Citing poor risk management and “wretched performance,” Morningstar has downgraded Cathie Wood’s ARK Innovation ETF.
According to Morningstar analyst Robby Greengold, the ETF “shows few signs of improving its risk management or ability to successfully navigate the challenging territory it explores.” Consequently, Greengold lowered his analyst rating to negative from neutral.
Morningstar's analyst ratings system evaluates fund companies based on three criteria—people, process and parent. In his piece published on Morningstar's web site, Greengold also cut the ratings on people and parent to below average from average.
“Since its meteoric rise in 2020, the strategy's exchange-traded fund has been one of the worst-performing U.S.-sold funds, as the aggressive-growth stocks it held fell back to earth,” Greengold wrote yesterday. “Its wretched 45.5% loss over the trailing 12 months through February 2022 significantly lagged the 7.9% decline of the average fund in the technology Morningstar category and the Russell Midcap Growth Index’s 4.3% loss. (The strategy behaves more like a tech fund than its own mid-growth category.)”
Greengold described Wood’s decision to double down on a shrinking number of highly volatile stocks in “hopes of a repeat of 2020” as “perilous.” He accused her of saddling “the portfolio with greater risk by slashing its number of stocks to 35 from 60 less than a year ago—thereby amplifying stock-specific risk.”
The downgrade contends that the ARKK strategy has decreased the fund’s liquidity while leaving it “more vulnerable to severe losses.” Another serious criticism is that the firm “has no risk-management personnel.”
In his scathing piece, Greengold also argued Wood’s methodology, or absence of an established investment process, is seriously flawed due to its “reliance on her instincts to construct the portfolio,” which he termed a liability. “This is a high-risk, benchmark-agnostic portfolio that invests across technology platforms the team thinks will revolutionize how sectors across the globe operate,” he wrote.
Another factor behind the downgrade was that the ARK complex’s holdings tend to be in companies that are “often unprofitable” and whose “stock prices are highly correlated,” a dangerous combination.
Greengold also charged ARK has “in place a poor succession plan for the 66-year-old Wood, who is essential as the firm's majority owner and lone portfolio manager.”
Finally, Morningstar maintained that ARK has adopted a cavalier attitude when it comes to stewardship of shareholder interests. “Wood has suggested that risk management lies not with her but with those who invest in ARK’s funds,” Greengold wrote. “It’s tough to see why that should be so.”