Warren Buffett closes in on Cathie Wood after tech stock crash

The Ark Fund, the flagship of the funds managed by Cathie Wood, is on the verge of being overtaken by Warren Buffett’s Berkshire Hathaway in the post-pandemic investment performance ranking, reflecting a dramatic reversal of the situation between the two big investors.

The Ark Invest Innovation fund — known as ARKK, for which it is quoted on the stock exchange — beat out most of its competitors in 2020 thanks to Wood’s aggressive bets on disruptive, high-growth companies like Tesla. This has attracted billions of dollars from investors, pushing Ark Invest’s overall assets to a peak of $61 billion at the beginning of last year.

However, many of Wood’s biggest bets began to hit snags last year and are falling further this year, in the face of a violent shift towards cheaper equities in less glamorous, older or just plain disadvantaged sectors.

Meanwhile, Berkshire Hathaway shares continue to climb steadily, narrowing the gap between the performance of Buffett’s investment conglomerate and exchange-traded fund (ETF) Ark Innovation to just eight percentage points from early 2020 onwards.

The relative performance of the two fund managers is in especially stark contrast this month, with shares of Berkshire Hathaway up about 2% since early January while shares of Ark’s largest ETF have fallen by 24%. ARKK is down 43% from early 2021 to Friday’s close, while Berkshire Hathaway is up 34%.

Wood’s Ark Invest and Berkshire Hathaway are often seen as prime examples of two very different investment styles – one focuses on growth and the other on value. The reversal in their bond prices reflects a disturbing rotation between the two tribes in recent years.

The start of 2022 has been especially difficult for the growth, often loss-making tech stocks favored by Wood, and the more stable stocks that are the hallmark of Buffett’s investing style. The strength of the turnaround caused amazement in the markets and generated speculation about the possibility that a new market environment is about to emerge.

“Does the violence of rotation suggest that a regime change is about to take place, and that a sustained reversal in the performance of growth stocks compared to value stocks is underway?” pondered the team of analysts at investment manager Wellington Management in a recent research note.

Investors looking for growth select companies that may not be profitable but are expanding rapidly, often found in hot sectors like technology. Investors looking for value are more price-conscious and often look for bargains in more outdated or troubled sectors — such as, recently, the energy sector and banking.

The improvement in the growth outlook and the turn of central banks to a tougher stance on inflation – led by the Fed (Federal Reserve), the central bank of the United States – was the primary trigger for the rotation of investors from growth to value. Value stocks are often found in sectors that benefit from strong economic growth and higher interest rates, while growth stocks are less attractive in such environments, analysts say.

Many fund managers polled in a Bank of America survey anticipate the turnaround will continue, and 50% of respondents in January predict that value stocks will continue to outperform growth stocks — a near-record result for this year. indicator.

“With the Fed turning in the direction of tightening, it is possible for rates to rise with some persistence,” said Lisa Shalett, vice president of investment at Morgan Stanley Wealth Management, in a research note. “This would signal that the growth-to-value rotation we are seeing has some room to continue in 2022.”