After a very rough 2021, investors in Catherine Wood (Trades, Portfolio)’s ARK Investment Management and its ETFs were hoping the firm could turn things around this year. Alas, this was not meant to be, as 2022 has proven even worse. Every single one of Arks nine exchange-traded funds has posted severe losses this year. From a peak of more than $60 billion last year, Arks total assets under management across all nine of its ETFs has fallen to less than $12 billion.
Even Arks flagship fund, the ARK Innovation ETF (ARKK), has suffered badly in 2022. Despite its continued declines in 2022, however, investors hopes for a belated reprieve have not faded completely. With the new year beckoning, now would seem to be an ideal time to take a look at what might lie in store for ARK Innovation in 2023.
From boom to bust
The ARK Innovation ETF was one of the big winners of the explosive bull market run of 2020. The ETF posted an astonishing 152% return during the year. This performance led to a flood of inflows during 2020 and early 2021. At its height in February 2021, the ARK Innovation ETF boasted just shy of $28 billion in assets under management – almost the same amount invested across Arks other eight ETFs combined.
The good times were not to last for the ETF, however. As I discussed previously, the high-flying ETF suffered a severe reversal of fortunes over the course of 2021, resulting in a 23.5% loss for the year. This year has proven even worse, with ETF down 67% year to date. As a result of continued poor performance, ARK Innovation has seen its assets under management decline precipitously to less than $6.5 billion.
ARK Innovation, like all Ark ETFs, is highly exposed to growth stocks. When zippy growth stocks were flying high, so was ARK Innovation. As sentiment has shifted away from loss-making, high-multiple growth stocks and toward safer, more value-oriented options, many of the names in ARK Innovations portfolio have taken a beating.
Victim of shifting sentiment
A growing number of analysts have turned against ARK Innovation as a result of its continued poor performance. Morningstar (NASDAQ:MORN) strategist Robby Greengold, for example, last week offered an unvarnished assessment of ARK Innovations recent performance, calling the ETF the canary in the coal mine for the regime shift from growth to value:
Ark Innovations results have been horrendous this year and very disappointing for investors A huge driver of the underperformance has been stylistic in nature globally, growth stocks have suffered and value stocks have been more resilient.
Of course, the markets sentiment shift from growth to value did not happen overnight. As AJ Bells Russ Mould pointed out in December last year, this was a major driver of ARK Innovations poor performance in 2021:
There has been an ebbing of enthusiasm for high-growth tech stocks. A lot of Ark Innovations holdings dont make money and in an environment where interest rates are expected to rise, this is not necessarily the place you want to be. [There are also] some stock-specific challenges, which have exposed some very lofty valuations.
Yet even as investors have shifted to value, and high-growth stocks have seen their optimistic valuations clipped, ARK Innovations strategy and portfolio composition has remained largely unchanged.
Failure to adapt
According to many analysts and commentators, the blame for ARK Innovations precipitous fall rests squarely on the shoulders of its boss, Catherine Wood (Trades, Portfolio). PensionCrafts Ramin Nakisa told the Financial Times as much on Dec. 21, citing Woods apparent credulity and lack of serious analytical process:
Cathie Wood is very credulous as long as theres a good narrative that goes with something shes willing to believe it. You have to question whether she has that sanity check on companies valuation, market share and potential profitability.
Rather than adapt its strategies to changing market conditions, Ark Investment Management has instead doubled down on its commitment to growth stocks. Wood has repeatedly blasted her critics for their perceived short-sightedness, such as on Dec. 20 when she took to Twitter to defend her investment strategy:
ARK invests in companies that we believe will change the world and generate extraordinary cash flow at scale, not mature companies catering to short-term investors.
Thus far, Woods efforts have largely failed to convince the majority of market participants who have made the shift from growth to value. If anything, her defensiveness and continued doubling down on a money-losing strategy has led to even greater levels of criticism.
My take
Warren Buffett (Trades, Portfolio) once said, Its only when the tide goes out that you learn who has been swimming naked. The ARK Innovation ETF offers a rather stunning example of this phenomenon in my view. After all, anyone can make money in a roaring bull market, but not everyone can keep it when the market turns bearish. If investors do not adapt their strategies to changing market conditions, they will inevitably set themselves up for failure.
The ARK Innovation ETF, once a darling of the growth stock crowd, is learning this lesson the hard way. Yet with over $6 billion still under management, plenty of investors have continued to leave their capital in the hands of Ark Investment Management. Whether that remaining faith can hold in the long-term remains to be seen. I believe we have yet to see convincing evidence that most of the hot growth stocks of 2020 can remain relevent for the long-term, just like with the dot-com bubble and its subsequent burst.
Trade carefully!
This article first appeared on GuruFocus.