Analysis-Wood’s ARK slammed by higher interest rates in 2022 along with other growth funds

By David Randall

NEW YORK (Reuters) -Cathie Wood’s ARK Innovation Fund, which more than doubled during the pandemic rally, is on pace to finish near the very bottom of all U.S. mutual funds in 2022 after surging inflation and higher interest rates dried up appetite for high-growth shares.

The ARK Innovation Fund has lost around 67% year to date, more than tripling the decline of the S&P 500 index. Its tumble has made it the worst-performing among all 537 U.S. mid-cap growth funds and put it near the bottom of all U.S. equity funds tracked by Morningstar, according to the firm’s Dec. 16 ranking.

With the S&P 500 on pace for its biggest annual decline since the Great Financial Crisis, few funds are likely to escape 2022 unscathed. Stock portfolio managers trailed their benchmarks by 0.6% this year, leaving most behind the 19% drop in the S&P 500 for the year to date or the nearly 22% decline in the Russell 2000.

“Portfolio managers got it wrong on inflation this year, and you could also say that the Fed got it wrong on inflation,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments.

The high-growth companies favored by Wood have fared especially badly as the Federal Reserve unleashed its most aggressive monetary policy tightening in decades to contain inflation policymakers initially believed to be transitory.

Higher yields can dull the allure of growth shares, whose often-rich valuations tend to be based on future profits that are discounted more severely as yields rise. They also undermine the case for owning stocks by increasing the attractiveness of Treasuries and other fixed-income investments.

Wood’s fund ranked 3,544 among all 3,552 actively-managed U.S. equity mutual funds tracked by Morningstar. The worst performing fund of the year, by comparison, was the Voya Russia fund, which is down 92% for the year to date.

Top-holdings such as Zoom Video Communications Inc, Tesla Inc and Block Inc (formerly known as Square) are all down more than 60% this year, while Teladoc Health Inc and Roku are both down more than 70%. Overall, each of the fund’s ten largest holdings is down 30% or more for the year to date.

Wood also seemed to be caught off-guard by the staying power of inflation, saying a year ago that deflation was the true risk for markets in the year ahead. In September of this year, she called the Fed’s rate hikes a “mistake” and in December said that she believes that the U.S. economy has been in a recession “all year.” Consumer prices surged in 2022 to their highest level in four decades.

The top 15 actively managed equity mutual funds this year, meanwhile, largely focused on energy or commodities, benefiting from a surge in prices for oil and other raw materials. The Invesco Energy Fund, which topped all diversified funds in Morningstar’s mid-December rankings, is up nearly 49% year to date.

The MicroSectors U.S. Big Oil 3x Leveraged ETN, which offers a triple daily return of the equally-weighted stocks in its portfolio like Chevron Corp and Exxon Mobil Corp, led all funds in Morningstar’s ranking. It is up 172% year to date.

Crash landing

Other funds that soared in recent years on the backs of large bets on technology stocks fell on hard times in 2022.

The $1.4 billion Morgan Stanley Insight I fund, which has its largest position in cloud company Snowflake Inc, was among the worst performing large-cap fund in the Morningstar ranking and is down 61.3% year to date, while the $59 million Zevenbergen Genea Fund, which like ARK has an outsized bet on Tesla Inc, slumped 59% and was among the year’s worst performing diversified funds, according to Morningstar.

Wood shot to prominence in 2020 as her portfolio of so-called “stay at home” stocks like Zoom and Teladoc soared, helping her fund at one time reach $27.6 billion in assets under management. The fund now has slightly less than $6.5 billion in assets.

Memories of those heady days may be one of the reasons many investors have continued to buy into her futuristic vision.

The ARK Innovation Fund has pulled in a net $1.6 billion in inflows this year despite its total assets under management shrinking by half due to poor market performance, according to Lipper data.

“The investor loyalty in the fund is abnormal,” said Todd Rosenbluth, head of research at analytics firm VettaFi. “This is still one of the largest actively managed ETFs and there’s staying power for this fund if it turns around its performance in 2023.”

(Reporting by David Randall; Editing by Ira Iosebashvili and Marguerita Choy)