June 6, 2023

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These 3 Funds Invest Like ARK But Didn’t Fall as Far

Just one year ago, the innovation-focused exchange-traded funds from Cathie Wood’s ARK Invest were some of the hottest on the market, thanks to their spectacular rise in 2020. Now, they’ve collapsed by half their value, and investors have withdrawn billions of dollars. The funds’ sharp fall is largely due to investors abandoning growth stocks, which are bets on the future and thus vulnerable to an inflation that makes future cash flows less valuable today.

But that’s not the whole story. Most actively managed growth and technology-focused funds have held up better than ARK in the past year, even as growth stocks generally fell out of favor. They might not have been as sensationally successful as the ARK funds in 2020, yet many still delivered strong returns that year.

From the end of 2019 through this past Thursday, about 25% of the group’s members have actually beaten the $12.7 billion

ARK Innovation

ETF (ticker: ARKK), Wood’s flagship, which returned 23% during that period. Barron’s talked to the managers of a few of the funds that did well in both 2020 and 2021—two entirely different environments for growth stocks. They discussed how to navigate market cycles, and disclosed some of their favorite stock picks for 2022.

The top-performing growth fund since the end of 2019 is $7.6 billion Baron Partners(BPTRX). The fund gained 149% in 2020—just a hair behind ARK Innovation’s 157%—and an additional 31% in 2021, while ARK lost 23%. This year, the Baron fund has also held up better than the ARK ETF, as growth stocks have tumbled.

Investors should be cautious about the Baron fund, however: Most of its recent gains came from just one stock,

(TSLA), which accounts for 50% of its portfolio. The fund bought Tesla shares between 2014 and 2016, and instead of selling to keep its weighting in check as the stock rose exponentially, the fund let it run.

That bet has worked out well, but also brings tremendous risk if Tesla falls. Yet portfolio manager Michael Baron says the fund isn’t as concentrated as it seems.

“We look at diversification differently,” he tells Barron’s. While the fund has just 31 holdings and the top 10 account for 90% of its assets, it aims to invest across different types of businesses beyond high-growth disruptors like Tesla. Some of Baron Partners’ other top holdings include real estate analytics firm

CoStar Group
(CSGP), diagnostics company

IDEXX Laboratories
(IDXX), and financial data provider

FactSet Research Systems

Fund / Ticker AUM (mil) Expense Ratio 2020 Return 2021 Return YTD Return Manager Name
Baron Partners / BPTRX $7,594 1.56% 148.5% 31.4% -12.9% Ronald Baron, Michael Baron
Jacob Internet / JAMFX 112 1.93 123.2 12.8 -16.9 Darren Chervitz, Francis Alexander, Ryan Jacob
Shelton Green Alpha / NEXTX 281 1.16 113.9 2.7 -13.3 Jeremy Deems, Garvin Jabusch
ARK Innovation / ARKK 12,669 0.75 156.9 -23.4 -22.0 Catherine Wood

Note: Data as of Feb. 10

Source: Morningstar

Those stocks have supported the fund when Tesla was falling. The ARK ETFs, on the other hand, solely invest in innovation stocks that tend to move in tandem with each other. That’s why the Baron fund did better in the January selloff, even though it has a much larger weight in Tesla. “Diversification has allowed us to do well in various environments,” says Michael Baron.

He likes

Charles Schwab
(SCHW), an established leader in the online brokerage industry that still has mid-single-digit annual growth. The firm made strategic acquisitions during the pandemic, lowered its operating costs per client assets, and expanded profit margins. “Their customers are getting stickier and utilizing more of their services. That’s a great recipe for long-term investors,” says Baron.

The $112 million

Jacob Internet

fund (JAMFX) returned 123% in 2020 and another 13% in 2021. Portfolio manager Ryan Jacob, a veteran technology investor, says the lessons he learned from the market collapses in 2000 and 2008 have helped him navigate this past year better.

The fund was launched in 1999 and was almost wiped out when the tech bubble burst. At the time, Jacob was so convinced of his stock picks that he kept buying more, even as prices were heading down. The rebound didn’t come. “Back then, we didn’t fully factor in the risks,” he told Barron’s. “The biggest lesson from that period is to respect the fact that there may be a change occurring in the market, and be more careful during periods of stock weakness. You need to be adaptable, and not too headstrong.”

That’s why when growth stocks started falling last year, Jacob sold some losing positions and waited for more clarity. This protected the fund from further losses in ensuing months.

For example, Jacob sold

(ZG) when the company appeared to have trouble with its house-flipping business. He bought back those shares after the company announced it was quitting house-flipping. “This doesn’t affect their dominance as a real estate portal,” says Jacob. “Their profitability in that realm is still unmatched.”

The $281 million

Shelton Green Alpha

fund (NEXTX) invests in innovation companies, just as ARK does, but only those that have a sustainable cause that improves human well-being or addresses climate challenges. “If a company is leveraging its innovation to make the overall economy less risky, it will have an additional tailwind because the world will have greater demand for what they do,” says portfolio manager Garvin Jabusch.

Jabusch avoided some highly valued ARK holdings such as video-chat software maker

Zoom Video Communications
(ZM) and remote healthcare platform

Teladoc Health
(TDOC), which saw high growth fueled by the pandemic. “These are great companies, but they’ve compressed five years’ growth into one year,” he says. “Their rapid-growth period is over now.”

Following the recent tech selloff, he’s eyeing some promising companies that were previously too expensive, such as biotech

Caribou Biosciences
(CRBU), electric-auto maker

(RIVN), and lithium battery firm


Again, diversification matters. Besides high-growth stocks, the fund also owns consumer cyclical names like

Sprout Farmers Market
(SFM), with its focus on organic foods, as well as utility

Brookfield Renewable Partners
(BEP), whose power is 100% renewably generated. “During a bear market, these firms help us hold up better than a pure innovation fund,” says Jabusch. The Shelton fund has fallen 13% this year, while ARK Innovation has lost 22%.

Write to Evie Liu at [email protected]