Cathie Wood is not doing enough to avert drawdowns in her flagship fund, which is hurting her investors, according to Morningstar. Morningstar lowered its rating on ARK Innovation to negative from neutral on Thursday. Plus, the firm slashed Ark's People and Parent ratings to below average from average. "ARK Innovation ETF ( ARKK ) shows few signs of improving its risk management or ability to successfully navigate the challenging territory it explores," said Robby Greengold, analyst at Morningstar. Wood — founder, CEO and CIO of Ark Investment Management — has made a name for herself by investing in "disruptive innovation" stocks across five technology platforms: artificial intelligence, blockchain, DNA sequencing, energy storage and robotics. Wood has big bets on names including Tesla , Teladoc and Roku. However, after Wood's banner year in 2020, ARK Innovation suffered a 24% loss in 2021 and is down roughly 30% in 2022 as growth pockets of the market are punished by surging interest rates. "Since its meteoric rise in 2020, the strategy's exchange-traded fund has been one of the worst-performing U.S.-sold funds, as the aggressive-growth stocks it held fell back to earth," said Greengold. Yet, Wood has "doubled down on her perilous approach," he said. ARK Innovation is down about 45% in the last 12 months, and it has lost about $1 billion in inflows during that time, according to FactSet. Wood continues to have conviction in her top picks during this rocky time for the funds. She has consolidated into her highest-conviction names in the past year. Following a 25% drop in UiPath' s stock on Thursday, Wood scooped up 3.5 million shares of the software company, a position worth roughly $75 million based on UiPath's closing price of $21.59 per share. "She has saddled the portfolio with greater risk by slashing its number of stocks to 35 from 60 less than a year ago — thereby amplifying stock-specific risk — and growing its aggregate exposure to companies in which ARK Investment Management is a large shareholder," said Greengold. ARK Innovation owns nearly 6% of UiPath, according to FactSet. Ark owns even larger portions of other stocks. ARK Innovation owns nearly 12% of 2U and nearly 12% of PagerDuty . "The strategy has effectively become less liquid and more vulnerable to severe losses," Greengold said. "Wood runs a variety of exchange-traded funds that often make shared bets on stocks and can't close to new investors — an option open-end mutual fund rivals can use to preserve their liquidity and investment opportunity set." Greengold also noted that Ark doesn't have a strong succession plan after 66-year old Wood's retirement. "Director of research Brett Winton would succeed her if needed, but his 15 years of industry experience include none as a manager," the analyst said. Ark did not immediately respond to a request for comment.
Catherine Wood, chief executive officer of ARK Investment Management LLC, speaks during the Milken Institute Global Conference in Beverly Hills, California, on Monday, Oct. 18, 2021.
Kyle Grillot | Bloomberg | Getty Images
Cathie Wood is not doing enough to avert drawdowns in her flagship fund, which is hurting her investors, according to Morningstar.