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Cathie Wood’s Flagship Fund is Down … Money is Still Flowing. WSJ

edited May 14 in Fund Discussions
On Friday May 13 ARKK rose nearly 12% bringing its YTD return to -53.9% according to Lipper. That’s still substantially worse than the -45% reported by the WSJ in this earlier excerpt. I will no longer be updating the return here as I’ve done now for several weeks. However, you can check the performance at Lipper. Thanks for reading my post.


(Extended excerpt)

Cathie Wood’s ARK Innovation exchange-traded fund keeps falling, but investors aren’t jumping ship. Shares of the popular ETF, which is known by its ticker ARKK, have declined 45% so far in 2022—including 21% in April alone—as rising interest rates punish stocks that are valued on the prospect of robust future growth. Those are just the type of companies that ARKK targets through its investment theme of “disruptive innovation.”Its big holdings include Tesla Inc., Zoom Video Communications Inc., Roku Inc., Teladoc Health Inc. and Coinbase Global Inc. With the exception of Tesla, those stocks have all fallen more than 35% this year. The S&P 500 has dropped 10% over the same period, while the tech-heavy Nasdaq Composite has retreated 18%.

Ms. Wood and her fund shot to prominence in 2020, when its shares soared nearly 150% as the Federal Reserve slashed interest rates to near zero and investors loaded up on risk. The S&P 500, by comparison, rose 16% that year. Since then, it has been tough going. While the S&P 500 gained 27% in 2021, ARKK shares slumped 24%, stung as rising government bond yields prompted a flight from high-growth stocks. The downdraft has continued this year as the fund sticks to its strategy of buying and holding companies it believes offer the greatest potential for innovation. Many of them haven’t yet achieved consistent profitability. Despite the drawdown, investors haven’t fled ARKK. Instead, they have funneled more than $658 million into the fund this year, according to FactSet data through Thursday, including about $59 million in the latest week. That is even as investors yanked $2.3 billion year-to-date from the Invesco QQQ Trust, a prominent ETF tracking the Nasdaq-100 index …


From: The Wall Street Journal April 25, 2022


Article was published Monday morning. So numbers are a couple days out of date. I also wonder about the conclusion here that money hasn’t fled. My hunch is that a lot fled and a lot of new money has raced in hoping to buy near bottom. Other thoughts welcome.
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Comments

  • A better comparison than ARKK and QQQ is ARKK and TQQQ.
  • TQQQ = 3X leverage QQQ. Some would accept hitting a home run once every 5 years.
  • Given the high level of risk in both ARKK and TQQQ and viewing them as short-term trading vehicles only, TQQQ has had better returns.
  • My fave fund, RLSFX is only down 40% YTD; so I guess I can count my lucky stars I don't own one of Wood's funds.
  • The year is still young and only one third done. Warren Buffet is busy shopping lately since he has lots of cash.
  • edited May 6
    Sven said:

    “The year is still young and only one third done. Warren Buffet is busy shopping lately since he has lots of cash.”

    It would be nice to get into his head! The guy is programmed to hunt for value. I suspect his investors possess the time horizons and stamina to wait out bear markets.
  • For years Buffet was criticized for holding lots of cash. Yet BRK-A/BRK-B stock does not pay a dividend. Now he has the cash to deploy at low prices in depressed times. He once said that the risk of stocks is greatly decreased when the price is decreased due to the market and not the fundamentals of the stock. YTD return of BRK-B is still in black while S&P500 index is down 12.6%. I invest with WB in any days over ARKK.
  • For years Buffet was criticized for holding lots of cash.

    Did he really come out ahead by keeping his "powder dry" for years? I think the numbers show that the opportunity cost of holding onto that power exceeded the benefit of waiting. While Buffett is often used as a model of patient investing, patience has its price.

    He purchased about $51B worth of equity in Q1 2022 (plus repurchasing $3.2B of Berkshire Hathaway stock).

    $11.6B of that was to acquire Alleghany Insurance at a 25% control premium. That's BH's primary MO - to buy control, not equity for income/gain. So IMHO we can discount this as not a "regular" investment.

    Of the remaining $40B, at least $14B (35%) went into Chevron stock. You can infer this by noting that the $4.5B owned at the beginning of the year was worth 40% more at end of quarter. Subtracting that $6.B from the $25.9B owned at the end of the quarter means that BH bought shares worth $19.6B at end of quarter. The cheapest those shares could have been purchased in the quarter was $14B (at beginning of quarter).

    So it is fair to focus on CVX.
    • Had the same shares been purchased at the beginning of 2017 instead of the beginning of 2022, he would have made 24.6% cumulative, 4.5% annualized instead of whatever cash was paying over those five years.
    • Had he purchased the shares at the beginning of 2018, he'd still have beaten cash, though not by much, with an annualized 3.02% return.
    • Investing three years ago (beginning of 2019) would have yielded 7.68% annualized. Now were talking real opportunity costs.
    • Two years ago? 4.07% annualized return.
    • And had he invested at the beginning of 2021 instead of the beginning of 2022 or later, he would have come out a whopping 46.32% (or more) above where he wound up.
    Certainly he benefited from waiting with some stocks, such as OXY. Though if we're going to look at other acquisitions, we should also look at AAPL (even though he bought "only" $600M during the quarter). Using the same links I gave above for Portfolio Visualizer analyses, one sees the opportunity costs of waiting to buy AAPL. A purchase 5 years ago (beginning of 2017) would have returned 45% annualized; 4 years ago, 45% annualized; 3 years ago, 67% annualized (!), 2 years ago, 57%; and the return he could have had by deploying that cash at the beginning of 2021 was 35%.

    Even though BH didn't add much to its AAPL holdings, its worth a mention because Buffett made a big deal about buying more on a three day dip. After a multi-year meteoric rise.

    FWIW, here's BH's cash and cash equivalent holdings over the past five years (always over $100B):
    https://www.wsj.com/market-data/quotes/BRK.A/financials/annual/balance-sheet
  • edited May 7
    On a different note, ISTM cash for acquisitions is nice to possess now. Correct me if wrong, but it seems a lot of M&A activity in recent years has been financed by borrowing. With rates rising that’s become a lot more expensive and activity has slowed. (Barron’s notes the slowdown in this weeks edition.) So Buffett would seem to be able to negotiate a “better deal” (better price ) with his pile of cash - or am I missing something?

    Edit: It’s occurred to me one might not necessarily get a “better price” with cash. More likely it’s a case of not having to compete against as wide a field of bidders. Those who would have used a leveraged loan to finance said acquisition have in a sense been priced-out of the bidding by more expensive credit. Those with cash have a competitive advantage in the bidding process.
  • ARKK is now trailing the S&P 500 over its lifetime.
    image
  • edited May 10
    It must take some special skills to manage a portfolio that’s down 58 56%.

    Lipper
  • Yes indeed. Fortunately I was born with those skills!
  • edited May 10
    Old_Joe said:

    Yes indeed. Fortunately I was born with those skills!

    Me too.:) Just gotta love red. (Green’s so dull.)

  • What is fascinating to me about that chart is how perfectly it illustrates the concept of regression to the mean.
  • That's one mean regression all right!
  • What is fascinating to me about that chart is how perfectly it illustrates the concept of regression to the mean.

    Or in the words of David Clayton-Thomas, what goes up must come down ...



  • "what goes up must come down"

    Yes, I've always found that to be true. But now the trouble is with the going-up part. :(
  • Sorry to hear that.
  • edited May 10
    "Cathie Wood shocks the market after dumping $12.7 million of Tesla stock to snap up some in General Motors".

    Amazing she still making headlines. What is her supposed skillset again?

    Oh yeah, she can make money disappear.
  • We all saw this BS back in the late 90's...history doesn't repeat but it sure rhymes. All fun and games until someone gets hurt / loses their arse in the casino.

    Talk to pilots who fly for the large package delivery services....they KNOW that a recession is coming, those co's are preparing for it...kinda strange to me, how everyone now is becoming a technical chartist and is ready to jump back into this shit show of a so called market.

    Who knows, I certainly don't!

    Good Luck to All,

    Baseball Fan
  • edited May 10
    msf said:

    Or in the words of David Clayton-Thomas, what goes up must come down ...


    “What goes up, must come down. Right?

    Umm. No. Not necessarily.

    If an object is thrown upward fast enough it will go up and never come down. The minimum speed needed to do this is called the escape velocity.

    No human has ever traveled faster than the escape velocity of the Earth. The Apollo astronauts got very close, but they were headed to the moon, which is trapped by Earth's gravity into a closed orbit. In some sense they didn't really want to escape the Earth. They did manage to travel faster than the escape velocity of the moon, however, which is why they were able to return to the Earth.

    Any spacecraft that has ever traveled to another planet or asteroid has managed to exceed the escape velocity of the Earth. Counting them all is too much work. It's somewhere in the low hundreds. Five space probes are currently on trajectories that will take them out of the solar system, which means they have exceeded the escape velocity of the Sun”


    https://physics.info/gravitation-energy/
  • Like the Blood Sweat and Tears-haha! That etf is down another 10% today. Ouch!
  • edited May 11
    How about the "Money is Still Flowing" (into ARKK) part??? Surely that's not still true? Unless maybe you can use Bitcoin, "Luna" or "Terra" to buy ARKK??
  • People taking profit from energy XLE and bargain hunting in ARKK? What is that saying - cut the flowers and water the weeds (or, is it the reverse)? Hard to know these days what makes sense.
  • I suspected it was a sign of things to come when she started to receive daily headline press coverage. But, it somewhat surprises me how quickly things have unraveled. Some day it may make sense to buy a little ARKK.......
  • edited May 11
    davfor said:

    Some day it may make sense to buy a little ARKK.......

    I considered ditching my small (and shrinking) stake in DKNG today and investing proceeds in ARKK instead. Made some sense. Both are down sharply YTD - although I’ve been able to buy and sell often enough to keep from loosing near as much as ARKK has. What changed my mind is a belief that one of the other players in online gaming will make a buyout offer for DKNG at some point. With ARKK you don’t have the potential for a quick gain. The benefit from such an offer would be diluted. Put in another limit buy at $10 today. No cigar. DKNG closed at $10.27.

  • ARKK under $37 and, according to M*, a P/E under 4. Whoa, value fund! Until you look and see that that P/E incorporates lots of individual negative P/Es. Companies that are losing money -- not where I want to be right now (or ever).
  • edited May 11
    At some point it will be prudent to buy a former high flyer, such as ARKK. BGAFX, Alex Umansky’s entry in the Baron stable, has declined 48% YTD and considerably more if you consider its 2021 peak to the current trough. Some aggressive growth funds could do no wrong for a long time; now it appears they can do no right. Thing is, no one knows where the bottom is. Even reasonably priced, profitable tech companies are getting gored.
  • Jason Zweig, When Cheaper P/E Ratios Mean Nothing, WSJ, Aug 16, 2017.
    https://www.wsj.com/articles/when-cheaper-p-e-ratios-mean-nothing-1502458113

    Aside from negative P/Es, there's a more basic question of how the P/E of a portfolio is calculated.
    And what is used in the industry? The Investment Company Institute, the mutual funds trade group, says funds may use any method they like to calculate P/E ratios. Spokesman Chris Wloszczyna says, "There are no regulations." At Vanguard, the industry's second-largest fund company, spokesman Brian Mattes says he's "not sure what methodology" the company uses to determine its funds' P/E ratios. Value Line reports an average P/E that is the arithmetic mean, but with negative P/Es and those greater than 100 excluded.
    Agrrawal, Pankaj, et al. “Using the Price-to-Earnings Harmonic Mean to Improve Firm Valuation Estimates.” Journal of Financial Education, vol. 36, no. 3/4, 2010, pp. 98–110
    https://www.jstor.org/stable/41948650

    M* currently uses a weighted arithmetic average of the P/Es:
    The (P/E) ratio of a fund is the weighted average of the price/earnings ratios of the stocks in a fund's portfolio. At Morningstar, in computing the average, each portfolio holding is weighted by the percentage of equity assets it represents, so that larger positions have proportionately greater influence on the fund's final P/E.
    https://www.morningstar.com/invglossary/price_earnings_ratio.aspx

    FWIW, I agree with the JSTOR paper that a weighted harmonic mean makes the most sense: Add up all the earnings in the portfolio and divide that into the total price of the portfolio. This also does a somewhat better job at handling negative P/E stocks.
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