Robby Greengold, Strategist for Morningstar’s U.S. Equity Strategies Team, joins Yahoo Finance’s Alexis Christoforous and Kristin Myers to discuss criticism directed towards ARK’s investment strategy and management.

Video Transcript

KRISTIN MYERS: All right, let's talk now about Cathie Wood. She just launched a new thematic ETF around space innovation, that's ARKX. But our next guest is raising some red flags about their flagship ETF, that's ARKK. Now he says that ARK's thematic approach is, quote, "ill-prepared for a major plot twist in the market."

So let's bring on Robby Greengold, Strategist for Morningstar's US Equity Strategies Teams. So Robby, you really pulled no punches here when it came to some of this criticism. You called-- I'm going to quote you here. You called the team "inexperienced." You said that they "lacked really stringent risk controls," and that the "portfolio is more vulnerable to severe losses." So what would it take, you know, for that plot twist to-- to come true for that almost doomsday scenario that you're painting?

ROBBY GREENGOLD: It could be any number of things. I think that-- I think that Cathie Wood herself, let's say right away, she's-- she's very experienced. I think that her supporting analyst team, that has seen a lot of churn. And the analysts in place now have-- have only been there for-- for a couple of years or-- or maybe they joined more recently than that.

And so-- so I'll say that just about the inexperience of the team and just relative to other-- other of its peers that are investing in these sorts of innovation-- innovative disruptive platforms that-- that ARK likes. Other firms out there have teams that have not only been at their firms for an extended period of time, but they also bring technical expertise that is pretty obvious. You have people in the health care space, for example, that-- that have medical doctors on staff. They have advanced degrees in neuroscience and-- or biology.

And so-- so these skills are important for the same kinds of names that ARK is investing in. They-- they invest in genomics and immunotherapy companies, for examples. Now the downsides, the red flags just surrounding the lax risk controls that we see, this is an issue that is really-- this is both a day-to-day issue, and also just a question of how ARK is going to handle a market crisis unlike any it's-- it has seen before.

They-- they were able to navigate the coronavirus sell-off and come out fairly well. I mean, 2020 was an incredible year from a performance standpoint. But things are different now. The-- the heft of the flagship strategy is-- is new. They have not had to run the amount of assets that they have now.

I think that-- I think that the strategy is about 22 or 23 billion now and-- so it's grown tenfold over the past year. And so that-- that brings new risks. And the-- the firm doesn't have a well-- it doesn't have a robust risk management infrastructure. There's nobody dedicated to risk management.

And it's all the more important for a firm like this one that is a high return, high risk-- it takes a high return, high risk philosophy. Some of its rivals don't need such attention to risk, because they are benchmark aware, or they are-- that they have some-- some sort of portfolio construction parameters that they will manage within. And ARK-- ARK doesn't have very much of that at all.

ALEXIS CHRISTOFOROUS: What about-- you bring up the point that you think that perhaps there's ultra specialization here, that perhaps the team at ARK is a little too, you know, narrowly focused on some of their stock choices. How does that-- why do you say that? And how does that leave them vulnerable?

ROBBY GREENGOLD: Well, I don't think that that is-- I wouldn't call that a red flag, because they are investing in just these-- these five disruptive platforms that they've identified-- artificial intelligence, blockchain, energy storage, robotics, and-- what would be the fifth one? So-- so I don't think that this being a thematic-oriented strategy is by itself a flaw. And I think that they're-- they've gone about product development in a-- in a thoughtful way. They've invested in these themes because they think they have longevity.

So they-- they probably wouldn't think that this ultra specialization within-- going back to health care once again, they're investing in just a handful of health care companies that are tied to this-- these specific names of DNA sequencing or immunotherapy. And when you look at-- when you look at some of ARK's competition, their health care teams are looking across biotech and pharma. And they-- they have just more hands on deck. And they are collaborating across the team. And so--

KRISTIN MYERS: Right.

ROBBY GREENGOLD: --I just-- it's just-- we come out-- as we rate that pillar, the people pillar, we come out at average, because, you know, I think that there's-- I think we should give credit for the experience that is there, especially at the top. But it--

KRISTIN MYERS: That's very true.

ROBBY GREENGOLD: --doesn't stand out.

KRISTIN MYERS: Cathie Wood has-- her performance has been absolutely incredible, and she's been very lauded because of it. Robby Greengold, Strategist for Morningstar's US Equity Strategies Team, thanks so much for joining us.