Morningstar Cuts ARKK Rating to Negative

Heavy concentration: Not only is the fund more likely to sell liquid, large-cap stocks, it does this to focus on “pure plays” — that is, typically “unprofitable small caps with extreme volatility and far less liquidity.” He added that its largest 10 holdings make up 60% of the assets, which is one of the “most severe asset concentrations” in the category.

Lack of seasoned staff: A key problem is that there is no succession plan for Wood. As the firm’s portfolio manager, CEO and chief investment officer, Wood is the main force of the firm. Her backup, Brett Winton, director of research, has no portfolio management experience, Greengold said.

But mostly the strategist bashes the firm’s “inability to develop and retain talent” as its main fault, noting that the nine analysts still on staff lack any deep industry experience.

Boom or bust: Despite its 12-month drop in performance, the firm since October 2014 through February 2022 has had a 20.6% annual gain, which has beat the 12.5% gain of this Russell Midcap Growth Index category benchmark, and beat out its peers in the category.

This might explain its ability to attract and retain its investors, Greengold said. The firm still has more than $23 billion in assets under management; that number, however, was $50 billion in February 2021.

He added, though, that this return isn’t as impressive when compared with tech fund returns, of which ARKK most resembles with its narrow focus on aggressive-growth stocks, he said. The S&P North American Technology Index gained 21% annually since 2014.

Greengold noted that most of ARKK’s returns were between 2017 and 2020, while it was one of the worst performers from 2021 through the first quarter of 2022.

He concludes that despite the fund’s low fees, “we think this share class’s alpha relative to the category benchmark index will be materially negative.”