Morningstar initiated its first analyst rating on an ETF from Ark Investment Management with a warning about its biggest fund, the Ark Innovation ETF (ARKK), which has over $17 billion in assets.
The ETF, which like all actively managed Ark ETFs has a five-star rating based on past performance, was given a neutral rating by analyst Robby Greengold, who wrote that the firm is "ill-prepared to grapple with a major plot twist," because it has only one portfolio manager, CEO Cathie Wood, who heads an "inexperienced team" and "lax risk controls."
"Few features of its research team or process suggest ARK Innovation will continue to beat the Russell Mid Cap Growth Index on a risk adjusted basis," Greengold writes.
The ETF aims for a minimum 15% annualized return over the next five years, which is double the annualized return of the Russell index since 2000, by investing in companies involved in artificial intelligence, blockchain, DNA sequencing, energy storage and robotics.
Cathie Wood's Dominance and Ark's 'Unclear Analytical Edge'
"As ARK's primary investment decision-maker who has established a ubiquitous media presence and enthusiastic following, Wood is essential to the firm's continued success," writes Greengold. He notes the firm's director of research, Brett Winton, who would likely succeed Wood if needed, has no experience as a portfolio manager though nearly 15 years experience in the financial industry. Moreover, writes Greengold, "Many of the analysts supporting the funds' research have come and gone, and most of the remaining nine lack deep industry experience."
Greengold criticizes Ark's analyst bench for lacking academic credentials beyond bachelor's degrees and, for some, even a history of full-time work. He's also uncomfortable with its crowdsourcing approach to research, outsourcing technical expertise to academics, entrepreneurs and former Ark analysts and inviting feedback on its research and investment ideas from individuals that follow the firm on social media.
"These features make the firm's process of gathering and digesting information unique, but its analytical edge remains unclear in an industry that provides (for a fee) subject-matter expertise to advise shops that lack requisite technical know-how," writes Greengold.
Wood would disagree. In her many public appearances, Wood celebrates the diversity and enthusiasm of the firm's analysts and their experience coming not from the usual financial services professional and academic pipelines but from engineering, computer science and mathematics.
