Is China Ready for Its Own Cathie Wood?
(Bloomberg Opinion) -- Cathie Wood is a superstar. In just one year, her ARK Investment Management took in nearly $40 billion of new money, behind only Vanguard Group and BlackRock Inc’s iShares, each of which has hundreds of funds. Last year, the performance of her flagship ARK Innovation ETF, which holds next-generation tech frontiers such as Tesla Inc. and Square Inc., was nothing but stellar.
You’d imagine China would be ripe for its own Cathie Wood. The nation’s infamous day traders are abandoning stocks for mutual funds. The demand is so strong that in January, a new fund seeking to raise 15 billion yuan ($1.9 billion) received a record 237 billion yuan in subscriptions instead. In addition, Wood’s investment philosophy — deep focus on disruptive innovations — is music to Chinese ears. In their world view, value investing is not about traditional accounting metrics like price-to-earnings ratios, but whether and how fast a small-cap can morph into a mega cap.
And yet China does not have its own Cathie Wood — of any gender. And it can’t. Not right now. That’s because its market players continue to behave like amateurs.
Let’s start with retail sentiment. Wood invests in a volatile space where macro factors, such as a sudden uptick in bond yields, can sink her stock choices. As her family of funds gets bigger, she needs her followers to have faith, to stay with her through good or bad — or at least not run for the exit so fast that fund outflows outpace her ability to sell shares to meet redemptions.
That kind of discipline is difficult in China. The attention span of retail investors often does not last longer than a few days. According to a recent mutual fund manager survey conducted by finance magazine Caixin, 30% of investors hold on to a fund for less than one month; 21% hang on for between one and three months.
Fortunately, Wood has not suffered that kind of faithlessness yet in the U.S. Her flagship ARK Innovation ETF saw a record $465 million outflow on Feb. 23, data compiled by Bloomberg show. But that was relatively tame, considering the fund tumbled from a recent peak. With high-flying niche ETFs, money left more slowly than it came in, either due to inertia or investors buying on dip, according to Bloomberg Intelligence analysts James Seyffart and Eric Balchunas. They cited the WisdomTree Japan Hedged Equity Fund as an example.
State-owned CCTV understands the Chinese ethos quite well. In a late January editorial, its finance channel complained that domestic investors were chasing after momentum and bolting at any sign of a dip. They clamor for celebrity managers but shame them on social media as soon as fund performance falters. Many do not research a fund’s holdings, or its asset manager’s track record, it lamented.
A second big problem is other managers. Even in the U.S., ARK’s stardom means the market is watching — and sometime copying — Wood’s every move, making it difficult for her to initiate and establish a new position. According to Morningstar, ARK has made 20 first-time buys across its five actively managed ETFs since the beginning of the year. Among those 20 new names, 14 saw their stock prices rise more than 3.5% the day after ARK’s first disclosure.
Morningstar analysts provided one example. On Jan. 20, ARK’s innovation ETF started buying heavy-duty truck manufacturer Paccar Inc.’s stock. The next day, upon ARK’s disclosure, Paccar’s share price jumped 7% at the open. It took ARK another ten trading days to build up its positions, but at higher prices.
Just imagine how Wood would fare in China, where copycatting is prevalent in every corner of the economy. If you’ve got a good idea, everyone jumps in, propelling your stocks to unsustainable valuations. Similarly, if you sell, even for portfolio rebalancing, the market offloads with you. It’s an industry largely devoid of original ideas. China has even got its own version of the Nifty Fifty — the popular list of U.S. large caps in the 1950s and 60s — which suffered from a heavy selloff recently.
China would be a nightmare for the likes of Wood. A star manager inevitably gets all the money. But at the size of her funds, it takes her more than a day to start new positions or reshuffle her portfolios. The whole market will simply watch and copy. That would cut into her returns, which in China would generate verbal abuse online and a retail exodus. And that’s why China won’t have its own Cathie Wood.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.
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