Fund manager Cathie Wood, Chief Executive Officer and Chief Investment Officer of ARK Invest, was at the peak of her fame on Wall Street last year.
Her actively managed exchange-traded fund ARK Innovation (ARKK) achieved a return of 150 percent in 2020. Not only was such a high return achieved in a year marked by a pandemic, but it was also significantly above the performance of the rest of the market, which grew by 16 percent as measured by the S&P 500 index.
Cathie Wood’s vision that disruptive innovations are key to growth in a rapidly changing world directed ARK Invest’s investments into stocks of companies that would change the world with their products and services.
Among them, the early recognition of Tesla’s potential (TSLA) stands out, as shares of the leading electric vehicle manufacturer held the largest position in the main ARK Innovation ETF for almost four and a half years.
Warren Buffett’s Status
Other stocks in ARK’s investment focus were also companies with innovative solutions, meaning that investors valued them based on their growth characteristics rather than traditional valuation parameters such as profitability and other fundamentals. This proved to be a winning combination in the extremely turbulent year of 2020.
With the emergence of the COVID-19 virus, new conditions for working and entertaining from home were created, and the stocks of companies that suddenly became indispensable in consumers’ daily lives, in which ARK primarily held stakes, soared, along with the ARKK ETF.
The above-average returns of the funds, as well as the vision that Cathie Wood successfully presented to the public, attracted millions of followers on social media and billions of dollars into the funds under her management. The new influx of money, favorable conditions for technology stocks due to historically low interest rates, and the focus of investors on what Ark Invest is investing in, given the daily display of portfolio status as in the case of any other ETF, provided additional impetus from buyers for positions in her portfolio.
All of this secured Cathie Wood’s status on Wall Street to the extent that she was referred to as the new Warren Buffett, the legendary investor who, considering his over 90 years of life, increasingly seemed to investors like an old story in a new, technology-dominated time.
However, at the end of 2021, a painful sobering began. Despite the still ongoing pandemic, with the emergence of new vaccines, market participants began to realize that life must eventually return to pre-pandemic conditions. As a result, earlier winners of the COVID lockdown era soon found themselves targeted by sellers, while ‘old economy’ companies, such as oil companies, regained favor with investors.
Furthermore, the pandemic, which caused over six million deaths, also resulted in a whole range of supply chain issues. When inflationary pressures caused by production problems are added to the impacts of trillions of dollars in stimulus injected into the global economy, both fiscally and monetarily, a favorable environment for the inflation we are witnessing today has developed.
The Hardest Year Yet
The American central bank, the Fed, which once called for inflation and denied it on the grounds that it was only temporary, made a sharp turn this year and initiated a process of tightening monetary conditions aimed at combating inflation.
This meant the beginning of raising key interest rates and reducing the Fed’s balance sheet through quantitative tightening. Conditions that are detrimental to high valuations of growth stocks, leading to positions in Ark ETFs being further targeted by sellers.
