Warren Buffett approaches Cathy Wood as technology stocks decline

Kathy Wood’s flagship Ark fund is on the verge of being overtaken by Warren Buffett’s Berkshire Hathaway in the performance table after the pandemic, reflecting a dramatic change in the fortunes of the two prominent investors.

Ark Invest, an exchange-traded innovation fund – known for its ARKK ticker ticker – smashed most of its competitors in 2020, thanks to Wood’s aggressive bets on fast-growing, destructive companies such as carmaker Tesla. This attracted billions of dollars from investors, raising Ark Invest’s total assets to a high of $ 61 billion early last year and helping Wood become the bull’s face.

However, many of Wood’s biggest stakes began to decline last year, and this year they have collapsed further in a violent direction toward cheaper stocks in often less glamorous, old-fashioned or otherwise disadvantaged industries.

Meanwhile, shares of Berkshire Hathaway continue to rise steadily, reducing the productivity gap between Buffett’s investment conglomerate and Ark Innovation ETF from early 2020 to just 8 percentage points.

Rebased line chart up to 100 showing Berkshire Hathaway catching up with Ark's flagship innovation fund

The relative performance of the two fund managers was particularly strong this month, with Berkshire shares rising about 2 percent since early January, although Ark’s largest ETF fell 24 percent. The ARKK has already fallen 43 percent from early 2021 to the end of Friday, while Berkshire Hathaway has risen 34 percent.

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

The start of 2022 was particularly difficult for the often unprofitable technology stocks preferred by Wood, and vigorous for the more stable stocks, which are the hallmark of Buffett’s investment style. The power of change has raised eyebrows in all markets and sparked speculation that a new market environment is emerging.

“The violence of [the] Does the rotation suggest a regime change and a lasting reversal in the effectiveness of growth versus value? ”Wellington Management’s team of analysts ponders a recent note.

Growing investors are looking for companies that may not be profitable, but are expanding rapidly, often in hot sectors such as technology. Value investors are more price sensitive and often look for bargains in worse or broken industries, such as energy and banking.

Improving the outlook for economic growth and shifting central banks to a smarter position on inflation – led by the US Federal Reserve – were the main reasons for the rotation of investors 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 declines somewhat in such an environment, analysts say.

Many fund managers surveyed by Bank of America expect this change to continue, with 50% of respondents in January predicting that the value will continue to outpace growth – close to a record high.

“As the Fed turns to tightening, interest rates may rise with some consistency,” said Lisa Chalett, chief investment officer at Morgan Stanley Wealth Management. This would signal that the rotation of value to growth we are seeing has some legs in 2022.

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