Ark Innovation (ARKK) edged higher Friday, outpacing gains for the broader Nasdaq Composite, following a downgrade from Morningstar for star investor Cathie Wood's flagship exchange traded fund.
Morningstar analyst Robby Greengold, who cut his rating on Ark Innovation to 'negative' from 'neutral' late Thursday, said the fund has recorded a "wretched" 45.5% loss over the past 12 months through February and is now saddled with even more risk following her move to reduce the portfolio to 35 stocks from 60, while growing its exposure to stocks in which ARK Investment Management in the biggest investor.
"Wood’s reliance on her instincts to construct the portfolio is a liability,' Greengold said. "This is a high-risk, benchmark-agnostic portfolio that invests across technology platforms the team thinks will revolutionize how sectors across the globe operate. The firm favors companies that are often unprofitable and whose stock prices are highly correlated."
"Rather than gauge the portfolio’s aggregate risk exposures and simulate their effects during a variety of market conditions, the firm uses its past as a guide to the future and views risk almost exclusively through the lens of its bottom-up research into individual companies," he added.
ARK ETF shares were marked 2.4% higher in early trading Friday to change hands at $67.81 each, a move that would leave the fund with a 30.5% year-to-date decline, nearly four times the 9.1% slide for the Nasdaq Composite.
That said, Wood's fund has surged nearly 28% since bottoming out on March 14, well out-pacing gains for the Nasdaq, as some of her bigger bets, including Tesla (TSLA), Roku (ROKU) and Teladoc Health (TDOC) powered higher.
Morningstar's Greengold also lowered his 'People and Parent' rating on Ark Innovation to 'below average', citing "a poor succession plan" for the Fund in the event of Wood's departure, who he describes as "essential as the firm's majority owner and lone portfolio manager."
"Director of research Brett Winton would succeed her if needed, but his 15 years of industry experience include none as a manager,"Greengold said. "Exacerbating that key-person risk is the firm’s inability to develop and retain talent: Many of its analysts have come and gone, and most of the nine remaining lack deep industry experience."
