Clip source: Cathie Wood'

https://www.bloomberg.com/opinion/articles/2024-02-14/cathie-wood-s-ark-etfs-have-lost-14-billion-but-she-s-interesting

As equity long-short hedge funds suffer massive withdrawals, once high-flying stockpickers, such as Julian Robertson’s Tiger Cubs, can look to Cathie Wood for some inspiration on how to fundraise and retain clients.

After the 2022 bear market, investors have grown skeptical that growth-oriented managers can protect their portfolios during downturns. Those searching for undervalued companies are also not favored. Greenlight Capital’s David Einhorn lamented that the rise of passive index funds and algorithmic trading has eroded the equity market’s ability to discover value.

Airing grievances won’t do. Rather, active managers need to become better storytellers — like Wood.

Granted, long-short equity hedge funds underperformed the US stock market in nine out of the last 10 years. But Wood did not deliver either. On the contrary, among providers of mutual funds and exchange-traded funds, her ARK Investment Management topped the chart in wealth destruction. Its family of ETFs, which managed around $16 billion as of 2023, wiped out $14.3 billion in shareholder value in the past decade, according to Morningstar Inc. estimates.

Miraculously, most investors stayed. After gaining huge inflows in 2020 and 2021, withdrawals have been fairly muted.

People are sticking around because Wood’s pitches are interesting. She’s been buying the dip in Tesla Inc. even as Wall Street sours on the stock because demand for electric vehicles is slowing and a vicious price war has broken out. But hey, Wood nailed it with her bull-case prediction in 2018 — some would even argue her stardom rose with that conviction call — so she might just be right again.

Or consider her exposure to artificial intelligence. When questioned by skeptics why her flagship ARK Innovation ETF dropped Nvidia Corp. in January 2023 and thus missed out on the chip designer’s rally, Wood said that chasing this mega-cap was too easy, expensive and obvious. She has a point.

Even massive losses can turn into a positive spin at ARK — imagine years of tax write-offs. "I don’t think many people understand what an asset we have in terms of those tax-loss carry-forwards," Wood has said.

Now Morningstar may have issues with many aspects of Wood’s portfolio construction, such as returns volatility and high stock turnover. But in the fundraising world, these liabilities can actually be assets. For instance, her concentrated portfolios inevitably bring about sharp price swings, but high-conviction funds often command higher fees. The most concentrated ETFs charge an average 0.73%, versus 0.25% for the least concentrated, according to Bloomberg Intelligence. The expense ratio her flagship fund charges is a handsome 0.75%, even as it underperforms the S&P 500.

As any stockpicker knows, beating the S&P 500 and the Magnificent Seven is a tough feat. But to draw in money, having a good track record is only part of the picture. After all, investors know past returns may not be indicative of future performance, that a star manager may just have been more lucky than skilled. A good fundraiser doesn’t even need to be a greatasset manager. She just needs to be interesting.

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