What You Need to Know
- Morningstar has downgraded Ark Invest's flagship fund, the Ark Innovation ETF, to negative from neutral.
- Reasons include that the fund is too narrowly focused in losing stocks and lacks any risk-management personnel.
- ARKK has taken a
Morningstar downgraded Ark Investment Management’s flagship fund, the Ark Innovation ETF, last week to negative from neutral. The $12.2 billion ETF, run by manager and CEO Cathie Wood, has fallen from grace since its incredible rise in 2020 of 156.91%. That was followed by a 23.38% loss in 2021 and a 28% drop year to date in 2022.
As Morningstar strategist Robby Greengold wrote in his analysis, “Invest at Your Own Risk,” the ETF has had a “wretched 45.5% loss over trailing 12 months through February 2022 and lagged the 7.9% decline of the average fund in the technology Morningstar Category and the Russell Midcap Growth index’s 4.3% loss.”
The big downfalls of the ARKK ETF, and the firm in general, include that the ETF in the past year has dropped the number of stocks to 35 from 60, “thereby amplifying stock-specific risk,” Greengold wrote. Further, in the aggregate, it makes Ark Invest its largest shareholder.
In addition, he wrote, “the firm has no risk-management personnel.”
Process, People, and Parent
Morningstar assesses funds through “People, Process and Parent pillars.” For ARKK, each of these areas has been downgraded, Greengold noted.
Some of the factors behind the downgrade include:
Wood’s use of instincts to construct portfolios is a “liability”: Greengold stated that the firm’s exposure to “technology platforms the team thinks will revolutionize how sectors across the globe operate” is high risk, especially as it “favors companies that are often unprofitable and whose stock prices are highly correlated.”
Instead of doing risk simulations, “the firm uses its past as a guide to the future and views risk almost exclusively through the lens of its bottom-up research into individual companies.”
This, he said, “can make or break” a fund’s performance as well as poorly position it to “prepare and react.”