Cathie Wood Selling Fortnite and League of Legends Owners

9/9/2021

Markets

0 min read

China’s New Rules on Some Public Companies has Cathie Wood and Others Adjusting Portfolios

One of the recent themes that has been successful for investors in U.S. equities is to own what the government is supporting and rid your portfolio of what it does not. Cathie Wood is applying this policy to other countries as ARK Invest is openly using this strategy on ADRs she holds in her ARK funds. Specifically with Chinese video game companies that put capitalism in a positive light, among other attributes.

Background:

Video game stocks from China continue their downward trend as executives from several Chinese companies are required to meet with government officials about restricting video games. One restriction that took effect September 1st is that citizens under the age of 18 are only allowed to play from 8 p.m. to 9 p.m. Friday, Saturday, Sunday, and public holidays. The rules come with enforcement measures. The reason given for the limited exposure of children is that they liken video play to substance abuse. Another change being discussed impacts games that have a “solitary focus of pursuing profit.” Companies that have been summoned included Tencent that owns 40% of Epic Games (Fortnite) and Riot Games (League of Legends) where there is full ownership.

Further downward pressure on these ADRs may be coming from an imposed hiatus. In a news story this morning (sept. 9) the South China Morning Post reported that the country has temporarily suspended approval of all online games.

Investor Impact

Cathie Wood the founder and CIO of Ark Invest and a closely followed and intentionally transparent investor, has said her funds had significantly reduced exposure to China. She said they only hold companies that are “currying favor” with Beijing. Her concern is that Chinese authorities are focused on social engineering and that anything deemed too profitable by Beijing was at risk of being shut down.

The Ark CIO cited a single weekend in July when the government of China set rules for the online education industry that sets a course toward achieving “common prosperity,” which is seemingly at odds with individual or company profit. These education directives ban for-profit companies from teaching school subjects. The crackdown is much broader than just gaming and seems to take aim at the very reason one invests in a company.

Take -Away

Political priorities are important for investors to note and then use to decide if they should set investment strategy around. This includes policy as well as budget priorities. Changes in one of the world’s largest economies has one of the world’s most followed investors adjusting her position. This may be short-lived and soon represent a buying opportunity, or may spread to other industries or other countries and markets.

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