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From Hero to Zero

14th January 2022

This week we came across a staggering statistic that we thought worthy of sharing more widely.

A Financial Times article noted that since the launch of the ARK Innovation ETF (ARKK), the fund has reported delivering excellent returns for investors of 328%. This included a truly sensational return of 157% in 2020 as the high growth but often unprofitable ‘concept’ stocks that manager Cathie Woods favours rode the narrative that the pandemic had accelerated big changes across society. Unsurprisingly, such strong performance encouraged investors to pile billions of dollars into ARKK at the start of 2021. Between January 1st and February 16th 2021, investors ploughed over $5bn into ARKK. Since the 16th February 2021, ARKK is down over 45%. The fund has enjoyed net inflows of $15.5bn since launch. However, as of Thursday’s (6th Jan) close, its net assets were just $14.4bn. This means that despite the reported returns of 328% since launch, the average investor has lost money since investing in the fund, and overall the fund has actually destroyed over $1bn worth of investor’s capital. Wow.

This is an extreme example that highlights how substantial the difference can be between time-weighted and money-weighted returns. Time-weighted returns don’t take into account the effect of contributions or withdrawals from a fund over time, and is the most common method used in the investment industry for displaying a funds returns. Money-weighted returns take into account the effect of cash flows.

In the investment industry, it is common for money-weighted returns to be below time-weighted returns. Funds that are successful early on in their lives build a strong track record when they are smaller and more nimble. Investors become attracted to those historic returns (indeed many investors today will only invest in funds with strong 3 or 5 year performance track records) and invest larger and larger sums, hopeful that the historic performance will continue. As a fund gets bigger and bigger, it becomes more difficult for the fund manager to move the portfolio around, build big positions as a percentage of the fund quickly, and move on from underperforming positions due to liquidity issues. As a result, relative performance suffers and later investors do not receive a good investment experience.

This herding behaviour, where investors chase funds that have performed well in the past without giving enough due care and consideration for why the fund has performed well and whether that performance is sustainable and repeatable (i.e. strong price performance matched by strong underlying business performance), is one of the biggest risks that investors can fall foul of, and is generally a very good way of losing a lot of capital quickly! We avoid these perils by rigorously analysing past performance drivers and getting under the bonnet of portfolio construction.

This is what happened with the ARKK Innovation ETF on a massive scale. As highlighted above, ARKK had a phenomenal 2020, and investors subsequently piled in billions of dollars hoping that these returns would continue. Unfortunately, they were deploying capital after an unbelievable and unsustainable performance run that was driven by the stocks owned getting more and more expensive, not from the underlying business’ fundamental performance improving dramatically.

We are incredibly conscious of the difference between time-weighted and money-weighted returns and work incredibly hard every day to ensure that our Funds are best positioned to continue to deliver attractive returns for all of our investors, whether they have been with us for 12 years or invested for the first time today. This focus is demonstrated in the consistency of Vanbrugh’s performance track record where the Fund has outperformed its benchmark over all rolling 5 year periods to quarter end since launch back in 2009.

Dan Cartridge – Assistant Fund Manager

This financial promotion is issued by Hawksmoor Fund Managers which is a trading name of Hawksmoor Investment Management (“Hawksmoor”). Hawksmoor is authorised and regulated by the Financial Conduct Authority. Hawksmoor’s registered office is 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS. Company Number: 6307442. This document does not constitute an offer or invitation to any person, nor should its content be interpreted as investment or tax advice for which you should consult your financial adviser and/or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. Any opinion expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represents the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. FPC36

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