💔 IT’S OVER! ARK Invest’s $700M Breakup with Illumina (ILMN) – A Case Study in Conviction

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Hey there. Alex here, and this is Ticker Symbol: You, the channel that invests in you. Last week, ARK Invest just sold out of their once massive position in Illumina, one of their highest conviction holdings over the lifetime of ARK Invest. Cathie Wood herself wrote an article explaining that Illumina is the cornerstone of the genomic revolution, owning the lion's share of what may one day be a four trillion dollar market opportunity. As of Friday, November 27th 2020, ARK Invest has zero shares of Illumina. Zero.

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This presents us with a rare and important data point because we can see how ARK Invest goes about totally selling out of a position that they once had high conviction in. I put a lot of research and effort into each one of my videos and sources to everything I discuss can be found in the description below. So I'd appreciate the early thumbs up and let's dive right in. I'm excited to present this case study of how ARK Invest totally sells out of a very large, high conviction position.

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If you didn't know, earlier this fall, Illumina was one of ARK Invest's biggest holdings and highest conviction positions. On August 7th 2020, Illumina was the eighth biggest position in ARKK, ARK Invest's largest fund by far, and the fourth biggest holding in ARKG, ARK Invest's fund themed around the genomic revolution. Remember this August 7th date? We'll revisit it in a minute. In an article titled Illumina is the Bedrock of the Genomic Revolution by Cathie Wood herself, she writes, “Illumina is the cornerstone of our genomic revolution theme and one of our highest conviction stocks.

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Illumina is to the genomic revolution what Microsoft and Intel were to the computing age or Google is to search. Illumina has a 90 percent share of one of the most dynamic and important innovations in history. Based on ARK's research, Illumina's declining cost curve will permeate a three point five to four trillion dollar market opportunity in health care and agricultural biology, while improving wellness and life expectancy in ways we cannot fathom. I believe that no one can argue that ARK Invest did not have the absolute highest conviction in Illumina earlier this year.

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In the most recent episode of my weekly Market Recap, covering the short Thanksgiving trading week ending Friday, November 27th 2020, we saw that ARK Invest sold their final share of Illumina. They currently hold zero shares. Zero. It has appeared at the top of my weekly trends list week after week. Here's my full watch list for the trading week before that, ending Friday, November 20th 2020. Here's my full watch list for the trading week ending November 6th 2020.

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That was the week of the presidential elections. And here it is as the biggest sell in the very first episode of the market recap. During the trading week ending October 30th 2020, they sold over sixty percent of their shares. Here's Cathie Wood explaining exactly why they lost so much faith in such a high conviction holding.

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One of the things that we believe is going on here is that Illumina, which its machines account for at least ninety five percent of all of the base pairs of DNA sequenced around the world, including China, today. And we've been a little concerned over the past few years that the cost to sequence a whole human genome has stabilized or had stabilized around one thousand dollars. Now, according to our research, DNA sequencing technology is following a cost curve, one of the steepest we've ever seen, in at least my experience, watching innovation.

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And as you know, Wright's law is at the heart of our research. Wright's law says for every cumulative doubling in units produced cost drop at a consistent percentage rate. Now, for DNA sequencing, we know that that rate is about 40 percent. Now, last year, there were two point six million whole human genome sequenced. And we know from oncology alone that the demand for sequencing is exploding. But we hear from other companies within the space molecular diagnostic companies that Illumina is not passing along or not pushing out new products fast enough to enable these cost declines.

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And I always am worried when we see prices stabilize in technologically enabled space like DNA sequencing is.

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OK. So hopefully I've proven to you that this is the real deal and we have the rare opportunity to see what it actually looks like when ARK Invest decides to totally sell out of a very high conviction position. Let's walk through Illumina's fall from grace from Friday, August 7th, 2020 in last week's Market Recap, ending Friday, November 27th. Here is what ARK Invest's top holdings looked like on August 7th 2020. On the left, we have a table of ARK Invest's top seven holdings in the rows and the columns are the actively managed ETFs that they're in.

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So Tesla, their number one holding overall was in ARKK, ARKW and ARKQ where it was the number one position in ARKK, the number one position in ARKW and the number one position in ARKQ. Then we had Square, Invitae, CRISPR, Roku and TWOU followed by Illumina, which was the eighth biggest holding in ARKK, the fourth biggest holding in ARKG and the seventh biggest holding for ARK overall. And what you're seeing on the right is a bar chart showing you those same things if you prefer to see it that way.

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Tesla was their number one holding overall, making up just under 10 percent of all of their funds. Number two was Square, Invitae, down and down the list until you get to position seven, which was Illumina. And at that point, they had just under three hundred and fifty million dollars in Illumina spread out across ARKK and ARKG. One of the metrics that I think is very important to the conversation is ARK Invest's assets under management. Between August 7th and November 27th, ARK Invest's assets under management increased by over one hundred percent.

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The ARKG fund grew by almost one hundred and thirty percent and the ARKK fund grew to just under 13 billion dollars, which is a growth of ninety six percent. This is important to remember because as ARK has been selling out of Illumina, their funds have continued to grow. And I'll show you how this growth is so important to the overall story. One thing we can ask ourselves is if ARK Invest maintained the same level conviction in Illumina, how big would their position be in it today?

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So to figure that out, what we can do is take the three hundred and forty million dollars they held in Illumina on August 7th and multiply that by the growth that they've experienced until last week. So one back of the napkin answer to our question is, if they were just as convicted in Illumina today, they would be holding a little over seven hundred million dollars in it. Another way to check that is to see how big their seventh largest holding overall is today.

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So this is similar to the table and bar chart you just saw. But for Friday, November 27th. And ARK Invest's seventh biggest position is in Slack, ticker symbol WORK. They currently hold a little under seven hundred and forty million dollars in Slack. As you can see, Tesla still makes up just under 10 percent of all of their institutional funds remaining their highest conviction position by far. And Slack is the number seven position in this bar chart, again, having just under seven hundred and forty million dollars today.

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Here's a comparison of those two bar charts side by side. On the left, you have August 7th, 2020. And on the right you have November 7th 2020. As you can see, no conviction change in Tesla, but their relative position sizes have changed a lot as their funds continue to grow. You can see that Square, Invitae, CRISPR and Roku stay in the top five in both charts. And you can see that Slack is in the number seven position on the right, while Illumina is in the number seven position on the left.

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So that is a good gut check. Whether we multiply the size of Illumina's position by ARK's overall growth between the two dates or whether we ask what is the seventh biggest position ARK holds today and how big is that? We can see that Alumina should make up about seven hundred to seven hundred and fifty million dollars of ARK's portfolios if they maintained that same level of conviction today. So this is basically a three quarter of a billion dollar breakup between ARK Invest and Illumina.

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Since many of us follow ARK Invest's trades over time, one thing we should ask ourselves is if we can detect this loss of conviction through their trading history. And that's what I'm going to show you now. Here is a plot showing ARK Invest's money invested in Illumina over time. This combines their money in ARKK and ARKG. And then we'll take a look at it fund by fund. August 7th is when Cathie released Episode six of In The Know on YouTube and their position was three hundred and forty million dollars.

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One thing you'll notice is their position continued to grow even after this video. They netted a few percent of shares each trading week. Then, during the trading week ending September 18th, 2020, they sold over a quarter of their position. And then again, over the next six weeks, their position in Illumina roughly traded sideways until the trading week ending October 30th 2020, where they sold a massive sixty one and a half percent of their position. The next week ending November 6th,

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2020, they sold another over 40 percent of their position. Then the week ending November 20th, they sold another almost 70 percent of their position. And then last Friday, the week ending November 27th, they sold the remainder of their position. So as you can see, their divestment from Illumina happened over almost four months of time. It gets even more interesting when you break it down fund by fund. Here is that same plot. But now we're just looking at ARKK. And as you can see, it's roughly the same story except a little faster.

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On the trading week ending September 18th, ARK Invest sells out of roughly a quarter of their position in Illumina. Twenty three and a half percent. Then on the trading week ending October 30th, they sell out of a massive eighty four percent of their position in ARKK and then the following trading week ending November 7th, they divest completely. In ARKG, the story happens a little differently. We see that the initial sale is even bigger. They're selling out of a third of their position instead of roughly a quarter, and then they sell out of their position over a longer period of time.

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Their sale for the week ending October 30th is only eight percent. The following week ending November 6th, it's almost 20 percent. Then their share count actually rises for a third time before they drop another seventeen and a half percent of their shares. Then a massive 70 percent sale during the week ending November 20th and then last trading week ending November 27th, they sold out of their position. If you're asking yourself why ARK Invest would continue accumulating shares even if they've lost conviction in a position, you're not alone.

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I am not an ARK Invest insider by any means. But in my opinion, the answer to this question is they're accumulating shares to maintain Illumina's relative position size to the rest of their portfolio as their funds continue to grow. What we're seeing here is the effect of them being active fund managers and not retail traders. As their assets under management continue to increase over time, they keep adding money to their current Illumina position size to maintain the overall structure of their portfolio.

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So both their buys and their sells also include the growth of the overall fund. Another thing that makes this chart a little hard to read is the fact that Illumina's share price changes from day to day and week to week. For example, during their massive sale on September 18th, they got rid of thirty three percent of their shares. But the share price also fell by fifteen percent, so their total position size changed by forty four percent, not thirty three.

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So one thing we can do is look at the same type of chart but track their percent change in position size instead of the total money they have invested. And I think this paints a much clearer picture. So what you're seeing here is almost the same plot we were just looking at except on the Y axis, we're tracking the change in shares week over week instead of the change in dollars. So let's start with August 7th. So from August 7th to August 14th, there's a one point five percent increase in shares .From September 4th to September 11th,

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there's a almost zero percent change in shares. And then from September 11th to September 18th, we see that they drop over twenty five percent of all of their shares. Then, the week ending September 25th 2020, they sell almost none of their shares. Then, for the next few weeks from the week ending September 25th, all the way to the week ending October 23rd, their share count stays roughly stable even as the price is fluctuating.

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This almost insignificant change in shares were the green arrows we were looking at earlier. But now they just move sideways because we're only tracking the number of shares and we've taken the price action out of the equation. When I look at ARK Invest's biggest buys and sells each week, this is the type of chart I track them on. When their share count doesn't change by more than five percent in either direction, I personally consider that normal trading action. This is part of active portfolio management.

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When the number of shares increases in a given week by more than five percent, but less than 10 percent in any direction, I mark this down and I consider it pretty interesting. When a given position is in the yellow range week after week, they make my watchlist. That middle list you see at the end of every market recap and finally, anything that falls outside of this region that is either a huge buy or a huge sell like the ones we're seeing in Illumina, they immediately make the buy and sell list because these are extreme changes in position relative to their other holdings in a given week.

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For example, in one week alone, the week ending September 18th, Illumina's overall position in ARK Invest dropped by 10 ranks from their seventh biggest position all the way down to their 17th before dropping another 60 percent of all of their shares on the week ending October 30th. This massive sale dropped it down twenty two ranks all the way down to rank forty five. Then immediately, the week after, they sold another forty two point three percent of their shares.

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I couldn't get the label for this week to show up. Sorry about that. Anyway, one week after that, there was almost no change in shares and the week after that they dropped another almost 70 percent of all of their shares, where Illumina fell from their fifty ninth biggest position all the way down to their one hundred and thirteenth biggest position out of roughly one hundred and forty five. And then the following week they dropped it completely. This null shows up here because there's no data to track when ARK doesn't hold that stock at all and they're no longer holding that stock as of Friday, November 27th.

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So, the first time I noticed something off with Illumina was when ARK Invest dropped twenty six percent of their shares by September 18th. The amount of time between Cathie Wood's video and when ARK Invest sold their first big chunk of Illumina shares was six weeks. And then the amount of time between that sale and the next big sale in Illumina was another six weeks. So if you're not watching ARK's data over a long period of time, you might miss these big trends during the sideways action as they continue to drop and pick up shares as part of their active portfolio management.

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Here's a table showing you their biggest sells of Illumina since Cathie Wood's video, removing all of the noise associated with active fund management. They sold Illumina out of ARKK during three separate weeks, over three months, and they sold it out of ARKG over five separate weeks, over almost four months. In my opinion, the more funds a given stock is in, the more important it becomes to track our overall position in that stock, because you never know which fund the first big sell signal is going to occur in.

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And that's why I'm always presenting a combined view of all of their actively managed funds. So here are some lessons that I'm taking away from this case study. ARK sells and buys for many reasons. Sometimes it's a change in conviction and sometimes it's active portfolio management. ARK divests over long periods of time, sometimes even with buys in between. A buy signal is not always indicative of a change in conviction. And likewise, neither is a sell signal. What's the number three is

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they don't sell out of all funds. For example, ARKK and ARKG at the same rate. As we saw, they sold Illumina out of ARKK well before they sold it out of ARKG. And finally, ARK will drop you if you don't follow the law. That is, of course, Wright's law. So does this mean that Illumina is a bad company now? Not at all. In fact, many of the things that Cathie Wood said about it back in 2016 are even more true today.

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And in their most recent earning call, they reported that they're working on making that next leap in cost declines. Does this mean that ARK Invest will never buy stock in Illumina again? I don't think so. I think that if Illumina shows that it's investing in lowering the costs of its products and services, ARK Invest will reinvest in Illumina so long that its cost declines are keeping in line with Wright's law. So should you sell all of your Illumina stock?

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Well, that depends on why you invested in Illumina in the first place. This is why I don't recommend blindly following ARK Invest and why my channel focuses so much on adding context to their investment decisions. Now would be a good time to research and confirm your own investment thesis on Illumina adding in this new information. And finally, how does this affect my trading strategy? And in truth, it really doesn't. I don't invest in Illumina directly. I am very long on ARKG, ARK Invest's genomic revolution fund and I personally trust ARK Invest to make the right investment decisions around the genomic revolution.

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ARK Invest's decision to totally sell out of Illumina is entirely consistent with their overall investment philosophy, a philosophy I strongly believe in. So I'm very excited to see the direction that Cathie Wood and ARK Invest take ARKG in the future. And I'll definitely be tracking if they reinvest in Illumina over time. If you've made it this far in the video, you're awesome. This is Ticker Symbol: You. My name is Alex, reminding you that the best investment you can make is in you.