Cathie Wood’s ARK Innovation Fund (ARKK), perhaps the world’s best-known actively managed ETF, performed astoundingly during the tech sector’s revaluation of the previous decade. But in recent years, returns have become catastrophic. We are regularly asked by investors about the opportunity to take advantage of the decline… But do we catch a falling knife?
On paper, the ARK Innovation fund (ticker ARKK) is attractive. For low entry fees (0.75%), it offers a very liquid ETF exposed to trendy technological themes. Specifically, its prospectus announces that “The objective is long-term capital growth. [Le fonds] seeks to achieve this investment objective by investing under normal circumstances primarily (at least 65% of its assets) in domestic and foreign shares of companies that are relevant to ARKK’s investment theme, namely innovation disruptive. ARK defines disruptive innovation as the introduction of a new technology-based product or service that has the potential to change the way the world works.“.
This aggressive way of investing worked wonders between October 2014, the fund’s launch date, and February 2021, its peak.
Everything is going well until the start of 2021 (the weird holes in the courses in 2016 are due to a technical problem with us)
An investor who put $20 on a share at the time of launch was looking at $155 7 years later. That is to say a gain of 660%, well above what the very successful Nasdaq 100 offered (236%). This represented roughly an increase of 34% per year for seven years. No wonder investors have been rushing to buy ARKK.
The problem is, the party came to an abrupt end. An investor who positioned himself with the worst timing in February 2021 thus lost 69% of his savings.
We added the S&P500 to show ARKK’s overall underperformance over nearly 10 years
ARKK’s underperformance since 2021 has accumulated: -23.4% in 2021, -67% in 2022 and -13.3% in 2023. This debacle has clearly damaged the long-term performance of the fund. It thus delivers a CAGR (gross average annual increase) of 9% over 10 years, which remains honorable, but much lower than that of the Nasdaq 100 (+17.3%) or even the S&P500 (11.3%). To be fair, this is barely more than the CAC40 Dividends reinvested (8.5%).
ARKK also displays unfavorable risk-adjusted performance ratios: it is below average on most traditional ratios, which means that it displays mediocre returns relative to the risk it poses to investors.
Assets under management reduced by 80%
Morningstar calculated at the start of the year that ARK funds had destroyed $14.3 billion in shareholder value since the creation of the management company. ARK indeed has its ARK Innovation fund (ARKK), its flagship, but also other ETFs. There are funds in particular for robotics, but also for the genomic revolution or even for space exploration and Israeli innovation.
The ARK Innovation fund itself is behind some of this value destruction. At its peak in early 2021, assets under management rose to more than $28 billion. It is currently flirting with $5.6 billion, a drop of 80%, between declines in asset values and withdrawals of funds.
With such performances, Cathie Wood has not silenced her detractors, who accuse her of being a mediocre manager, who only knew how to ride the wave of free money when the key rates of the major central banks were close from zero. The person concerned is still as divisive, especially since she retained a certain arrogance in the interview. She continues to proclaim loudly and clearly that her choices are the right ones for the long term. For now, the numbers prove him wrong.
