Cathie Wood’s ARK faces loyalty test after Tech-Stock rout

What happens next to the ARK Innovation fund, which bears the symbol ARKK, and other risky investments like this will help tell the story of financial markets in 2022. The most speculative assets, ranging from ARK and many of its participations in so-called meme actions such as GameStop Corp.

and AMC Entertainment Holdings Inc.

to cryptocurrencies like bitcoin, have soared during the pandemic thanks to the huge sums that governments and central banks have poured into the economy to counter the impact of lockdowns. Now those gains are eroding as the Federal Reserve prepares to start raising US interest rates as early as March.

This is driving a change in investor behavior, causing an overhaul of the sky-high valuations that markets had attached to growth stocks. The result is a decline in the riskiest assets and a revaluation of even the largest technology stocks.

Ms Wood’s ETFs are at the epicenter of the sell-off that sent the S&P 500 down 7% and the Nasdaq Composite down 12% just four weeks into 2022. The hardest hit were shares of tech companies and biotechnology that generate little or no profit. , but which have high valuations – the kind of companies Ms. Wood’s ARK favors.

Some of the ARK Innovation ETF’s holdings are down more than 50% from their recent highs, including Spotify Technology HER,

To block Inc.,

Focus on video communications Inc.

and Roku Inc.

Ms Wood insists the fund’s holdings should rebound. “After correcting for nearly 11 months, innovation stocks appear to have entered deep value territory, their valuations a fraction of peak levels,” she wrote in a blog post last month.

Larry Carroll, financial adviser at Wealth Enhancement Group advisory firm in Rock Hill, SC, still has some $18 million of client money in ARK Innovation after first buying stock in 2018. The company manages about $55 billion in stock and bond portfolios, with Mr. Carroll using ARK Innovation as a way to give select clients exposure to cutting-edge companies.

Thanks to ARK’s strong surge at the start of the pandemic, he says he’s already taken more money out of the fund than he originally put in, leaving him comfortable holding a position. important as we wait for depressed stocks to rebound.

“The real question was whether we were buying more,” Mr. Carroll said. “I resisted the urge mainly because I don’t think you’ll see ARK and Disruption Stocks doing well in this environment.”

Funds that beat the market often go through periods when they lag, although the magnitude of ARK’s ups and downs makes this clear. Investors withdrew $1.4 billion net from ARK funds in the past month, the most redemptions of any U.S. ETF issuer, according to FactSet data. This pushed net outflows over the past six months to more than $8 billion, more than all net outflows recorded by other ETF managers over the same period.

Some $16 billion was paid into ARK Innovation from the second quarter of 2020, when the Covid-19 pandemic took hold, until the first quarter of 2021, when the fund’s assets peaked at $28 billion. Investors who have since bought have lost money, said Vincent Deluard, director of global macro strategy at StoneX Group. Inc.

Renato Leggi, client portfolio manager at ARK, said some investors have started to agree with Ms Wood’s assessment over the past week and are buying shares. She said the company’s strategy requires investors to take a long-term view.

But Klaus Derendorf, a 50-year-old business development manager from Los Angeles, said he sold his shares in the ARK Innovation fund in November and increased his cash after losing about 20% in the fund in less than a year. “I have to go back to the real fundamentals,” he said.

Ms Wood’s early returns have earned her a large following on YouTube, Twitter and other social media platforms. Joe Seid, a 58-year-old Chicago sales manager, bought shares of ARK Innovation in late 2020, in part because he saw it on TV and his financial advisor flagged the fund as the one of the hottest on the market. He sold last year after losing 10% of his investment and now thinks he may have gotten carried away.

“For me, it was way too speculative,” Mr Seid said. “It didn’t really align with more fundamental financial beliefs.”

Write to Michael Wursthorn at Michael.Wursthorn@wsj.com