Past performance is not an indicator of future returns is a disclaimer well worth it as data shows very little persistency in fund performances. Yet, most investors tend to ignore this data and behave in exactly the opposite way – they pile into funds which have had a great run and exit after period of poor performance. Ben Carlson, the author of the best selling personal finance book – A Wealth of Common Sense, shows that is happening again highlighting the staggering inflow into Cathie Wood’s Ark Innovation ETF following her stupendous performance driven by concentrated bets in new age tech and biotech firms, notably Tesla among others.
Ben shows that Wood’s ETF has returned an unreal 615% returns in the last six years compared to the S&P500’s 111% but much of this outperformance has come since March 2020.
“The Nasdaq 100 has been next to impossible to beat these last few years because of the heavy concentration in big tech yet ARK’s performance makes it look quaint by comparison.
Wood has made even more concentrated bets in certain areas of tech and it’s paid off handsomely.
ARKK has been outperforming for a number of years now but you can see things have really ramped up since the bottom earlier this year in late-March.”
This performance is clearly attracting new investors taking inflows into ARK’s ETF to record levels. ARK’s fund size has gone from $2bn earlier this year to $18bn currently with inflows per day hitting $600-800m. Apparently, only Vanguard does more than that.
“While the fund is up 170% this year, the assets under management are up nearly 900%.
Investors have an awful track record when it comes to chasing the hottest funds of the day.
Let’s take a stroll down mutual fund lane to see how this has played out in the past.
In Big Mistakes, Michael Batnick profiles Fidelity’s Jerry Tsai, who was basically the first star fund manager in the Go-Go Years of the 1960s.
Investors went crazy for mutual funds in general as total fund assets grew from a little over $1 billion in 1946 to over $35 billion by 1967.
But Tsai stood out from the crowd. After a run of outperformance that began in 1958, Tsai saw the number of shareholders in his fund sextuple from 6k to 36k from 1960 to 1961.
After leaving Fidelity in the mid-1960s to start his own fund, Tsai got crushed in the bear market of 1968-1970 which saw momentum stocks get killed.
Assets fell 90% over the next few years and Tsai’s fund would go on to have the worst 8-year track record of any mutual fund in history to that point.
Peter Lynch ruled the 1980s and for good reason. From the late-1970s, when he took over the Fidelity Magellan Fund, through his retirement in 1991, Lynch returned close to 30% annually.
Unfortunately, the majority of investors in the fund received far less than Lynch’s 29% annual gains. It’s been said the average investor in his fund earned just 7% per year, far less than the returns of the fund itself or the overall market because they rushed in after performance was good and redeemed the fund whenever it underperformed….
I don’t know if Cathie Wood will experience a similar drop off in performance as these examples. Size is the enemy of outperformance but you never know with these things.
However, I am fairly confident those investors now piling into her fund will almost certainly underperform the actual fund’s performance.
ARKK cannot outperform at this pace forever. There is bound to be a misstep or the style will simply fall out of favor for a period of time. Many of the investors chasing the hot dot will head for the exits at that point.
Investors don’t have a great track record when it comes to chasing the hottest fund of the day.
I hate to be that person, but I’ve seen this movie before and it ends with a behavior gap.”
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