Fund Management

Rising Rate Fears Hit "Disruptive" Tech Fund

Shirin Aguiar Reporter January 10, 2022

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Reports said that expected higher borrowing costs to curb inflation have hit the kind of tech sectors in which the Ark Innovation business is invested.

The flagship fund of Ark Invest, the investment management firm founded by US figure Cathie Wood, has dropped 9 per cent this year following a sharp fall in 2021, an example of how expected higher interest rates this year are hitting fashionable investments such as AI and robotics.

The firm’s Innovation exchange-traded fund, ARKK, was down more than 48 per cent on Thursday last week from its February 2021 all-time intraday high. It closed down by 0.6 per cent at $85.58 per share on Thursday. This represents a drop worse than the one the fund saw in March of 2020 during the pandemic, media reports said (sources: Bloomberg, Financial Times, other).

The fund invests in US-listed companies that focus on disruptive innovation, particularly in areas related to DNA technologies, automation, robotics, energy storage, artificial intelligence and fintech. It is an actively-managed exchange-traded fund that will invest under normal circumstances primarily in domestic and foreign equity securities of companies that are relevant to its investment theme of disruptive innovation.

Among the fund's ten biggest holdings are Tesla (8.67 per cent), Roku (6.05 per cent), Teladoc Health (6.05 per cent), Zoom (6.02 per cent), and Coinbase Global  (sector: cryptocurrency exchange 5.10 per cent).  Others include Spotify Technology, Unity Software (video game developer), Exact Sciences (molecular diagnostics), Twilio (cloud communications) and Block (digital payments).

The Ark entity is not alone in feeling the heat. The Global X FinTech ETF, to take another example of such a tech-rich investment entity, is also down from the start of the year. 

The selling was largely due to a spike in interest rates, media reports said. Higher rates typically penalize growth pockets of the market that rely on low rates to borrow for investing in innovation. Future earnings look unappealing when rates are on the rise.

A crop of high inflation figures in the US, the UK and other major countries has already prompted the US Federal Reserve to accelerate the wind-down of its quantitative easing program, signaling a move from the ultra-loose monetary policy and near-zero interest rates that have been in place since the 2008 financial crisis. Also, tech stocks have generally fared well in recent years, even benefiting from the shift to remote working amidst the pandemic. 

According to her website, Wood founded ARK to focus solely on disruptive innovation while adding new dimensions to research. Through an open approach that cuts across sectors, market capitalizations, and geographies, she believes that ARK can identify large-scale investment opportunities in the public markets resulting from technological innovations centered on DNA sequencing, robotics, artificial intelligence, energy storage, and blockchain technology. Wood is chief investment manager and portfolio manager.

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