Monday, May 16

Performance comparison: Warren Buffett is clearly catching up with Cathie Wood


ARK Invest with a strong run in 2020
Warren Buffett’s Berkshire Hathaway is catching up
Rotation from growth to value companies

While 2020 was clearly the year of star investor Cathie Wood, 2021 turned out to be rather mixed for her and her investment company ARK Invest. Although Wood’s best-known ETF, the ARK Innovation ETF, reached a record high of $159.70 on February 16, 2021, it ended the year at just $94.59, a full 40 percent lower. And the downward trend has also continued in the new year. The main reason for this is the recent slide in growth stocks such as Tesla, which are part of the fund’s portfolio.

Berkshire Hathaway stock strong in 2021

But as the star investor’s star falls, the strength of another stock market legend who has received far less excitement in recent years is showing itself – Warren Buffett. Although his investment holding company Berkshire Hathaway did not achieve any heights in 2021 that would be comparable to the former success of ARK Invest, the share price has risen continuously and consistently. While Berkshire B stock started 2021 at $231.87, it ended the year at $299, up 77 percent. And in 2022, too, the needle is pointing north despite a difficult, volatile stock market environment.

As a result, the performances of the two competitors have almost matched again since the first quarter of 2020, according to calculations by the Financial Times using Refinitiv data.

Different performance favored by unequal investment strategies

It is no coincidence that the two investment companies perform so differently, since both investment professionals rely on fundamentally different strategies. Cathie Wood’s expertise lies in finding companies that are developing technologies that have the potential to disrupt and transform the economy. It focuses primarily on growth stocks that have good growth prospects. At the same time, Wood does not shy away from extremely high ratings, such as those from Tesla or newcomers to the stock market such as Coinbase. Your investment horizon is long-term.

Warren Buffett also plays for the long haul, but has made a name for himself with his value strategy. In doing so, he relies on individual companies, whose fundamental data he examines closely and assesses the extent to which they differ from the competition through unique selling points. If he realizes that the potential of such a company is misjudged by the stock market, i.e. it is valued too low, he strikes and bets that the value of the company will increase in the long term.

Rotation from growth to value

The recent performance reversal of ARK Invest and Berkshire Hathaway could indicate a major rotation from growth to value stocks, according to analysts at Wellington Management, as strategist Trevor Noren writes in a blog post. The reasons for this are the improving economic prospects and rising inflation, which has already prompted the US Federal Reserve to adopt more hawkish tones. The market is now expecting three to four interest rate hikes. Rising interest rates, in turn, often have a negative impact on growth stocks, since these usually have an increased need for credit.

The question now is whether this change from growth to value will last in the longer term. Here the experts do not really agree. As a Bank of America survey of numerous fund managers shows in early January 2022, only around half believe that value stocks are likely to outperform the growth sector for some time. Whether that actually happens remains to be seen.

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