Decoding Cathie Wood’s ARK funds — An interesting Portfolio Trek with Python gears

TL;DR — This is a slightly detailed analysis of the ARK Investment portfolio by a curious investor (& a hobbyist programmer). I hope the answers will raise more questions for you to continue your further exploration.

ARK investments have taken the world really by storm recently. If you are an investor and don’t have a strong opinion about Cathie Wood and ARK investments, you may need to take a long walk by the countryside. The opinions typically vary from “ARK are how investment houses in the Digital world will start to work” to “This too will pass. Look at what happened to <Fill in your not so favourite fallen personalities>”. If you imagine the ARK Portfolio of funds to be a park, this article walks you through the park with Python as your guiding light — when darkness is gripping fast.

Image courtesy: Business `Insider

Let us suppose you are not familiar with ARK & Cathie Wood. In that case, think of Cathie as a contrarian who defies traditional wisdom & structures takes bets on disruptive themes as technologies that change the way we live our lives or have an exponential potential to do so. Few of her bold bets — like the one on Tesla — have proven to be a wild success, and her eight funds have attracted significant inflows from investors. Your opinions about Cathie and her ARK are bound to be more often binary — you either want her to succeed or want to go bust.

ARK funds have approximately $50B Assets Under Management, minuscule compared to the largest fund houses like Blackrock and Vanguard, whose combined might exceed $10 trillion. Despite this. ARK has gained attention perhaps due to the David vs Goliath type Cathie Wood vs Establishment stories. This is very interesting with the rising popular sentiment of retail investors vs wall street popularised by the Gamestop saga. If you haven't done already, please pay a visit to the retail investors' mecca here.

One of the significant striking points of ARK is its transparency. If you subscribe to their email, you get information about their trades daily. This is quite contrasting to the secretive hedge fund world required to disclose their positions 45days after the closure of the quarter through SEC-14F requirements.

ARK’s portfolio management alert received on 1st of April 2021

Thanks to the Easter break, I thought it would be good to take a deep dive into ARK with the information they have made available to do fact-checking myself. A fact-checking on data that ARK shares, market data etc., instead of having subjective biases take over.

This article covers 7 of the many fact-checking questions that I bombarded ARK data with.

1. Allocation— How the c. $50 Billion is distributed across the 8 Funds?

2. Underlying instruments — How many distinct instruments are there are across the ARK portfolio? How many of them are the US vs International markets?

3. Pricing — How different funds are priced now

4. Trends — Any trends we can infer based on the ARK Funds historic performance [disclaimer — historical prices are not indicative of future performance and other …]

5. Stress Test — How does the portfolio stand for stringent fundamentals & technical scrutiny?

6. Performers & Laggards — Who are the Top 10 performers of ARK portfolio across fund — by price

7. Deep dive into one sector — Healthcare is a trending sector. What’s ARK’s story here?

To get our answers, let’s begin our exciting trek into the ARK Forest now. Our starting point is right here (ARK Investor Resources), from where we can download the latest position files of the 8 ARK funds. The results you see in this article are based on the files downloaded on April 5th 2021, and market data from FinViz & yFinance. Market data — Historic pricing information, Fundamental & technical ratios and others.

Few gears you need when you are on your own :

1. Jupyter Notebook (I used Jupyterlab 2.2.6 from Anaconda)

2. Market Data — I used exports from FinViz to gather information about several tickers & yFinance for historical pricing information

3. A lot of patience to prepare Data for analysis — A big thanks to Pandas, Matplotlib and several Python libraries, which made my journey a bit fun.

The above gives you a flavour of the work involved in this type of analysis, and further sections are mostly non-technical.

Please note this article is neither a recommendation of ARK nor investment advice before we go on the trek.

ARK, as of now, has eight funds. Before understanding the funds, it’s essential to understand the investment philosophy of ARK.

List of ARK Funds

Disruptive Innovations

So our question 1: How the c. $50 Billion AUM is distributed across the 8 Funds?

Allocation of ARK funds & weightage

The key here is $23 B is in the instruments that the ARK team believes will give the investor exposure to Innovation. ARKG, A fund that invests in gene therapy, bio-informatics, bio-inspired computing, molecular medicine, and pharmaceutical innovations, has about $9B. This sector has garnered good attention in COVID times. Another $6 B is in Next Generation Internet.

Also, the weightage doesn't add up to 100% as it should. I need to have a closer look. Another point here is the investments are into equities, other ETFs and few other assets; hence I am using “instruments” to refer to the underlying assets.

Question 2 — How many distinct instruments are there are across the ARK portfolio. How many of them are the US vs International markers.

There are 273 unique instruments in ARK’s portfolio across eight funds. Of the 273, we can find market data for 226 from the leading market data provider FinViz and the remaining 46 need to be studied more closely. So c. 80% is invested into US markets.

Question 3: How different funds are priced now

Based on April 2nd 2021

Interestingly, ARKW (Next Generation Internet) fares better than the rest, with ARKK (Innovation), and ARKG (Genomics) claims the next two spots.

Let’s say Hi to our new friend yFinance, who has volunteered to provide further clarity in our walk around the ARK park. yFinance is an exciting Python utility that provides historical pricing information, amongst many other good things that it offers. Let’s fire up yFinance to ask the next question.

Question 4: So. Any trends we can infer based on the ARK Funds historic performance [disclaimer — historical prices are not indicative of future performance and other ..]

ARK* funds moves

We see a significant jump in the last year (COVID-19, retail investors, increase in Cathie’s popularity, bullish market conditions …) but noticeable volatility in recent times. It will be good to correlate with the overall S&P 500 volatility later.

Warning — If you want to be reading beyond this, you are expected to have some exposure to the fundamental & technical indicators used. It’s not complicated, but I thought I would forewarn. I strongly recommend you to read ahead further and consult Investopedia to further understand these terms here, especially for those that have not been explicitly explained.

Thanks for reading this far, and I hope this triggered enough interest to do your further analysis. The entire source code of my analysis (Jupyter Notebook) will soon be made available on Github for you to tinker with.

<Update> You can view the Jupyter Notebook here. This is released under Apache 2.0 https://tldrlegal.com/license/apache-license-2.0-(apache-2.0)

The author is not liable if your computer blows up running this code and will not stake claims to accidental billions your might make.

</Update>

Please leave a comment so that I can update you when I publish the source code.

This is very much a work in progress, and I am moving the notebook to colab to add a bit of NLP, Deep learning etc. Something for later.

Now on to our Question 5: How does the portfolio stand stringent fundamentals & technical scrutiny

A quick dip test with a combination of fundamental and technical indicators results in 10 tickers of the 226 (total US instruments in ARK portfolio).

df_ark_all_tickers.loc[
(df_ark_all_tickers[‘EPS (ttm)’] > 0) &
(df_ark_all_tickers[‘Current Ratio’] > 1.5) &
(df_ark_all_tickers[‘20-Day Simple Moving Average’] > 0 ) &
(df_ark_all_tickers[‘Relative Strength Index (14)’] > 60 )
]

Only ten results found,

A more robust condition like above where we are expecting good Earnings Per Share for the last 12 months, more powerful ability to handle obligations, momentum in the previous 20 days and a move into Oversold category — This is what others are focusing on and a point of divergence for Cathie Wood & ARK. Not for everyone’s appetite.

Question 6: Who are the Top 10 performers of ARK portfolio across fund — by price

Top 10: by Price

Top 10 performers by Price

Primarily familiar names; I didn't know a few of them like ISRG, ALGN. It’s always good to make new friends and be in touch.

Bottom 10: by Price

Bottom 10 performers by price

Question 7: Healthcare is a trending sector. What’s ARK’s story here?

Sixty-four instruments in ARK’s portfolio are healthcare-related. Out of the 64, 31 are into BioTechnology as a super hot space. If we look at Volume's bottom ten lists in the Healthcare sector, it can make anyone nervous. Probably these are the risks that ARK is taking that defy the conventional investment approach of value investments, active vs passively managed portfolios etc.

Bottom 10 by Price in the health sector

In conclusion, I would like to call upon three pointers :

1. ARK investment is a relatively new phenomenon that doesn't adhere to established beliefs. While the broader contours look bright, the details are scary for those with a lesser risk appetite. I am taking this as a portfolio that has a probability of identifying few Teslas, but there will be casualties due to the sheer nature of disruptive innovation. Even if ARK goes bust, the investment style [theme based bets into disruptive innovation] might be copied by big fund houses.

2. The transparency that ARK has demonstrated is something industry should adopt and adhere to. This will give rise to a new breed of programmatic investors who leverage market data, use Cloud computing and Data Science. Financial Industry should welcome this segment, especially with the emergence of retail investors.

3. A low-code / no-code platform for programmatic investment is a white-space. There are several ingredients (market data, ML models, years of research, real-time sentiment data), and we need a few innovators to stitch all of these together.

Lastly, these seven questions are far too basic to provide a complete picture. I am very respectful of the intense due diligence that the ARK team and the investors do (even though the latest Tesla valuation model was ripped apart didn't do them any favour). I hope this article has piqued some interests in having fascinating trek/safaris into impressive portfolios. Should you have any questions, I would be delighted to have a chat.

Acknowledgements :

Please note I have tried to capture all the links for the images. If you are not in agreement with the usage even after acknowledgement, I would be more than happy to support your views and remove them from this article.

1. Image: https://markets.businessinsider.com/news/stocks/ark-invest-ill-prepared-market-downturn-inexperienced-analysts-cathie-wood-2021-3-1030269708

2. https://www.mountainbug.com/walking-holidays__trashed/walking-holidays-explorer/

3. https://ark-funds.com/active-etfs

4. https://ark-invest.com/investment-process/

5. https://aroussi.com/post/python-yahoo-finance

6. https://www.thestockmarketontheinternet.com/stock-market-four-most-dangerous-words-in-investing/

7. https://www.stackoverflow.com and other forums that I consulted for resolving issues that I encountered