Equity markets were down a bit last week. Omicron, the Fed, inflation, and good old fashion fear helped the S&P 500 move slightly south -1.2%. Speculative stocks, on the other hand, were under enormous pressure last week. Lost in many of the talking points about the stock market in 2021 has been the deflating of the highly speculative corner of the market whilst the broad market continues its advances. We have in the past used the ARK Innovation ETF ( Ticker Symbol: ARKK) as a proxy for this sector. The fund’s founder and manager, Cathie Wood, was anointed the new wunderkind in the investment management field last year after an explosion of value in ARKK. The fund was +153% in 2020 and the investing public noticed. We applaud Cathie for what she accomplished; she had a killer year in 2020. 2021, however, has not been kind to ARKK as it is down -24.9%, while the S&P 500 is up +22.4% on a total return basis as of market close on December 3rd. The issue we want to examine is not with ARKK or how they invest thematically but with how the public interacts with bubbles.
Investor psychology can be a curious thing. We all know that there is danger in chasing performance, following the crowd, and moving outside of your stated investment goals in search of the next big thing. If we are going to look at investing into something that has had a significant run-up recently, we have to ask ourselves if we are early or late to the party. That is often difficult to divine, and it is always easier to just follow the money into the hot market segment. Put simply, investment vehicles that go up significantly garner attention and asset flows. Consequently, most investors are happy to get into the new investing fad, but they end up having very different return profiles than the investment vehicle they have chosen.
This dichotomy between a fund’s return and investor return is on full display in the chart above. At the beginning of 2020, ARKK had a total value of roughly $1.8 billion with roughly $1.5 billion of that coming from flows into the fund. It was a big fund for having such a narrow investment focus. The early adopters reaped the rewards of the great returns that were to follow in 2020. The fund did not really start attracting investors until mid-summer when it became apparent that there was a thematic shift to speculative tech stocks happening in the marketplace. Of course, this was after a period of significant outperformance byARKK to the broader market. The fund itself returned +153% in 2020, a spectacular success by any measure. But what about the investors in the fund? The chart above illustrates that the investor flows into the fund did not begin in earnest until well after the performance gains started to happen.
Drilling in a bit more we see that half of all the money that has flowed into the fund, roughly $9.5 billion, came in after 12/16/2020. As seen in the chart below these late investors have seen nothing but falling asset prices and have had a very different return profile than the early investors. The fund is down -27% since half of its total inflows occurred. This is not to say that the strategy is broken, but when things go up that far that fast they are bound to take a breather at some point. The fund has seen nearly $4 billion in net outflows as clients are moving on to seek the next hot prospect.
What can we learn from this? Risk size your speculative bets if you are not an early investor. Since it can be difficult to know exactly when a bubble will pop, it is best to not invest a sizable amount into speculative assets. Always be sure that you can handle the risk that you are taking on. Always be sure that you have an exit plan if things do turn south on you.
Model Update
On Thursday, December 2nd, the Fortunatus Focused Income model rebalanced its underlying holdings in order to better achieve its investment objectives.
There were no other trades in the Fortunatus models during the week ending on December 4th, 2021. The major equity market sectors remain in a long-term favorable trend, and the Fortunatus Asset Allocationmodels are near their maximum allowable equity exposure with domestic stocks favored over international shares.
Past performance is no guarantee of future results. Trend signals are proprietary research of Fortunatus Investments, LLC, a Registered Investment Advisor with the Securities and Exchange Commission (SEC). Reference to registration does not imply any particular level of qualification or skill. Prior to June 2014, Fortunatus Investments was a wholly-owned subsidiary of Executive Wealth Management, LLC and they continue to share common ownership and control. The data source for returns is FactSet Research Systems Inc. This chart is not intended to provide investment advice and should not be considered as a recommendation. One cannot invest directly in an index. Executive Wealth Management does not guarantee the accuracy of this data.
Quote of the Week
The huckleberry is becoming a quagmire.
From a recent article “Let’s Buy the US Constitution” from technology commentator Packy
Comment from Malcolm Dell, head of the International Wild Huckleberry Association, in a recent BloombergBusiness week article entitled “The Great Huckleberry Supply Crunch.” COVID complications, erratic weather, and growing demand have created havoc for huckleberry harvesters, leading to shortages and skyrocketing prices for the fruit that is both tart and sweet.
Executive Wealth Management (EWM) is a Registered Investment Advisor with the Securities and Exchange Commission. Reference to registration does not imply any particular level of qualification or skill. Investment Advisor Representatives of Executive Wealth Management, LLC offer Investment Advice and Financial Planning Services to customers located within the United States. Brokerage products and services offered through Private Client Services Member FINRA/SIPC. Private Client Services and Executive Wealth Management are unaffiliated entities. EWM does not offer tax or legal advice. Please do not transmit orders or instructions regarding your accounts by email. For your protection, EWM does not accept nor act on such instructions. Please speak directly with your representative if you need to give instructions related to your account. If there have been any changes to your personal or financial situation, please contact your Private Wealth Advisor.
Returns are calculated as indicated below with reinvested dividends not considered except for the Barclays U.S. Aggregate Bond Index. Data source for returns is FactSet Research Systems Inc. The London Gold PM Fix Price is used to calculate returns for gold.
1 Week = closing price on November 26, 2021 to closing price on December 3, 2021
1 Month = closing price on November 3, 2021 to closing price on December 3, 2021
3 Month = closing price on September 3, 2021 to closing price on December 3, 2021
YTD = closing price on December 31, 2020 to closing price on December 3, 2021
All information and opinions expressed in this document were obtained from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to its accuracy or completeness. All information and opinions as well as any prices indicated are current only as of the date of this report, and are subject to change without notice. Material provided is for information purposes only and should not be used or construed as an offer to sell, or solicitation of an offer to buy nor recommend any security. Any commentaries, articles of other opinions herein are intended to be general in nature and for current interest. Some of the material may be supplied by companies not affiliated with EWM and is not guaranteed for accuracy, timeliness, completeness or usefulness and EWM is not liable or responsible for any content advertising products or services.
Copyright © 2021 Executive Wealth Management. All rights reserved.