Wed. May 18th, 2022

Cathie Wood’s flagship Ark Fund is about to be overtaken in the post-pandemic performance chart by Warren Buffett’s Berkshire Hathaway, reflecting a dramatic shift in fortunes between the two prominent investors.

Ark Invest se Innovation exchange-traded fund – known under its stock market maker ARKK – crushed most of its competitors in 2020, thanks to Wood’s aggressive bets on high-growth, disruptive companies such as carmaker Tesla. This attracted billions of dollars from investors, which raised Ark Invest’s overall assets to a high of $ 61 billion early last year and helped make Wood the face of the bull run.

However, many of Wood’s biggest bets have started relax last year, and this year further tumbled into a violent pivot to cheaper stocks in often less glamorous, old-fashioned or otherwise unfavorable industries.

Meanwhile, Berkshire Hathaway’s shares have continued to climb steadily, narrowing the performance gap between Buffett’s investment conglomerate and the Ark Innovation ETF since the beginning of 2020 to just 8 percentage points.

Line chart from Rebase to 100 showing Berkshire Hathaway catching up with Ark's flagship innovation fund

The relative performance of the two fund managers was particularly sharp this month, with Berkshire’s share rising by about 2 per cent since the beginning of January, even though Ark’s largest ETF has fallen by 24 per cent. ARKK has now tumbled 43 per cent from the start of 2021 to Friday’s close, while Berkshire Hathaway has risen 34 per cent.

Wood’s Ark Invest ETF and Berkshire Hathaway are often seen as excellent examples of two very different investment styles – growth and value, respectively. The reversal of their share prices reflects a shocking rotation between the two tribes in recent years.

The start of 2022 was particularly difficult for the often unprofitable technology growth stocks favored by Wood, and strong for the more stable stocks that are the hallmark of Buffett’s investment style. The power of the shift has raised eyebrows across markets and caused speculation that a new market environment is imminent.

“Do the violence of [the] rotation indicates that regime change is imminent and a sustained reversal in the performance of growth versus value is underway? “Wellington Management’s analyst team said in a recent note.

Growth investors are looking for companies that may not be profitable, but that are expanding rapidly, often found in hot sectors such as technology. Investor value is more price sensitive, and often looks for bargains in shaky or shaky industries – such as energy and banking recently.

The improved economic growth outlook and central banks moving to a more false position on inflation – led by the US Federal Reserve – were the primary triggers for investor rotation from growth to value. Value stocks are typically found in sectors that benefit from stronger growth and higher interest rates, while the attractiveness of growth stocks in such environments fades somewhat, analysts say.

Many fund managers surveyed by Bank of America expect this shift to continue, with a net 50 percent of those asked in January predicting that value will continue to outperform growth – near a record high.

“With the Fed moving toward tightening, it is possible for rates to move higher with some persistence,” Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, said in a note. “This would indicate that the value-to-growth rotation we observed has some legs in 2022.”

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