Can Cathie Wood’s homework be copied?

Bull Queen Cathie Wood’s flagship fund, ARK Innovation ETF (NYSE:ARKK), has been turbulent during the year and has fallen 2% so far. The new fund space concept ETF, ARK Space Exploration & Innovation ETF (NYSE:ARKX), has performed poorly. However. , This has not stopped the market from paying attention to the every move of the ARK fund.

According to market news on April 21, transaction data showed that ARK Fund increased its holdings of Meituan (HK: 3690), Tencent Holdings (HK: 0700), Netflix (NASDAQ: NFLX), and reduced its holdings of Tesla (NASDAQ: TSLA) and PayPal (NASDAQ:PYPL); Earlier, after the listing of the cryptocurrency exchange Coinbase (NASDAQ:COIN), ARK built a large position within two days, buying $352 million in Coinbase; the market also noticed that the two funds under ARK opened nearly 3.08 million positions Stock Tucson Future (NASDAQ: TSP).

After all, nearly 150% of revenue was achieved in 2020, and the aura of the "Bull Queen" still makes many investors wonder whether to "copy their homework." Before answering this question, you might as well have a deeper understanding of ARK's funds.

Cathie Wood has repeatedly expounded her investment philosophy-to discover companies with long-term investment value in industries with disruptive innovation. Of course, this also means that these "potential stocks" are not yet profitable, their financial reports are not good, and even their market value is small. ARK has held Tesla for at least six years before reaping excess returns in 2020.

In fact, more than half of the companies in ARK funds have not made a profit in the past year. According to an analysis by Dow Jones market data, of the 165 stocks covered by ARK's active management ETF, 85 of them had a net loss in the most recent fiscal year.

Neither the streaming company Roku Inc (NASDAQ:ROKU), the real estate trading site Zillow Group Inc (NASDAQ:Z) nor the music streaming media Spotify Technology SA (NYSE:SPOT) failed to report profit in the most recent annual report. Teladoc Inc (NYSE:TDOC), a telemedicine platform with a total position of up to US$2.3 billion in ARK funds, has been in a loss since it went public in 2015, with a loss of US$485 million last year.

One of the characteristics of these companies is their high Beta, that is, when the market rises, they rise more, but when the market falls, they also fall more aggressively. As Ben Johnson, head of research at Morningstar Global ETF, said, the inherent risks of these stocks are higher than the broader market.

Moreover, considering the current general trend of switching from growth stocks to value stocks in the market style (although the process is often volatile), investors are more inclined to buy stocks that are sensitive to the economic cycle, which also makes it more difficult for these stocks to acquire in the short term. Outstanding performance.

You know, for a long time, investors have been relying on valuation indicators such as price-earnings ratio to measure a certain stock. However, for companies that are not yet profitable, these indicators are not useful. On the contrary, ARK relies on a discounted cash flow model based on near-zero interest rates, as well as "eyes" (or imagination) to judge the company's prospects to justify the high valuations of these stocks. This is why Cathie Wood's investment targets are often extremely controversial.

Morningstar also pointed out that the high concentration of the ARKK fund in small-cap stocks with poor liquidity means that once the position is adjusted, it will inevitably trigger violent fluctuations in these stocks. "The fund holds and increases its shares in small companies, so it is difficult to sell these small-cap stocks without having a significant impact on their stock prices. Among all the funds registered in the United States, this ETF is the most concentrated Holds shares of companies that hold 10% or more of its outstanding shares. However, ARK’s inexperienced team of analysts, intuitive risk management methods, and huge capital base make it doubt whether this fund can maintain its past excellence Performance record." Morningstar said.

Moreover, with Cathie Wood's market appeal, both institutions and retail investors have poured new funds into the same company. For example, Nikko Asset Management, a Japanese company that holds a small stake in ARK, and ARK jointly hold more than 25% of the shares of at least three companies, including Compugen Ltd (NASDAQ:CGEN), Organovo Holdings Inc (NASDAQ:ONVO) and Intellia Therapeutics Inc (NASDAQ:NTLA). The two companies also jointly hold 20% or more of the shares in the other 10 companies.

Going back to the question at the beginning of the article, before deciding whether to copy the work of "Mu Mujie", you must first understand these characteristics of the stocks purchased by ARK funds, especially to comprehensively evaluate the current market trends and investment cycles.

ARK will often disclose its latest position adjustment operations, and investors should not copy them. After all, the adjustment of certain stocks is only to adjust positions and diversify risks, not for reasons of bullishness or bearishness on a certain stock.