Conor Mac's avatar
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Low Interest Rate Phenomenon: Sinking Ships Make Money
Cathie Wood's flagship Ark fund has generated more than $310 million in fees in 9 years while wiping out $10 billion of investors' cash

Did you see what god just did to us, man?!

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The most recent bubble’s poster child, Cathie Wood, has been in the newsagain. Long gone are the days that she was celebrated for being the next Buffett. Today, the woman who once expressed that her investments were “fulfilling the will of god" is more often satirised for having lost her investors so much money. $ARKK

“Did you see what god just did to us, man?!”

Fear & Loathing in Las Vegas, but probably ARKK investors too

Standing as one of many low-interest rate phenomenons, there was once a time when investors praised the fund’s forward-thinking investments in disruptive technology. Investors paid little attention to the fund’s 0.75% fee being twice the average for actively managed ETFs. Why would they? The Fed was printing money, the share price of ARKK continued to climb, and capital was sloshing around like petrol in the tank of an offroad dirtbike. But then the final bell at the bar began to ring and as is typical of market cycles, investors remained illusioned; thinking the music was still playing in the background. Denial would follow, and then later illusioned would turn into disillusionment. Tech stocks got well and truly romped. From the point of ARKK’s high in February 2021, the Nasdaq 100 has fallen ~17%, which is a bad stretch of performance by anyone’s standards. Not our Cathie though, she is built different. Her flagship fund has fallen ~75% over the same period and today still holds many of the fallen angels that marked the end of the 2020 bubble.

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A list of ARKK’s current holdings, data accurate as of March 9th 2023

They must be struggling now right? …… Right?

Some of ARKK’s largest inflows came right before the top. In the first two weeks of February 2021, ARKK recorded more than $3 billion of inflows; a period when the fund was up more than 700% since inception. Assets at this point in time were just shy of $28 billion and have since dwindled to $7.6 billion. Since its inception nine years ago the ARKK fund has collected ~$310 million in fees. I know what you must be thinking; “it must be hard to earn a comfortable living now that the music has stopped”. Surprisingly not. Ark has earned more than 70% of those fees since it peaked in February 2021; more than $220 million while the share price plummeted by 75%, not bad. Just this year Factset reports that it has brought in an average of $230,000 in fees per day.

The cherry on top?

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Since its inception, ARKK has wiped out more than $10 billion of its investors’ cash. But many investors have continued to support Cathie Wood and her band of analysts. Ben Johnson, Morningstar, believes they are simply trapped.

“There is a category of investor that is trapped. They’re anchored to the price at which they purchased it, and hoping it gets back there someway, somehow”.

Ben Johnson, head of client solutions at Morningstar

It’s true that ARKK inflows remain peculiarly robust. Over the last three years (since the outbreak of the pandemic) the fund has recorded net inflows of more than $15 billion. Over the trailing 12 months inflows are a little over $650 million.

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But as the share price of ARKK has recovered marginally in 2023, investors have been using this as an opportunity to disembark this sunken ship. Over the trailing 3 months, ARKK has recorded net outflows of $434 million, and over the last month outflows of $137 million. I would imagine that, if one were to have faith in Cathie’s Ark, then now would be the best time to accumulate shares, not sell them. But in the same vein, these are the same investors who catapulted their savings into the fund during peak optimism. Nothing new here; uninformed investors are accustomed to feeling most pessimistic when they ought to be marvelling at the opportunities before them.

It was John Templeton who once said that bull markets mature on optimism, die on euphoria, and are reborn from pessimism.

Thanks for reading,

Jazzi Young's avatar
This is a great piece Conor, with a lot of lessons for the retail investor.
Here's some of our takeaways from this whole debacle:
  1. Investor behaviour, by and large, doesn't change. People still flock to what becomes popular because of recent price momentum. This is recency bias at work.
  1. Many "trapped" investors facing large paper losses are probably rationalising their investment decision and even doubling down. Many resort to "cult-like" behaviour because they've been forced to become long-term investors in the fund. The ARKK hordes come for you if you post anything bad about the fund on social media. They've built up strong conviction, stubbornly held, which is the exact opposite of what you should do: strong conviction, weakly held. This is price-anchoring, loss-aversion and the endowment affect all working in unison.
  1. We suspect many haven't practiced "safe investing" and went full in on Cathie's fund, severely underestimating their risk exposure. They either didn't know, or threw out the rulebook when it comes to position sizing. This is an investing mistake as old as time. Investors underestimate their exposure to downside risk when we're in a full blown bull market. It's only when the bear comes out of hibernation do we really get to see our true risk exposure.
Despite saying all of this, people might be surprised to know that we are still holders of $ARKK and absolutely love this fund ! If you position size a holding in $ARKK judiciously in a diversified portfolio, it can be an excellent addition.
We were lucky enough to come across this fund well before it earned its "cult" status. We opened a position that was 2% of our total portfolio. It was a few years later when ARKK caught the attention of the profit seekers. ARRK is an actively managed fund, focused on the exponential technologies sector and makes big bets on the "potential" that the technology behind each holding will catch on and be successfully commercialised. Most of the businesses are yet to make a profit. It's clear that this is not the kind of fund that you should anchor the bulk of your portfolio on. It should be an optionality play.
We are currently down -6% on our ARKK holding on a cost basis, a position which is now less than 1.5% of our US portfolio (because our other holdings have done much better). Our paper losses are tiny in relation to the rest of the portfolio, ARKK was the last thing we worried about during this current bear market.
The ARKK narrative is yet to fully play out. We don't know how well businesses in the exponential technologies sector will perform in the future. It's important to realise the bulk of Cathie's gains in the past have come from holding Tesla ($TSLA). We don't know which holdings in the fund will drive future performance, but if it recaptures its previous glory, it's likely the holdings driving returns will be heavily skewed. One or two holdings will generate the bulk of the gains while the rest will be "meh". That's the nature of the fund.
We love this fund because it has a high active share relative to the S&P 500 index and most of the fund's holdings we wouldn't go anywhere near ourselves. It's a hedge against our own stock picking preferences. We find some of the statements Cathie makes to be downright cringe. So cringe that we don't even listen to her anymore. But what if Cathie ends up being right over the longer term? We have been impressed with her staunch and unwavering commitment to her process. That's exactly what we want from an active fund manager. We've got enough of an exposure to help our results if ARKK knocks it out of the park and becomes a multi-bagger, but not so much that it becomes a big drag on our portfolio if the fund ends up being a dead duck. It's clear that the fund won't be able to hit it out of the park until we're well into the next bull run. This fund is an excellent vehicle to thrive on convexity.
That's our opinion on how retail investors should best approach funds like ARKK. Judicious exposure to risk is always your ticket.
Conor Mac's avatar
@jazziyoung "It's a hedge against our own stock picking preferences" - nice way of framing it. As always, very thoughtful commentary from you too, thank you for sharing it!
Dissecting the Markets's avatar
They should've been selling put options or writing covered calls to save themselves



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