Ark Investment risks having too much money, not enough stocks

New York

WHILE many active stock-pickers these days are worrying about money walking out of the door, Cathie Wood will soon have the opposite problem. Her firm, Ark Investment Management, could be getting too successful for its own good.

Already in February, Ark's small lineup of exchange-traded funds (ETFs) has added another US$7 billion in assets. That comes on top of January's roughly US$8 billion flow, taking the money manager's ETF assets to US$58 billion.

"Too much money" is not a phrase heard often on Wall Street, but for a thematic fund specialist like Ark, it could be a headache. The business that Ms Wood founded seven years ago invests in future-focused trends such as genomics and robotics, and there are only so many stocks that fit the bill.

As the cash continues to pour in, Ark already owns 10 per cent or more of at least 24 companies, according to data compiled by Bloomberg. They include Invitae Corp, Cerus Corp, and CRISPR Therapeutics AG.

"There is risk with so much money flowing into so few," said James Pillow, managing director at Moors & Cabot Inc. "When the flows stop, or worse yet reverse, one should expect a day of reckoning."

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Two kinds of threats are looming, Peter Garnry of Saxo Bank wrote in a recent research note. The first is Ark's potential impact on the market. The firm's huge inflows over the past year have helped fuel a biotech boom, for instance. If assets start to flow out, it could undercut the sector.

The second threat is from the market to Ark. A slide in the companies it is heavily exposed to could force the firm to sell in turn, starting a feedback loop, according to Mr Garnry, Saxo's head of equity strategy.

Ark is not the first investment firm to grow so big so fast. Back in the 1990s, the Janus Twenty mutual fund was red hot. By investing in a small group of growth shares, it rose more than 500 per cent in the decade, garnering assets of as much as US$38 billion and making a star of manager Scott Schoelzel.

It went on to drop by more than 50 per cent during the dotcom crash before staging a more evenly paced recovery from late 2002, although investors were ultimately rolled into a different fund.

"Probably the one thing she is going to have to figure out a way to navigate is size," Mr Schoelzel said about Ms Wood on a recent episode of Bloomberg's Trillions podcast. "I don't know if it's US$50 billion or US$70 billion or US$100 billion or US$150 billion - but there will be a point where size will become her enemy."

Ms Wood addressed the concerns on a webinar early last week, noting that the stocks her firm buys scale quickly, which helps to relieve capacity issues. Plus, the increase in initial public offerings and special-purpose acquisition companies will give them more options to choose from.

"When people say, 'oh, they're forced into larger-cap stocks,' well, I can give you a few examples," she said during the webinar, citing Invitae, which went from "roughly US$250 million, if I'm not mistaken, to US$8 billion."

There are no signs that suggest trouble is imminent. Ark is luring all that cash because it has made highly successful bets on companies that have soared during the pandemic. Its five actively managed products have all returned more than 100 per cent in the past year, among the best-performing in the US. The flagship US$28 billion Ark Innovation ETF (ARKK) is up 164 per cent in the past 12 months, compared to just 43 per cent for Invesco QQQ Trust Series 1 (QQQ).

Ms Wood's moves are so closely watched that any stocks she chooses can receive a boost. Her new stake in DraftKings Inc fuelled a recent jump. The announcement that she would launch the Ark Space Exploration ETF (ticker ARKX) ignited a sector-wide rally.

"The fact that they just filed for a space-themed ETF was enough to push the share price of Virgin Galactic higher, which is just incredible," said Ben Johnson, Morningstar's global director of ETF research.

Thematic funds as a whole are flourishing as investors seek to ride the next big trend, though there are worries that some pockets are getting frothy. For example, money is pouring into funds focused on responsible environmental, social and corporate governance practices even as their stocks trade at lofty price-to-earnings multiples. BLOOMBERG