wood's turbulent investment strategy highlights a major mistake that new investors miss, which is the difference between a great company and a great stock. There's no denying that many companies Ark invests in are well run and lead their industries. And many that don't lead their industries certainly have the potential to break paradigms. The issue is that Wood and her team were valuing many of these companies as if they had already done much of what they hoped to do, which discounts uncertainty and leads to poor risk management.
Price and valuations should always matter. But they matter even more during a recession. Companies that lack profits and positive free cash flow are heavily dependent on economic cycles, industry growth, and low interest rates. Take that fuel away, and you have a far dimmer fire.
I have a lot of respect for Wood and her team and find it unfortunate that they were, in many ways, the poster child of the growth stock boom from 2019 to the end of 2021 and have since become the poster child of the tech stock sell-off. For everyday investors, the turbulent ride of Wood's funds shows just how quickly an investing strategy can go from in favor to out of favor. The reverse is true for Warren Buffett's Berkshire Hathaway, which was underperforming the S&P 500 but is now all the rage as Buffett's value investing bent becomes more attractive during times of economic uncertainty. The best thing an individual investor can do is recognize the power of recency bias -- which is the tendency to overweight recent events over long-term trends. Recency bias can cloud your judgment by emphasizing whatever is working in the short term and making you lose sight of the big picture.
Zoom out, and all that matters is achieving your financial goals over a multidecade time horizon. There are many paths to get there, and it's important to take the one that best suits your personal risk tolerance.
Strategy shift ahead
James Brumley: When most people hear or say the words "tipping point" they're usually talking about a change of fortune. In this case a change would be for the worse. Wood and Ark Invest were on top of the world for the better part of 2020 and 2021, when the planet's most popular tech stocks were soaring. Now they're untouchable, and Wood as well as most owners of Ark exchange-traded funds are paying an exaggerated price.
The thing is, I don't think Ark's (or Wood's) future marketability is the tipping point to be talking about. I've got a feeling that the bigger change afoot is going to be how most of the Ark funds are managed.
I mentioned this a couple of weeks ago, but it bears repeating now: Ark's managers are doing a whole lot of trading, with most of its funds looking more like actively managed instruments rather than passive ones. That strategy works when the bull market is a full-blown stampede; just throw money into the rising tide. The downside of this approach has become clear over the course of the past year, though. That is, not even most professionals can predict the market's near-term ebbs and flows. Lesson learned, or at least relearned.
So, as I see it, the tipping point Ark and Wood are at is a move back to the funds' original intents. That's plugging into major trends and themes with leaders from those industries, and leaving them alone for the long haul. This should really cut back on portfolio turnover, and ultimately set the stage for above-average results.
NYSEMKT: ARKK
Key Data Points
Don't bank on a turnaround right away
Keith Noonan: If Wood and Ark use the current bearish conditions for technology stocks to identify top players in the space that are worth holding, it could wind up creating an opportunity that pays off big over the long term. However, that will likely require an approach to portfolio composition that's at odds with the type of management that the firm has utilized recently.
As James mentioned above, Ark has been very active when it comes to trading, and that kind of approach is likely to create problems when market conditions remain tumultuous for extended periods. Facing sustained bearish volatility, you're much more likely to wind up making bad trades and recording big losses when buying and selling frequently.
As it stands right now, there aren't many indicators pointing to the tech and hypergrowth stocks favored by Cathie Wood being on track for a strong rebound in the near term. Inflation continues to run hot, the Fed will likely implement five more significant rate hikes this year, and the challenging economic conditions and efforts to stem inflation threaten to push the U.S. economy into a recession. With rates rising, borrowing money to fund growth initiatives is becoming more expensive, and the weakening global economy means businesses and investors are facing a combination of higher risk and lower reward.
Amid the challenging macroeconomic backdrop at hand, the type of growth stocks favored by Wood and the Ark teams could be posting soggy performance for a while. That would probably mean more negative press and "I told you so" refrains directed at the company and its CEO, but Wood and Ark could eventually reemerge triumphant if they use the growth-stock bear market to build long-term positions in the right companies.
