Ark Invest’s Crypto-Powered ESG Fund Emerges as Top Performer of 2023

Ark Investment Management’s best-performing ESG fund of 2023 had made a bold bet on cryptocurrencies.

The $2.4 billion Nikko AM Ark Positive Change Innovation Fund (ticker NIPCIPJ LX) achieved an outstanding return of 68% last year, surpassing the gains of the S&P 500 index.

What makes the fund stand out is its substantial bet on cryptocurrencies, with its largest holding being Coinbase Global Inc., which constitutes nearly 10% of the fund’s portfolio.

The success of the Nikko-Ark fund is remarkable considering the challenges faced by many ESG funds focused on traditional clean-tech assets such as wind and solar, which experienced setbacks due to disruptions caused by higher interest rates.

Notably, ESG funds that ventured into other areas of technology enjoyed greater success.

Coinciding with a 21% decline in the S&P Global Clean Energy Index, the market value of Coinbase skyrocketed almost fivefold last year.

The surge in the largest US cryptocurrency exchange contributed significantly to the fund’s impressive performance.

Buy the Rumor, Sell the Fact

The positive momentum for cryptocurrencies continued into 2024 as the US Securities and Exchange Commission finally approved several Bitcoin exchange-traded funds, sparking enthusiasm among crypto enthusiasts.

However, subsequent market fluctuations have led some analysts to attribute the decline in Bitcoin’s value to the classic “buy the rumor, sell the fact” phenomenon.

Thomas Hartmann-Boyce, a portfolio manager at Ark, believes that the SEC approval provides ample room for Coinbase shares to continue their upward trajectory.

As the leading custodian for underlying Bitcoin (BTC) assets, Coinbase holds a prominent position in the digital assets category, making it the fund’s highest conviction investment.

The Nikko Ark fund primarily focuses on disruptive technologies that align with the United Nations sustainable development goals.

While acknowledging the energy-intensive nature of Bitcoin mining, Hartmann-Boyce emphasizes the fund’s sustainability rationale, which centers around transaction transparency and providing financial services to the underbanked.

ESG Funds that Focused on Tech Outperformed Peers

ESG funds that steered away from conventional green assets and instead fully embraced tech outperformed their counterparts last year.

Among the notable performers was the JPMorgan US Technology Fund (JPMUSTC LX), which delivered returns of almost 65% to its investors.

Similar to the Nikko Ark portfolio, this fund is registered as “promoting” ESG, falling under the European Union’s Sustainable Finance Disclosure Regulation’s Article 8 category.

Hartmann-Boyce reveals that Ark aims for a compound annual rate of return of at least 15% over the next five years for its high-conviction public equities, including Coinbase, CRISPR Therapeutics AG, Block Inc., and Pacific Biosciences of California Inc.

Investors in the Nikko Ark fund are no strangers to volatility, as the substantial gains of 2023 followed a decline of over 50% in 2022.

In the early part of this year, the fund has experienced a modest loss of approximately 5%.

Similarly, Coinbase’s value has decreased by 23% year-to-date, with 11 out of 28 analysts tracking the stock now recommending selling.

Despite the volatile macroeconomic outlook and a challenging start for tech stocks, Peter Graf, the chief investment officer for Nikko in the Americas, remains committed to the fund’s strategy and allocations.

Graf emphasized the long-term exposure to sustainability-related innovation that the fund aims to provide, highlighting the belief that new technologies will withstand business cycles.