Inside ARK Innovation’s Big Issues in Small Businesses

Investors Flood ARK Innovation ETF (ARKK) with new money in recent months hold an exchange-traded fund with an unusually large number of outsized holdings in small and medium-sized companies.

When combined with positions held in some of ARK Investment Management’s other fast-growing ETFs, the result is a range with significant exposure to a single company’s portfolio.

ARK Innovation has captured the attention of many investors with triple-digit returns in 2020. The result is that ARKK has become one of the fastest growing funds of its size in history. (Morningstar Direct and Office customers can find our article on ARKK Fund Flows here.)

There’s also a lot going on under the hood when it comes to ARKK’s portfolio.

As of February 22, 2021, ARKK held at least 5% of a company’s public shares in more than a third of its holdings and at least 10% of the free float in 10 of the 55 companies in its portfolio. A company’s free float, or public float, is the number of available shares in which the public can invest.

Source: Morningstar Direct.

With this type of shareholding, ARKK stands out from other mid-cap growth funds of its size. Of the 15 largest mid-cap growth funds other than ARKK, nine held stakes of 5% or more in a company as of December 31, 2020, but only two held more than 10% of the capital. Excluding ARKK, the 15 largest funds hold on average less than 2% of the companies in their portfolios. ARKK holds on average a 4% stake in its portfolio holdings.

Take T. Rowe Price New Horizons (PRNHX). The $49.6 billion fund owns 12% of a single company, Armstrong World Industries (AWI)out of the 165 companies in its portfolio.

Compared to the broader universe of mid-cap growth funds, which are primarily passive strategies, the level of company ownership for actively managed ARKK is particularly high.

ARKK held 46% of its portfolio of 55 stocks in its top 10 holdings as of February 22. This contrasts with 23% for the mid-cap growth ETF, where portfolios average 197 stocks. For example, the second mid-cap growth ETF, iShares Russell Mid-Cap Growth (IWP)spreads its assets across 351 individual companies and has 13% in its top 10.

ARKK’s Biggest Corporate Stakes

ARKK’s portfolio is focused on the technology and healthcare sectors. The ETF had $25.7 billion in assets as of February 23, but the massive acceleration in inflows saw lead manager Cathie Wood increase her positions in existing and new holdings.

In the health sector, ARKK owns Compugen (CGEN), a therapeutic discovery company, since its inception, but the fund doubled its stake in 2020 and now owns 21% of the billion-dollar company. ARKK also owns more than 10% of Editas Medicine EDIT, which it has held since 2017. The fund doubled its stake in the US gene-editing company in 2020, and the stock has returned more than 100% during three months until February 1. 22.

In December, when it received $3.1 billion in new money, the fund added $36 million to its position in Proto Labs (PRLB) (it already held $457 million), leading ARKK to own 18% of the publicly available shares of the industrial company.

ARK Investment Management’s influence is not limited to small cap companies. Additional purchase of Stratasys shares by ARKK (SSYS)a manufacturer of 3D printers, in 2020 increased its stake to 21% of the company’s free float.

ARKK added to an existing position in another mid-cap growth company in December, Twist Bioscience (TWST), leaving the fund with a 7% stake in the $7.3 billion company. Throughout 2020, ARKK also invested in the genetic information company Invitae (NVTA)which is now the ninth participation of the fund, a participation which represents 9% of the free float of the company.

While ARKK is by far the largest fund in the company – ARK Genomic Revolution ETF (ARKG) is half its size – there is a large crossover in the holdings.

Not only does ARK Investment Management hold 21% of Stratasys’ free float in its ARKK fund, but it also holds 5% and 3% of the company’s free float in ARK Autonomous Technology & Robotics ETF. (ARKQ) and the 3D printing ETF (PRNT)respectively.

ARK Genomic Revolution ETF shares a large number of holdings with ARK Innovation. The two funds combined own more than 20% of three healthcare companies: Compugen, Seres Therapeutics (MCRB)and Syros Pharmaceuticals (SYRS).

ARK Genomic Revolution alone holds significant stakes in Personalis (PSNL) and Château Biosciences (CSTL)and on the subject of 3D printing, ARK Autonomous Technology & Robotics ETF and The 3D Printing ETF together hold 19% of the capital of ExOne (XONE) free float.

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