Will there be more pain for Cathie Wood’s Ark funds despite HUGE potential?

Dr James Fox takes a closer look at Cathie Wood’s portfolio after her stocks staged a comeback at the start of 2023. Does he think it can continue?

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Cathie Wood’s Ark portfolio contains six actively-managed ETFs (Exchange Traded Funds), two index ETFs and one ETF venture fund. 

These funds — all named after the Ark of the Covenant — focus on disruptive innovation across different sectors. The companies the funds invest in are essentially growth stocks with disruptive technologies or innovations or, as I see them in some cases, growth stocks on steroids.

Wood’s portfolio — with a total value of $13.9bn invested in 538 stocks — has recovered in recent months. In fact, the flagship Ark Innovation, is up 32% since the turn of the year. But it’s down 30% over one year.

So what’s next for the Ark portfolio? Let’s take a closer look.

Disruptive innovation

Disruptive innovation is a highly volatile part of the market. After all, her idea for a such a portfolio was deemed too risky for asset manager AllianceBernstein — where Wood worked until 2014.

The volatility of this part of the market is clear when we look at the Ark portfolio over the last two years. As of December 2022, total assets across its nine ETFs had slumped to $11.4bn. That was down from a peak of $60.3bn in February 2021. Wood’s portfolio had lost nearly $50bn.

But the rise had been as steep as the fall. In 2020, Wood was named best stock-picker of the year by Bloomberg News editor-in-chief emeritus Matthew A Winkler when the portfolio’s speculative investing soared during the pandemic.

Long-term upside

Wood invests for around five years. She contends that to be the optimum period to remain invested to generate maximum returns on disruptive innovation.

The core feature to these 538 investment is cost-cutting. This component is essential because it encourages quick adoption, Wood believes. These are solutions that create large-scale efficiencies that generate their own momentum and demand.

But adoption doesn’t take place over night. Sometimes, it will take even longer. Take Wood’s $374m investment in Crispr Therapeutics. Gene editing is an highly promising technology, but technology requires regulatory approval around the world before adoption can take place. There’s clearly huge potential here, but what if it’s never realised.

More pain to come?

Sometimes it seems that the US market is disconnected from the fundamental data that should govern investment decisions. Speculative investing is seemingly more prevalent in the US markets than elsewhere in the world.

This is probably reflected in the fact that US stocks still look expensive, and gained earlier this year, despite fairly negative forecasts for the S&P 500.

Personally, I’m not buying any Ark portfolios right now because I’m anticipating a challenging 2023. One reason for this is rising interest rates. And with the US economy looking hotter than many anticipated, it may take more rate rises than expected to bring inflation down.

Why would this impact Ark? Well, growth stocks tend to need to borrow to fund growth. Higher interest rates therefore increase the cost of growth. Instead, I’m focusing more on established values stocks, ideally without debt issues.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Fox has no position in any of the shares mentioned. The Motley Fool UK has recommended CRISPR Therapeutics. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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