How Much of a Company is ARK Willing to Own?

To get the most out of this post you should read an earlier post on why shares fluctuate even when a trade isn’t reported if you haven't already. On to the story...

For eight sessions, from November 11 to December 4 Ark reported no trades of PACB in the ARKK ETF, yet the share count increased from 6.83mil to 7.53mil. Over that same period of time Ark reported no trades of NVTA in the ARKK ETF yet the share count remained exactly the same.

This anomaly isn’t found only with NVTA. It’s also CGEN NTLA EDIT CERS and SSYS. This is a glaring contradiction to the previous post on why shares fluctuate even when no trades are reported. That is the way active ETFs work, and it's the way Ark has always run their business. So something must be different about those holdings.

It turns out Ark owns more than 13% of each of those companies. Not just the float, but the total shares outstanding. Those are seven of the nine highest ownership percentages of all positions in the Ark funds.

CGEN - 20.15%
CERS - 16.41%
SSYS - 16.37%
NTLA - 15.35%
EDIT - 14.52%
NVTA - 13.32%

It seems that Ark has an ownership cap that sits between 13-20% of a company. The scope of which likely depends on how much money the company has already raised, it’s market cap, etc.

How much of PACB does Ark own? 14.99%.

Two things can happen here. Either Ark buys right through and ignores their ownership percentage which would totally disprove this theory. Or, PACB does a secondary offering and dilutes the position which would allow Ark to continue buying.

The ninth highest ownership percentage holding is NNDM (Nano Dimension). Ark owns 36% of the company. What makes that possible  seems to be that the company is tiny, $74mil market cap. At some point NNDM is going to do a secondary offering, which will dilute the Ark ownership holdings. In the meantime, Ark is likely fostering a working relationship with NNDM so management isn’t spooked and Ark can load up on what could end up being a very high conviction play.

Admittedly, I can’t prove this in a definitive way but it seems to be the case. Consider the case of Stratasys…

The five main Ark ETFS (ARKK, ARKG, ARKW, ARKQ, ARKF) own 16.37% of the company, yet the 3D Printing ETF (PRNT) only holds 0.37% and its weight rank in PRNT is just 17th. SSYS is a very—arguably the most—important 3D printing company. So why wouldn’t it be the number one holding in PRNT?

It’s probably because the Ark ETFs are more important to investors than the PRNT ETF so the Ark Invest team would want to give their investors as much exposure to one of their highest conviction ideas as possible. In doing so they’ve maxed out their ownership allotment.

Also, SSYS isn’t in a position to do a secondary offering. The stock has been beaten down for years and investors are wary of the 3D printing genre as it hasn’t worked its way out of the underdelivering trough that followed the hype bubble bursting back in 2013-2014.

The cap is logical. At some point you have to stop buying the company for one of two reasons:

1. If you own too much of it and you need to exit the position there’s very little liquidity for you to sell into.
2. Company management could become hostile and enact policies that hurt Ark if they come to own too many shares. At some point, if you continuously buy, you end up in complete voting control of the company. Few companies want that.

As Ark continues to put assets under management they are constantly having to buy more shares of underlying companies to create new shares of the Ark ETFs. That’s how these anomalies started popping up. i.e. they have too much money.

This in turn begs the question of whether the Ark funds won’t become watered down with less than stellar companies simply because it’s bad business to own too much of the best ones. That might not be likely, but it’s possible. Which makes it worth keeping an eye on.

In the meantime, Ark should be cheering on the SPAC and direct listing theme so they have a bigger pile of young, up-and-coming companies to pick from.