DEDUCED RECKONING: Is Cathie Wood the queen of disruption or destruction?

In April 2021, Morningstar got it right about Cathie Wood. In its first ever evaluation of the ARKK Innovation ETF, the rating agency gave ARKK a neutral rating. It did so saying ARK’s strategies were “below industry standards.” Morningstar criticized its “lone portfolio manager approach, inexperienced team with limited financial training … and lax risk controls as the reasons for its poor score.”

Wood is a trained economist, not a research analyst. Those skills are different and not fungible. Her 2021 performance implies her analytical skills are weak and her portfolio management skills are lacking. Managing portfolios is a difficult business. You need to understand the economy, identify the industries in which you want to invest, and pick the right companies after evaluating their financial statements. Nowadays, you must also be able to read stock charts well. Yet, ARK buys stocks that are collapsing with broken downward chart patterns.

If you own enough of a stock that is on fire, it can pull your entire portfolio along with it. For Wood, that stock was Tesla in 2020 when it quadrupled and was a 10% position. Wood runs a lot of money with a relatively small number of positions: 35-50. When you deploy billions of dollars in smaller companies, before you know it you own more than 10% of it. Then how do you sell it and to whom?

Her terrific marketing pitch has been you must own disruptive companies because they are the future even if they don’t have earnings now or anytime soon. Stay-at-home stocks were briefly her bread and butter but they are collapsing the fastest. Just now as the Federal Reserve backs away from its easy money policies that enabled stock prices to disconnect from reality, investors want dividends and for sure they want earnings.

ARKK Innovation peaked in February 2021 at $160. Almost from the moment that number was in the books, Wood’s hot hand turned to the sub-zero temperatures of dry ice. In March 2021, I wrote a column warning against ever buying “last year’s winner.” That rule always applies each and every year to stocks, funds or ETFs. Now trading at 76.91, ARKK has fallen 52%. Had you chosen to buy her ARKG Genomics Fund, that peaked on Feb. 10, 2021, at 115.15 and is now trading at 48.68, a drop of 58%. These numbers clearly demonstrate that Ms. Wood has no secret sauce or unique skill in managing money for others. Rather, it would call into question the judgment of print reporters and TV interviewers who continue to describe Wood to their audiences as some sort of investment guru. What she is superb at is marketing and as Sarah Palin would describe it, “putting lipstick on a pig.” Sad to say, just now, her funds are oinking loudly.

Throughout recent months Wood has been all over TV telling anyone who would listen that her stocks are going to rise 40% per year for the next 5 years. Her past 7 year record has been spotty. She has only been up 40% once. Yet she thinks she will compound at that rate for the next five. She also repeats that TSLA is going to $3000. Yet, in recent weeks, ARK has been disgorging Tesla at an unrelenting rate. At her peak she owned 5.5 million Tesla shares and now owns only 1.5 million.

Ms. Wood has recently relocated her firm to St. Pete. Maybe she is getting into position for an early retirement in sunny Florida. She is old enough to know that the things she is saying are absurd. For ARK, things are getting worse not better. Since Jan. 1, Genomics ARKG is off 21% and ARKK is off 19%. The S&P 500 is off only 4%.

Joan Lappin CFA has been called an “investment guru” by Business Week and a “top manager” by the Wall Street Journal. The Sarasota resident founded Gramercy Capital Management, a registered investment adviser, in 1986. Email her at JLappincfa@gmail.com. Follow her on twitter: @joanlappin. Her past columns appear at heraldtribune.com/business/columns.