US fund manager Cathie Wood has her share of fans — the seven US-listed ETFs in her Ark fund have pulled in close to $17bn this year to mid-March alone, bringing the total assets under management to over a whopping $50bn. One of her funds returned close to 150% in 2020.
Her share of detractors has also grown. Concerns about the mammoth-sized weight of her holdings in smaller companies and the potential impact if redemptions swell have crossed the pond to reach European investors, too.
One London fund manager said he has pulled out of any positions also owned by Ark ETFs, including Crispr Therapeutics and Pacific Biosciences of California, because he doesn’t “want to be the one holding the bag if redemptions force Wood to sell”. A London trader said clients are shorting “anything illiquid” in Ark ETFs, particularly healthcare stocks.
And Neil Campling, the London analyst who shot to fame for calling Wirecard a zero more than a year before the German payments company’s collapse, told Financial News that he’s advising EU clients to steer clear of less liquid names held by Ark, as “it could get nasty in a down draft”.
The fund manager summed up investor fears, saying of his decision to exit his positions: “If someone owns 10% of a public company and then becomes a forced seller because of redemptions, then the shares in that company will fall — a lot.”
The moves highlight the issue that has been plaguing Ark for months — short-sellers, detractors and investors alike have raised concerns about how difficult it might be to sell positions in smaller Ark-held stocks if markets get rockier. The concerns prompted Wood herself to address liquidity fears in two online videos — a half hour one in late February, and a mid-March recording that was almost an hour long. Ark declined to comment for this story, instead referring FN to Wood’s videos.
In one video, she said, among other things, that many investors don’t fully understand liquidity issues when it comes to ETFs. Ark’s ETFs are listed in the US, adding an extra hurdle to European investors keen to get in on the action. But Ark’s Innovation ETF holds Tesla, Zoom and Spotify among its top 10 positions — popular stocks that have attracted huge investment from UK- and Europe-based fund managers amid the frenzy around tech companies.
“The flows are very choppy,” said Ali Masarwah, director of editorial research at Morningstar. “This is a concern for investors in Europe, because they have to look at the inflows and outflows from the Ark ETF to gauge the liquidity risks for their holdings.”
Wood’s funds faced a big test during the tech selloff that kicked off in February. Bloomberg data showed $465m was yanked from the Innovation ETF on 22 February, prompted by investors fleeing for the exit as some of its largest holdings came under pressure. The ETF bounced back, attracting some $464m a few days later. Wood has a devoted following of passionate investors — indeed, even during the rollercoaster markets of the last month, more investor money flowed in to the funds than flowed out.
Ark’s flagship Innovation ETF has pulled in more than $7bn this year, according to Bloomberg data, although flows in and out of the fund have been wild.
Performance has also taken a hit, with the Innovation ETF tumbling by more than 25% in a month to 8 March. It has since recovered, but is still down by more than 6% so far this month.
Neil Campling, an analyst with Mirabaud, is among those who have noticed the Innovation ETF has been building its stakes in smaller cap stocks, such as Beam Therapeutics, Berkeley Lights, Teledoc Health and Fate Therapeutics.
He said “the doubling down” on increasing stakes in more illiquid stocks “could be a very risky strategy”, pointing to data showing the Ark Innovation ETF was selling larger liquid holdings to fund increases in smaller positions.
Wood likes healthcare stocks and has attracted tens of billions of dollars from clients — her flagship Innovation ETF, an actively managed fund, returned close to 150% in 2020.
Campling, the only analyst to call Wirecard a zero as peers touted the stock, created what he calls the “Ark 10% Club”, a basket of companies in which the Innovation ETF owns more than 10% of outstanding shares. For example, the largest of Ark’s 10% or more holdings is Crispr Therapeutics — filings show that Ark owns about $954m of the shares across two of its funds, making up about 10% of Crispr’s $9.54bn market cap.
Campling’s analysis found that most of the other companies in this category are fairly small in terms of market capitalisation and have sunk by double-digits over the month ending the first week of March.
Indeed, Ark positions include biotech firm Arcturus Therapeutics Holdings, which has a market cap of about $1.4bn. Israeli biotech firm Compugen, is in two Ark funds, Ark Innovation and Ark Genomics, and has plunged 14% in the past month, trimming its market capitalisation to about $716m.
Peter Sleep, a senior portfolio manager at 7 Investment Management, said: “When you have any investor taking such a big stake in a company in a relatively short time it is going to ramp the share price up. To some extent Ark’s performance in 2020 has probably been helped just by the sheer weight of their own money going into some stocks.”
Sleep, who invests predominantly in index products, called it “sloppy fund management”.
“A fund manager should not be taking such big stakes in companies – especially in ETFs. Taking such large positions in companies can only end in tears when the music stops,” said Sleep.
Ark explains its vision behind such big bets on its site, saying in healthcare, for example, that it sees improvements in drug development efficiency adding $9tn to market capitalisations of therapeutic stocks over the next five years.
“Liquidity works both ways,” said Campling, saying that if Ark has to be “a net seller rather than net buyer due to fund flows, the floodgates could open”.
That’s what worries the London fund manager who sold down the positions he shares with Ark.
“Even when Ark was on the way up it was really hard to get out of”, the fund manager said, meaning the stocks proved difficult to sell to exit the positions even as the stocks were rising, when typically there would be more demand from buyers. “There wasn’t much liquidity.”