Analysis: Wood’s ARK and other growth funds will be hurt by rising interest rates in 2022.

The ARK Innovation Fund run by Cathie Wood, which more than doubled in value during the pandemic rally, is on track to finish near the bottom of all U.S. mutual funds in 2022 because rising inflation and higher interest rates have made investors less interested in high-growth stocks.

So far this year, the ARK Innovation Fund has lost about 67%, which is more than three times as much as the S&P 500 index. Morningstar’s Dec. 16 ranking of U.S. equity funds shows that it has done the worst out of all 537 mid-cap growth funds and is near the bottom of all U.S. equity funds.

The S&P 500 is on track to have its worst year since the Great Financial Crisis, so it’s unlikely that many funds will be unaffected by this in 2022. This year, most stock portfolio managers were 0.6% behind their benchmarks. This was less than the drop in the S&P 500 of 19% or the drop in the Russell 2000 of nearly 22%.

“Portfolio managers and the Federal Reserve both got inflation wrong this year,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments.

Morningstar kept track of all 3552 actively managed U.S. equity mutual funds. Wood’s fund was ranked 3,544 out of all 3552. The Voya Russia fund, on the other hand, is down 92% for the year so far, making it the worst fund of the year so far.

The high-growth companies that Wood liked the most have done the worst since the Federal Reserve raised interest rates. This made bond yields go up, which made high-growth stocks less appealing.

Zoom Video Communications (NASDAQ:ZM) Inc, Tesla (NASDAQ:TSLA) Inc, and Block Inc (formerly Square) have all declined more than 60% this year, while Teladoc (NYSE:TDOC) Health IncN and Roku (NASDAQ:ROKU) have both declined more than 70%.Overall, each of the ten biggest investments in the fund is down at least 30% for the year so far.

Wood also seemed surprised by how long the inflation lasted. A year ago, he said that deflation was the real risk for markets in the coming year. In September, she said that the Fed’s rate hikes were a “mistake,” and in December, she said that she thinks the U.S. economy has been in a recession “all year.” In 2022, consumer prices rose to their highest level in 40 years.

This year, most of the top 15 actively managed equity mutual funds focused on energy or commodities, which helped them make money from the rise in the price of oil and other raw materials. The Invesco Energy Fund is up almost 49% so far this year. It was the best-diversified fund in Morningstar’s rankings at the middle of December.

Morningstar’s list of the best funds was led by the MicroSectors U.S. Big Oil 3x Leveraged ETN, which gives three times the daily return of the equally-weighted stocks in its portfolio, such as Chevron Corp (NYSE:CVX) and Exxon Mobil Corp (NYSE:XOM). So far this year, it is up 172%.

CRASH LANDING

Other funds that did well in the past few years because of big bets on tech stocks did badly in 2022.

Morningstar says that the $1.4 billion Morgan Stanley (NYSE:MS) Insight I fund, whose biggest holding is in cloud company Snowflake Inc, is one of the worst-performing large-cap funds this year and is down 61.3%. cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval cheval

In 2020, Wood became famous because her portfolio of so-called “stay at home” stocks like Zoom and Teladoc went through the roof. This helped her fund reach $27.6 billion in assets under management at one point. The fund’s assets are now worth a little less than $6.5 billion.

Many investors may still believe in her vision of the future because they remember how exciting those times were.

Lipper data shows that the ARK Innovation Fund has brought in a net of $1.6 billion this year, even though its total assets under management have dropped by half because the market has done so poorly.

“It’s unusual that investors are so loyal to the fund,” said Todd Rosenbluth, who is in charge of research at the analytics firm VettaFi. “This is still one of the biggest actively managed ETFs, and if the fund’s performance improves in 2023, it will have staying power.”