ARK Invest – Time To Buy?

Over the last year, Cathie Wood has turned from the next Warren Buffett into the most visible casualty of the spec-tech wreck. ARK Invest’s largest fund ARKK has now lost three-quarters of its value so some people think this presents quite a bargain. In this video, I take a closer look at what’s been going on with ARK’s ETFs and whether now is a good time to buy them.

Over the last year kathy woods has turned from the next warren buffett into the most visible casualty of the speculative tech wreck in fact ark’s largest fund its innovation fund has now lost three quarters of its value so some people think that presents quite a bargain so let’s look at our funds and whether now’s a good time to buy them in a bit more detail the

Turnaround for arc has certainly been spectacular in fact all of their funds follow pretty much the same trajectory which was a sharp sell-off in february of 2020 followed by an incredible rally during the pandemania rally but then in february of 2021 something changed the appetite for her kind of stocks suddenly disappeared and very rapidly the value of all of her

Funds fell very sharply such that today three of her funds so that’s rk the main fund but also arcgi which is the genomic revolution fund and r kef which is the fintech innovation fund are all below where they started in 2020. now a popular graph which has been making the rounds on twitter is the one which you can see beside me here it’s actually posted by tier one

Alpha but there are multiple versions of it and what it does is it overlays arc k the innovation fund with the nasdaq during the dot-com bubble of course you have to scale the graphs appropriately so for the nasdaq we look at the period between 1998 and 2003 and for arc k we’re looking at the period since 2016 but once you jiffle the graphs together you can see

The spooky similarity beneath me so arc is in red the nasdaq is in blue now naturally what people think is well what happened next for the dot-com bubble well if history does repeat itself it doesn’t look great there was a bit of a rally after the dip that you can see here but then it continued falling for some time so if it did follow that trajectory arcade would

Carry on falling all the way through to the end of 2023 so you’re probably thinking well surely it would have recovered fairly quickly well actually no it wouldn’t in the case of the nasdaq composite if we look at the time taken for it to recover its previous peak it actually took over 15 years and if we’re thinking about such long periods of time you really have

To consider inflation so if we inflation adjust the value of the nasdaq composite the recovery time actually gets much longer it goes all the way almost to 18 years you can see that once we’ve had a huge peak in euphoria the time taken for things to recover can be very long but arc isn’t alone in having suffered such large drawdowns in fact goldman sachs maintains

A basket of stocks called a non-profitable tech basket and in fact that’s suffering its worst drawdown ever it stand by almost 70 percent arc has received a lot of criticism because it seems to buy stocks regardless of valuation now there’s a brilliant website called kathy’s arc dot com which drills into the fundamentals of her funds and the two lines which are

Beneath me which are interesting are the ones in blue and pink the blue one shows the price to sales ratio which is often used to value tech companies even if they’re lost making because of course the top line is still positive they have to generate positive sales that actually peaked that valuation measure around summer of 2021 and it’s been falling ever since

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And it fell very sharply in march of this year so that’s certainly not as extreme as it was just six months ago and the pink line shows you the percentage of companies which are loss making that’s gradually been falling also although it is still well above 20 if we look at an equivalent ratio which is enterprise value divided by turnover so that’s roughly priced to

Sales what i’ve done here is i’ve compared the stocks in rk with the ones in the nasdaq 100 and you can see that our k isn’t that much higher its median enterprise to turnover ratio is 6.7 versus 6 for the nasdaq 100. there are still some stocks which are very highly overvalued but it doesn’t make up the majority of the stocks in the fund so certainly the valuation

Extremes have reduced in kathy woods stock selections however would it sell off more i think there’s a lot of room for small cap growth stocks to carry on falling because if you actually look at their valuations in the russell 2000 that’s the blue line here you can see that they’re still significantly higher than value stocks in the russell 2000. now of course not

All of her stocks are small cap growth stocks they are growthy but not all small cap tesla for example is a mega cap but still i think this style of investing growth still has further to fall in terms of the dispersion with its historic averages people are usually willing to pay more for growth but at the moment they’re still willing to pay far more than usual and

I suspect that premium will also mean revert as we see interest rates rise and the fed normalizing policy in fact what we’re seeing right now is a huge style shift away from growth and that’s probably a lot to do with what the fed’s doing so what i’ve shown here are all of the different combinations of small cap large cap but also growth versus value for the u.s

Stock market using individual etfs and this covers that period of euphoria after the pandemic sell-off notice how the funds which are doing by far the best are small cap growth stocks as characterized by the etf called iwo mid cap growth also performed very well that’s ijk and even large cap growth perform very well and notice that there’s a big break between

Those growthy small cap stocks at the top and the quality and value stocks at the bottom of the graph so large cap value for example is actually third from the bottom since the beginning of this year however there’s been a complete reversal with high dividend yield and large cap value performing the best and small cap growth performing the worst now the standard

Explanation for that is that growth stocks have much more of their value in the future and that means when interest rates increase you’re discounting those cash flows much more heavily than you would for say a value stock where a lot more of that value is closer to the present day so while it’s the case that interest rates will carry on increasing for some time

Then that’s not a great look for growth stocks and it’s not going to be an easy time for kathy woods either if you want to learn more about these different styles of investing like growth stocks and value stocks then why not do that as part of our pension craft community you can do that now on our website you also get access to lots of other goodies

Like our slack channel so you can ask a question anytime you want but also our members only videos an ever-growing library of content to which only you will have access to learn more about that just click on the link beside me and in the description beneath me but what’s truly remarkable about kathy woods is the strength of belief in her stock picking ability to

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See an example of that in april 2022 rk had its worst monthly return of almost minus 29 and yet a few days after that awful return was posted you can see there was a huge single day inflow this was on may the 3rd of 2022 of 367 million dollars so it’s certainly not true that people are capitulating and pulling their money out of kathy’s funds far from it the belief

Seems to be something like surely it can’t get any worse this must now be a bargain and yes of course money chases returns so the green bars you can see here are money flowing into arc k and this is on a weekly basis notice that the scale here is one billion dollars so during that incredible period when the returns were huge of course there were huge inflows and as

The huge positive returns turned into negative ones of course that switched into outflows a lot of the time but it hasn’t been a consistent pattern there have still been weeks in which there have been big inflows and if we look at the period in 2022 there have been fairly consistent inflows except for this three-week period so there are still plenty of believers

In kathy out there until recently uk investors didn’t have access to cathy’s funds all we could do was buy a similar fund called scottish mortgage investment trust this has a similar ethos of investing which is to go for disruptive tech stocks which are at the forefront of some kind of trend and you can see if i plot the returns of that since the beginning of 2020

Versus arc k they’re very similar scottish mortgage is shown in blue and rk shown in red and it rallied a little bit less than rk but it’s also fallen a little bit less perhaps that’s as a result of its structure because it’s an investment trust which is closed-ended that means that lots of money can’t flow into and out of the fund it has a fixed amount of capital

So it’s never a false seller if there are outflows if people want to take out their money they have to sell their share to somebody else also it’s got its own board because it’s structured as a company and the job of that board is to ensure proper risk management and they could even fire the fund manager if they do a bad job so these are the reasons why i like

Scottish mortgage it’s certainly on my market crash shopping list but i haven’t bought it or at least not yet but i’m keeping a sharp eye on it for a turnaround when valuations are a little bit cheaper in the uk now we also have a suite of funds issued by leverage shares and as the name suggests you can go for leveraged exposure to arc funds so if arc isn’t risky

Enough for you you can get a daily three times fund which gives you three times the daily return on arc k for example and you can either go long so you make money if the share price goes up or you can go short which means you make money if kathy loses money so i’ve plotted the returns of the long fund in blue that’s a three times levered long fund so if when it

Was issued in december 2021 you’d have invested a hundred that would now be worth just eight pounds and that’s a loss of ninety-two percent over the same period if you’d have just bought a simple tracker you’d have lost about half your money without k on the other hand if you’d have gone short that’s a three times daily short fund you’d have turned your 100 into

264. now personally i’d never touch these levered funds because i think arc itself is risky enough also i wouldn’t necessarily short arc even though i don’t love the fund because it can be subject to very rapid increases in value which would lose huge amounts if you go for the three times daily short fund so really these are kind of gambling funds and i certainly

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Wouldn’t go anywhere near them and i recommend that you don’t either so in conclusion then first let’s consider the reasons why you might want to buy some of these kathy woods funds i’m always amazed by the fact she’s so transparent in her analysis of stocks you can really read her thoughts about any stock either via her regular emails or by reading her reports you

May not agree with them but at least you can see what her thought process is exactly and she never buys a stock without a good justification at least in her eyes she’s also been very consistent when people lose money and they see outflows sometimes you see style drift where they see what they’ve got right now is not working so they change their spots well kathy’s

Never done that kathy is kathy and that’s what’s great about her but it’s also a problem for some people as well but at least she is consistent and finally she provides thought leadership everybody wants her to come and talk at conferences you’re watching this video because kathy’s interesting not because i’m interesting and in fact you could almost think of her

Funds as their own style kathy woodsey’s style it’s more than just growth and tech it’s her own thing and finally i like kathy woods funds for the same reason i like star trek it’s a kind of belief that technology can solve problems and you can invest in those solutions and for someone who’s a bit nerdy like me that’s a very attractive prospect and if we consider

The reasons why you might not want to buy her funds well i’d say the primary one must be that she is price insensitive she’ll buy stocks at any price and the natural consequence of that is that the long-term returns are smaller as many people have commented their risk management at arc seems to be lacking somewhat kathy doesn’t seem to have that extra layer of

Pushback people around her who’ll say to her no kathy this is a bad idea or at least that’s the way it seems and while her marketing ability is completely unquestioned she has an amazing ability to convince people to give her money that seems to be greater than her ability to pick stocks or at least that’s the way it’s looking right now and my final concern is

To do with that regime shift growth did incredibly well during that period of zero interest rates but will that continue now that the fed’s going into its hiking cycle that’s going to be an uphill battle i think for kathy and other growth funds so i’m not convinced now’s a great time to buy kathy’s funds they’re a lot cheaper than they were that’s for sure but i

Don’t like the fact that the fee is always paid whether they succeed or not i also don’t like the cult of star managers i think that’s unhealthy and we’ve also seen that she has very little governance in terms of pushback to stop her doing crazy things but if you love kathy you like her style of investing then certainly now’s a better time to invest and maybe you

Could dollar cost average into her funds now don’t forget our offer for our membership we now run that on our website and if you want to learn more about that just click on the link beside me and in the description beneath me and as always thank you for listening

Transcribed from video
ARK Invest – Time To Buy? By PensionCraft