Tue. Jan 18th, 2022

Founders and senior executives of companies held by Ark Invest’s flagship fund have launched an unprecedented onslaught of stock sales.

Company insiders sold $ 13.5 billion worth of shares – and bought only $ 11 million – in the six months to December, much higher than in any previous period, according to calculations by StoneX, a broker.

The rush to exit is the latest push to the fortunes of the Ark Innovation exchange-traded fund (ARKK), which lost nearly half its value since its peak in February 2021. Its profit of more than 150 percent in 2020 made it the poster child for Wall Street’s technology-driven boom, nicknamed Cathie Wood, its founder, CEO and portfolio manager. earned. “Queen of the bull market”.

“The rise in inside sales and the lack of buying interest is worrying,” says Vincent Deluard, global macro strategist at StoneX. “The median ARKK stake has lost 55 percent since its peak in 52 weeks: if insiders are not buying now, why should investors?”

Deluard said it is not unexpected that inside sales should be greater than buying, as founders who cash-poorly diversify their portfolios and early employees receive stock options.

A similar trend also unfolded in the broader U.S. stock market, with insiders selling a record $ 32 billion worth of shares in S&P 500 companies over the past six months, while purchases fell to a six-year low of $ 95m.

However, Deluard said the large size of the gap between insider buying and selling for ARKK’s companies in which it was invested was surprising given the sharp sales of many of these shares in the last two months of 2021 – a period during which the S&P 500 kept rising. .

“Company insiders tend to be completely contradictory in their actions. They buy after a big drop. We had a big drop and we saw a lot of sales and not a lot of buying, ”Deluard added.

“If the smart people do not buy, why should anyone else? Bubbles are always and everywhere a transfer of wealth from the public to insiders. ”

Insider transactions in shares held by ARKK

Ben Johnson, director of global ETF research at Morningstar, said the insider transaction data “would seem to indicate that Cathie and team have more conviction in these firms than the people who run them”.

The data comes as ARKK’s sales mean that the fund has now destroyed shareholder value since its launch in 2014, despite reporting returns of 328 percent over this period.

ARKK has had cumulative net inflows of $ 15.5 billion since launch, but as of Thursday’s close, its net assets were just $ 14.4 billion, meaning it created no value for the average investor, most of whom bought in first after the fund the most of its returns.

Line chart of assets minus net flow ($ billion) showing ARKK shareholder value creation

“No shareholder value was created because most investors piled up high prices in 2020 and 2021,” Deluard said.

“Cathie Wood has no control over her investors’ [poor] timing and the true measure of her talent comes from time-weighted returns, which remain staggering despite last year’s losses. The reality of investor flow can nevertheless not be ignored. ”

This trend is far from unique to ARKK. Investors ‘tendency to pile into a fund after making its biggest gains is so strong that investors’ dollar-weighted returns lagged by 1.7 percentage points per year across the U.S. market in the decade to 2020, according to Morningstar. Het. .

But there is room to question Wood’s statement of Ark Invest’s higher goal.

Wood, a devout Christian, said Ark’s mission is not just to make money for investors, “it’s about allocate capital to God’s creation in the most innovative and creative way possible ”.

ARKK attracted $ 17 billion in net inflows between January 2019 and June 2021, money invested in companies that generated $ 23 billion in combined earnings during this period, Deluard found.

These companies have spent $ 47 billion on research and development over the 30 months, as well as issuing $ 14 billion in new shares.

Deluard argued that this investment and fundraising was “undoubtedly facilitated by ARKK’s massive acquisitions”, which “allowed many young companies with unproven technology to raise many shares at much higher valuations” than would otherwise have been the case.

“The claim that ARKK funds research and increases the pace of innovation is credible. “Newly issued shares sold to ARKK have helped bridge the gap between high-growth companies’ small or negative profits and their large R & D expenses,” he added.

However, Deluard said that ARKK’s companies in which they were invested issued $ 23 billion in share-based payment over the same period.

“A less optimistic narrative is equally credible. Flow in Ark ETFs may have spurred research and innovation, but they have also allowed insiders and founders to pay out at absurd valuations, ”he said.

“Time will tell whether Ark Investment Management funded the next industrial revolution or organized a historic transfer of wealth from the public to insiders and early investors,” Deluard concluded, a hypothesis he believes has been bolstered by the current onslaught of inside sales.

Johnson believed that ARKK might have improved society during his lifetime, “but if so, by a noticeably small amount and in a very circumspect manner”.

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