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Analysis: Cathie Wood's ARK funds still in favor despite poor first-quarter performance

[March 31, 2021] By David Randall

NEW YORK (Reuters) - Cathie Wood failed to repeat her stellar 2020 performance with ARK Invest funds in the first quarter, but the celebrity fund manager still managed to attract a steady pile of cash into her red-hot funds.

Wood outperformed every other actively managed equity mutual or exchange-traded fund manager last year, according to Morningstar, helping propel the firm's assets under management of its flagship ARK Innovation fund from $1.86 billion at the end of 2019 to nearly $22 billion as of March, according to Lipper data.

But for the first quarter her flagship fund is down 10.7% through March 29, ranking in the worst 1 percentile of the 601 U.S. mid-cap growth funds, according to Morningstar data https://www.morningstar.com/etfs/
arcx/arkk/performance. Over a five-year period, its annualized gain is 44.6%.

ARK's Space Exploration & Innovation ETF also slipped on Tuesday in their Wall Street debut.

ARK Invest did not respond to a request to comment.

Despite this year's performance, ARK still attracts retail investors at a time when many have given up on stock pickers in favor of passive index investing. Wood's ARK Innovation ETF has brought in nearly $5.5 billion in new funds so far this year, the most of any actively managed equity fund, while three other ARK funds attracted inflows that ranked among the top 10, according to Morningstar.

The inflows could signal that retail investors are focusing on frothy stocks rather than fundamentals, said Phil Toews, chief executive of financial advisory firm Toews Corp, which has about $2 billion in assets under management.

"I used to feel that at some point we could reach the highs of the late '90s during this rally. Witnessing the rise in ARK and the stocks that support it helped me realize we are already there," said Toews.

A fixture on financial media and Twitter, Wood is among the few mutual or exchange-traded fund managers whose remarks can move markets. When Wood said earlier in March that she expected Tesla Inc shares to top $3,000 by 2025, shares of the electric automaker popped nearly 5% in morning trading.

Still, rising concerns about inflation have stalled a rally in Wood's portfolio companies like Roku Inc and Square Inc that outperformed during the pandemic. Wood, for her part, has said that she still considers companies like Zoom Communications Inc "undervalued" and has been buying on dips.

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A man points a computer screen showing stock information in this illustration photo taken in Bordeaux, France, France, March 30, 2016. REUTERS/Regis Duvignau

Wood is not alone in her tepid performance since the start of the year. The Nasdaq Composite Index fell into a correction - a 10% decline from its most recent highs - on March 8. For the quarter as a whole, the Nasdaq is up 1%.

Technology and high-growth stocks that Wood favors have suffered as investors price in the likelihood of above-average inflation that would raise borrowing costs for consumers and companies. The yield on benchmark 10-year U.S. Treasuries hovered near a 14-month high of 1.72% this week, as investors priced in the effects of the Biden administration's $1.9 trillion stimulus plan and the Federal Reserve's pledge to keep monetary policy loose, boosting economic growth and inflation.

Wood's adherence to her investment approach despite the movements of the broader markets could be a double-edged sword, said Lisa Shalett, chief investment officer of wealth management at Morgan Stanley, who has known Wood for over 30 years.

"She's a gifted, brilliant portfolio manager because she is so committed and disciplined to her style and rides the rollercoaster of the markets because sometimes that style goes out of favor and sometimes that style has spectacular bear markets," she said.

Some investors and analysts said that Wood remains correct in her bullish outlook despite the short-term hiccups.

Dan Ives, an analyst at Wedbush Securities, said higher bond yields and inflation would have less of an effect on the technology and growth stocks in Wood's portfolio than the market expects.

Wood has "been dead right over the last three to four years," said Ives.

(Reporting by David Randall; editing by Megan Davies and Richard Chang)

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