Cathie Wood Is Trimming Her Biggest Stakes as Ark Funds Stumble

Cathie Wood’s tactic of selling holdings in bigger, more liquid companies during drawdowns and buying less well-traded names helped fuel fears that Ark Investment Management would become overexposed to its most speculative bets.

So far, the opposite has happened.

While the number of companies in which Ark holds more than a 10% stake is the same as it was three months ago, other metrics show concentration in retreat.

The New York-based money manager no longer holds a stake bigger than 20% in any stock, down from three companies in February. Its largest holding remains in Compugen Ltd., but that has dropped to 17.2% from 21.3% earlier in the year.

Cathie Wood Is Trimming Her Biggest Stakes as Ark Funds Stumble

When its ownership is combined with that of Nikko Asset Management -- the Japanese firm with a minority stake in Ark that it has partnered with to advise on several funds -- the pair now control 25% or more of just one company, Compugen. And the number of stocks in which the two own more than 20% has dropped to eight from 10 previously.

“This is an evolution a bit -- Ark accepting it’s a large fund-family now,” said Tom Essaye, a former Merrill Lynch trader who founded “The Sevens Report” newsletter. “It makes sense that especially in some of the smaller cap names they are reducing that concentration. How much money you put to work in the smaller names can alter the risk-reward calculation.”

Ark’s exchange-traded funds have endured a torrid few weeks, with the flagship fund down more than 32% from its Feb. 12 peak. Yet outflows have remained modest, even though tens of billions in late-arriving investments are underwater.

This means the money manager has had time for an orderly adjustment of positions, rather than being forced into a panicked liquidation. Ark did not respond to a request for comment.

“My fear was that investors that were relatively new to the strategy would see weak performance and then pull out just as management had increasingly favored some of these smaller companies,” said Todd Rosenbluth, head of ETF & mutual fund research at CFRA Research. “But because investors have stayed relatively loyal, they have not had to make changes to the portfolio to meet client redemptions.”

Cathie Wood Is Trimming Her Biggest Stakes as Ark Funds Stumble

The firm’s drop in total ETF assets -- currently at $41 billion, down from $60 billion at its peak -- is mostly due to the stocks in its funds plunging, amid fears of higher inflation and a rotation into value names that will benefit from the economic recovery.

In fact, since the end of February, the family of funds -- six actively managed and two tracking indexes -- has lost only about $1.2 billion. They have still taken in a net $15.1 billion year-to-date.

“That speaks to the conviction of Ark investors,” said Nate Geraci, president of the ETF Store, an advisory firm. “Investors aren’t running for the hills, they appear to be in it for the long haul.”

None of this means Ark funds won’t face outflows in the future. A prolonged period of underperformance might shake out some of Wood’s fans.

The $20 billion ARK Innovation ETF (ticker ARKK) dropped for four straight weeks and notched four straight weeks of outflows, before rebounding slightly to finish this week 1.5% higher. Short interest as a percentage of shares outstanding is 3.5%, according to data from IHS Markit Ltd., down from its all-time high of 5.3% but still elevated.

“Investors may not want to make that rash a decision, but if the fund doesn’t bounce back -- and we don’t think it will so quickly -- then we could see some of those newer investors take their money back,” Rosenbluth said.

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