Hey Matt, have you done your homework on ARKK? A 40% stake would be significant and ARKK is relatively risky. If you are able to stomach the volatility and be discplined in your investment game plan, I guess you will be alright!
ARK has it's merit against index investing, such as delivering a staggering 152.2% return to it's investors while market index VOO and QQQ clinched 18.35% and 48.60% returns in 2020.
While ARK has acheived stellar performance, I would like to share why I would be cautious in having a huge stake in ARK.
1. Thematic Investing Risk
ARK utilises thematic investing to capture disruptive innovation.
Thematic investing is an approach which focuses on predicted long-term trends.
However, thematic investing is extremely difficult.
The challenge with thematic funds is knowing whether you have found a long-term trend or a very short-lived fad.
Themes can be impacted by a range of factors. Such as changes in government policy, interest rates, geo-political climate and advances in technology.
Even if one were to spot a lasting theme, it would not bring about significant out-performance if he/she were late to catch on to it.
The future prospects of the company may be priced in and reflected in the stock price.
Even Warren Buffet has instructed the trustee in charge of his estate to invest 90 percent of his money into the S&P 500 for his wife after he dies, Buffett told CNBC’s Becky Quick in an exclusive interview on “Squawk Box.”
2. ARK’s liquidity issue
In Feb 2021, ARKK saw a record outflow of almost half a billion (456M) when bond yields surged anew.
Data showed investors pulled a record amount of cash from the firm during the tech selloff.
An article by Reuters highlights the severity of the issue “According to some who watch the fund closely, a far bigger problem could be it's 15% plus stakes in a handful of companies whose shares are relatively illiquid and potentially hard to exit when redemptions surge.”
ARKK’s performance and popularity has caused many investors to mirror their holdings, commonly known as copy trading.
When a downturn occurs, ARK will be competing with retail investors for liquidity.
Not only that, the presence of short sellers and hedge funds will be looking to exacerbate ARKK’s downturn.
This is supported by another article by Reuters where it writes “The pressure on the fund this week has lured in short-sellers, with 100% of Ark Innovation shares available for shorting out on loans.”
ARKK’s ETF trades are online and highly tracked. Hence when market goes south, competitors will be looking for ways to profit by front-running them.
As a result, ARKK may either have to sell at much lower prices or be forced to sell its more liquid holdings.
Both results in a lose-lose situation and hence investors should be wary and know that while it has deliver stellar results, it comes with risks.
3. Past performances does not indicate future
ARKK’s out-performance wasn’t a phenomenon.
In fact throughout the years, there were funds that achieved remarkable growth rate. Yet, came crashing down. We have witnessed the the fall of Gerald Tsai in the 60s, Peter Lynch in the 80s, Tech Funds in the 90s, CGM Focus Fund in the 2000s and the list continues.
4. Case Study : Wood Ford Fund
Neil Woodford, he was UK’s best-known stock picker. He achieved “star” status following 25 years of market beating returns with Invesco Perpetual. In 2014 he launched his own Wood Ford Investment Fund and it was a resounding success.
Free of restrictions and the control of past bosses at Invesco, he made many risky investments.
He sometimes chose to put money into businesses with shares not listed on a public stock exchange and his style was based on conviction.
One of those conviction was a smooth outcome from Brexit, but politics has not played out that way.
This risk is highlighted above where I explained how thematic investing is extremely difficult.
Uncertainty over Brexit caused the fund to tumble. Negative sentiments were overwhelming and it caused panic selling.
However, the fund purchased a myriad of small-cap, illiquid stocks which led to inability to exit trades.
Investors were told they were not able to redeem their investments and the fund was suspended for 28 days.
The closure sparked Europe’s biggest fund management scandal for a decade.
For months, investors were stuck in the fund while they aguishly look at the value of their investment dwindle.
Closing Thoughts
Nobdody can predict the future no matter how experienced an investor or fund manager is.
Thus, it will be wise for investors move away from Hollywood-style culture of star worship when choosing to invest in fund managers.
Hey Matt, have you done your homework on ARKK? A 40% stake would be significant and ARKK is relatively risky. If you are able to stomach the volatility and be discplined in your investment game plan, I guess you will be alright!
ARK has it's merit against index investing, such as delivering a staggering 152.2% return to it's investors while market index VOO and QQQ clinched 18.35% and 48.60% returns in 2020.
While ARK has acheived stellar performance, I would like to share why I would be cautious in having a huge stake in ARK.
1. Thematic Investing Risk
ARK utilises thematic investing to capture disruptive innovation.
Thematic investing is an approach which focuses on predicted long-term trends.
However, thematic investing is extremely difficult.
The challenge with thematic funds is knowing whether you have found a long-term trend or a very short-lived fad.
Themes can be impacted by a range of factors. Such as changes in government policy, interest rates, geo-political climate and advances in technology.
Even if one were to spot a lasting theme, it would not bring about significant out-performance if he/she were late to catch on to it.
The future prospects of the company may be priced in and reflected in the stock price.
Even Warren Buffet has instructed the trustee in charge of his estate to invest 90 percent of his money into the S&P 500 for his wife after he dies, Buffett told CNBC’s Becky Quick in an exclusive interview on “Squawk Box.”
2. ARK’s liquidity issue
In Feb 2021, ARKK saw a record outflow of almost half a billion (456M) when bond yields surged anew.
Data showed investors pulled a record amount of cash from the firm during the tech selloff.
An article by Reuters highlights the severity of the issue “According to some who watch the fund closely, a far bigger problem could be it's 15% plus stakes in a handful of companies whose shares are relatively illiquid and potentially hard to exit when redemptions surge.”
ARKK’s performance and popularity has caused many investors to mirror their holdings, commonly known as copy trading.
When a downturn occurs, ARK will be competing with retail investors for liquidity.
Not only that, the presence of short sellers and hedge funds will be looking to exacerbate ARKK’s downturn.
This is supported by another article by Reuters where it writes “The pressure on the fund this week has lured in short-sellers, with 100% of Ark Innovation shares available for shorting out on loans.”
ARKK’s ETF trades are online and highly tracked. Hence when market goes south, competitors will be looking for ways to profit by front-running them.
As a result, ARKK may either have to sell at much lower prices or be forced to sell its more liquid holdings.
Both results in a lose-lose situation and hence investors should be wary and know that while it has deliver stellar results, it comes with risks.
3. Past performances does not indicate future
ARKK’s out-performance wasn’t a phenomenon.
In fact throughout the years, there were funds that achieved remarkable growth rate. Yet, came crashing down. We have witnessed the the fall of Gerald Tsai in the 60s, Peter Lynch in the 80s, Tech Funds in the 90s, CGM Focus Fund in the 2000s and the list continues.
4. Case Study : Wood Ford Fund
Neil Woodford, he was UK’s best-known stock picker. He achieved “star” status following 25 years of market beating returns with Invesco Perpetual. In 2014 he launched his own Wood Ford Investment Fund and it was a resounding success.
Free of restrictions and the control of past bosses at Invesco, he made many risky investments.
He sometimes chose to put money into businesses with shares not listed on a public stock exchange and his style was based on conviction.
One of those conviction was a smooth outcome from Brexit, but politics has not played out that way.
This risk is highlighted above where I explained how thematic investing is extremely difficult.
Uncertainty over Brexit caused the fund to tumble. Negative sentiments were overwhelming and it caused panic selling.
However, the fund purchased a myriad of small-cap, illiquid stocks which led to inability to exit trades.
Investors were told they were not able to redeem their investments and the fund was suspended for 28 days.
The closure sparked Europe’s biggest fund management scandal for a decade.
For months, investors were stuck in the fund while they aguishly look at the value of their investment dwindle.
Closing Thoughts
Nobdody can predict the future no matter how experienced an investor or fund manager is.
Thus, it will be wise for investors move away from Hollywood-style culture of star worship when choosing to invest in fund managers.