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The research house has downgraded the US$12.2bn ARK Innovation ETF citing its ‘wretched’ 45.5% loss over the past 12 months and little sign of improvement.
Despite the downgrade Wood is confident that her innovation-and-disruption-themed approach will prevail in the long run.
In its research report Morningstar has dropped its analyst rating from neutral to negative, and its people and parent ratings from average to below average.
Morningstar strategist Robby Greengold said, "since its meteoric rise in 2020, the strategy’s exchange-traded fund has been one of the worst-performing US-sold funds, as the aggressive-growth stocks it held fell back to earth."
The fund soared 156% in 2020 as Covid-19 lockdown measures favored many of its internet-related holdings. But that top-one percentile category finish turned into bottom 100 percentile finishes in 2021 and the first quarter of this year, as the fund lost 23.38% and 29.92%, respectively, in those periods.
Greengold says "the strategy’s long-term total returns look phenomenal within its current category. From its October 2014 inception through February 2022, the ETF’s 20.6% annualised gain topped all actively managed mid-growth funds and beat the 12.5% gain of the Russell Midcap Growth Index category benchmark.
"But its results look much less impressive when considering its style and level of risk-taking. It tends to behave most like a tech fund."
But its volatility is a different story.
"Over the three-year period ending in March 2022, the fund returned 14.2% on an annualised basis, which doesn’t lag the 14.8% return of the Russell Midcap Growth index badly.
"But over that period, the fund’s 40% standard deviation of returns is the highest in Morningstar’s Mid-Cap Growth fund category and nearly double the 21.4% reading for the Midcap Growth index."
Greengold also noted that Wood’s firm "has no risk-management personnel" and that her decision to concentrate ARKK’s holdings (35, down from 60 at one point in 2021) ‘has saddled the portfolio with greater risk."
"Wood has suggested that risk management lies not with her but with those who invest in ARK’s funds," Greengold says.
"It’s tough to see why that should be so. ARK could do more to avert severe drawdowns of wealth, and its carelessness on the topic has hurt many investors of late. It could hurt more in the future."
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