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It is surely not a surprise that mean reversion for fund managers' performance is more prevalent than we expect. Good performance will attract more capital and more capital increases the barrier to continuous good performance. It is a feature, not a bug.

ARK Innovation Has Likely Been a Disappointment for Most Investors

ARK Innovation ETF (ARKK) gained 152.5% in 2020 and ranked as the best fund in the mid-cap growth Morningstar Category.

The eye-popping return caused investors to flood into the exchange-traded fund. At one point, ARKK was collecting $1 billion a week.

But now, these investors may feel like they had the rug pulled out from under them. While the Morningstar US Market Index was up 22% this year through Oct. 31, 2021, ARK Innovation was down 2.6%, while the average mid-cap growth fund gained 17%. ARKK now ranks as the worst-performing fund in the category.


https://www.morningstar.com/articles/106...-investors
Not the biggest fan of Ark Invest (though some of our investments do overlap), but long-term perspective matters:
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(11-11-2021, 11:38 AM)Wildreamz Wrote: [ -> ]Not the biggest fan of Ark Invest (though some of our investments do overlap), but long-term perspective matters:
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6 -7 yrs is not that long especially when the bulk gain happened within a short time frame within this period
(11-11-2021, 12:37 PM)donmihaihai Wrote: [ -> ]6 -7 yrs is not that long especially when the bulk gain happened within a short time frame within this period

True. But when you have a couple 100% head start, it's usually quite difficult for her competition/benchmarks to catch up over the next 10 years.
SARK launches as short interest in ARKK jumps to new record
https://www.ft.com/content/47fe0b65-e5a2...2a2945511d
Quote:Tuttle Capital Management’s Short Innovation ETF rose by 5.5% on its first two days of trading, mirroring ARKK’s fall

The first exchange traded fund to take an inverse exposure to another ETF rose by 5.5 per cent on its first two days of trading, mirroring the day’s fall in Cathie Wood’s flagship $21bn Ark Innovation ETF (ARKK).
An observation:

I have friends in the financial sector (e.g. investment analysts) who don't like Cathie Wood, feeling that she is akin to a stock promoter. Personally, I think while she often publicly express her bullishness for her portfolio companies, she usually justifies her selections in an analytical way (whether or not you agree with her thesis). And her portfolio positions are disclosed everyday, and are usually in-line with her public statements. 

Chamath Palihapitiya on the other hand, feels more akin to a "stock promoter" (IMHO). He often publicly express his bullishness and disruptiveness of some of his portfolio companies on financial media such as CNBC. He sometimes also immediately do a 180 in a few months time and said he sold his position, back when he was actively promoting the company/SPAC (SPCE and Tesla comes to mind). There is a clear disparity between his words and actions.
(12-11-2021, 02:28 PM)Wildreamz Wrote: [ -> ]An observation:

I have friends in the financial sector (e.g. investment analysts) who don't like Cathie Wood, feeling that she is akin to a stock promoter. Personally, I think while she often publicly express her bullishness for her portfolio companies, she usually justifies her selections in an analytical way (whether or not you agree with her thesis). And her portfolio positions are disclosed everyday, and are usually in-line with her public statements. 

Chamath Palihapitiya on the other hand, feels more akin to a "stock promoter" (IMHO). He often publicly express his bullishness and disruptiveness of some of his portfolio companies on financial media such as CNBC. He sometimes also immediately do a 180 in a few months time and said he sold his position, back when he was actively promoting the company/SPAC (SPCE and Tesla comes to mind). There is a clear disparity between his words and actions.

Both are promoters/speculators. There was a financial model done up by ARKK's analyst for its portfolio company that was floating around the industry. Model was riddled with schoolboy errors that basically made the valuation utter nonsense.

Also, ARKK turnover ratio is 71% (based on what I can find online). So they invest in their portfolio company for 1.4 years on average. I find it hard to believe when someone tells me he's an investor, but flips his holdings at such high frequency. If you are selling your companies after 1.4 years on average, you are:

1) probably just doing momentum trading
2) speculating on short-term quarterly results
3) treating stocks as pieces of paper to trade around, as opposed to ownership stakes in actual businesses, and are just trying to dump the paper to the next fool that comes along

And while ARKK's performance has been great (notwithstanding the recent blip), very little money has actually been made for its clients, as suggested by the article. If you examine the fund inflows/outflows, you will see that most of the inflows came in at the high. While we can't blame CW for this (since she doesn't control the timing of the flows), it doesn't change the fact that ARKK as an investment vehicle has created little wealth for the average client.
(12-11-2021, 03:42 PM)Corgitator Wrote: [ -> ]..

There was a financial model done up by ARKK's analyst for its portfolio company that was floating around the industry. Model was riddled with schoolboy errors that basically made the valuation utter nonsense.

..

Thanks for the additional points of reference. Really appreciate it.

1. For the financial model, would probably need to look the source to comment about that.

2. Based on what I can find, their average turnover ratio over the last 6 years was 63.5% and got lower as the fund gets bigger (45% in most recent FY): https://etfs.ark-funds.com/hubfs/1_Downl...Report.pdf

Yes, they indeed trade much more frequently than I would like; hence, the reason I'm not a fan. Tesla's YTD returns is 45.73% yet ARKK is -5.89%. 

But that alone, is probably not enough to conclude that they are pure speculators. Part of the reason the turnover is so high, could also be at least partially attributed to the high volatility and failure rate (as with dynamic, high growth industries) of the names they buy.

Edit: Just found this: https://microcapclub.com/2020/10/portfol...-progress/
Quote:Peter Lynch had 300% turnover per year in the early years of the Magellan Fund. Joel Greenblatt had similar turnover at Gotham Capital. Even Warren Buffett’s public company portfolio ranged between 50-100% turnover per year during his first three decades. In fact, contrary to what most believe, many of the greatest long-only investors had their best performance when they had higher rates of turnover in their portfolios. And these were investors that invested in larger, more established businesses where low turnover is much more achievable.

A big part of what made these investors great was spotting when they were wrong quicker. Successful stock picking isn’t just picking winners. It also means picking out the losers in your portfolio. The greatest advantage in public markets is “You can sell”.  But you have to know when to sell.

3. Even if they are pure momentum traders, it also showed they have the skill to pull it off to consistently beat the market. Not an easy feat.

4. Time will tell whether ARKK's recent investors will make money in the long-term. As far as I can tell, most of them are not running for the exit, yet: https://ycharts.com/companies/ARKK/total...management
Thanks for the additional points of reference. Really appreciate it.

1. For the financial model, would probably need to look the source to comment about that.

I can't find the model from my computer, but this link touches on the matter: https://themarketplunger.com/2019/05/26/...dels-fail/

2. Based on what I can find, their average turnover ratio over the last 6 years was 63.5% and got lower as the fund gets bigger (45% in most recent FY): https://etfs.ark-funds.com/hubfs/1_Downl...Report.pdf

Yes, they indeed trade much more frequently than I would like; hence, the reason I'm not a fan. Tesla's YTD returns is 45.73% yet ARKK is -5.89%. 

But that alone, is probably not enough to conclude that they are pure speculators. Part of the reason the turnover is so high, could also be at least partially attributed to the high volatility and failure rate (as with dynamic, high growth industries) of the names they buy.

Edit: Just found this: https://microcapclub.com/2020/10/portfol...-progress/
Quote:Peter Lynch had 300% turnover per year in the early years of the Magellan Fund. Joel Greenblatt had similar turnover at Gotham Capital. Even Warren Buffett’s public company portfolio ranged between 50-100% turnover per year during his first three decades. In fact, contrary to what most believe, many of the greatest long-only investors had their best performance when they had higher rates of turnover in their portfolios. And these were investors that invested in larger, more established businesses where low turnover is much more achievable.

A big part of what made these investors great was spotting when they were wrong quicker. Successful stock picking isn’t just picking winners. It also means picking out the losers in your portfolio. The greatest advantage in public markets is “You can sell”.  But you have to know when to sell.

Greenblatt was doing special sits investing at Gotham Capital e.g. spin-offs, distressed, merger arbitrage. These event-driven strategies typically have shorter investment horizons by design. For example, if you do a risk arb, typical timeline for deal closure would be 3-9 months. So I'm not surprised by that turnover i.e. he definitely wasn't doing LT compounders at Gotham Cap.

Buffett was mainly doing pretty much cigar butt hunting, following the footsteps of his mentor, Graham. You buy 50-cent dollars, and you sell when the mispricing is arbitraged. The sooner that happens, the higher your CAGR. Similarly, he definitely wasn't doing LT compounders back then, until Munger came and influenced him.

Lynch is a more interesting case: https://www.forbes.com/sites/gurufocus/2...d8bbc3508a. I quote: Despite being famous for 10-baggers, in the early years Lynch was like a productive grocery store. He got very high returns by achieving relatively small margins on many different items (stocks) but turning over his capital multiple times per year. His turnover exceeded 300% per year during the early years of Magellan. He frantically would buy stocks that were dirt cheap, sell them as they appreciated and then rotate his funds into other stocks that were cheaper. You have to put this in context, though, as the early years of Magellan were very good years for value investing. Walter Schloss also had the best stretch of his career from 1977 to 1982, a period when the overall market averages didn’t do much, but bargains were everywhere. The U.S. economy entered a recession in the late 1970s, then again (the now often-applied phrase “double-dip recession”) in the early 1980s. The stock market hadn’t budged in 17 years (it was flat between 1965 and 1982). But for value investors like Lynch (yes, he was a value investor), it was heaven. So Lynch in the early years was buying bargains. In "Beating the Street," he remarked, “I doubt that I was ever more than 50% invested in the growth stocks to which Magellan’s success is so often attributed.” So it was a value investing heaven back then, when the market was dirt cheap, and it makes more sense (at least financially), to make bets on valuation re-rating as opposed to investing in LT compounders. I'm pretty sure no sane investor would consider US market dirt cheap right now.

All in all, I respect the 3 investors above because they did what they said they will do. Greenblatt did special sits, which led to high turnover. Buffett did net-net investing, which led to high turnover. Lynch was taking advantage of the dirt cheap markets to do valuation re-rating plays, which led to high turnover. None of them (at that point in time) said they were looking to buy LT compounders (or quality businesses that are able to reinvest at high rates of returns), and their turnover matched their style.

What I cannot stand about CW is her hypocrisy. She positions herself as a LT investor making bets on disruptive tech trends that take years/decades to play out. Yet, her turnover suggests otherwise. Intellectual honesty is very important if one wants to become a great investor.


3. Even if they are pure momentum traders, it also showed they have the skill to pull it off to consistently beat the market. Not an easy feat.

Same point as above. I have no issue (and would even have respected CW) if she had just said upfront that she's a mom trader, because it appears she's a pretty decent one. The reason why she gets disparaged by some investors (mostly old traditional value investors, maybe dinosaurs in her eyes) is because she says one thing, but does another. Hell, I would have respected her even if she said she's a world-class promoter. 

4. Time will tell whether ARKK's recent investors will make money in the long-term. As far as I can tell, most of them are not running for the exit, yet: https://ycharts.com/companies/ARKK/total...management

This I agree. Time (and performance) will tell whether she's any good. But I'll be more convinced if she manages to tide through a full cycle. Since ARKK was started in 2014, you would have observed that it's been a market driven by momentum/tech/large caps, which are basically her playbook. Every value investor looked like a genius in the early 2000s (and every growth investor in the late 1990s), and it will be interesting to see if she can continue with her great performance even after her style loses popularity (as all styles do, eventually).
Thanks for the opportunity to discuss Ark, it's an interesting exercise for the weekend. Need to emphasis that I'm not a fan of Ark, nor do I follow them closely, so much of this is new to me as well.

(12-11-2021, 06:58 PM)Corgitator Wrote: [ -> ]I can't find the model from my computer, but this link touches on the matter: https://themarketplunger.com/2019/05/26/...dels-fail/

Thanks for the link to the blog. I don't have time to go through point by point, so I checked the first point on Ark's Tesla model based on this link: https://github.com/ARKInvest/ARK-Invest-...18.21.xlsx

And the specific allegation that Ark have hard-coded 19 billion PPE as 19,000 is simply not true, they did coded it correctly (screenshot below):
[Image: D2THhxo.png]

Just FYI, @keubiko that raised that point, is a perma Tesla bear (TSLAQ), that used a blocklist to block me on Twitter as well. I have never interacted with his account before, very weird.

2. On Ark not doing what they say they are going to do (Long-Term compounding):
This is a link to the Prospectus of their flagship fund: https://etfs.ark-funds.com/hubfs/1_Downl...pectus.pdf

They did not mention anything about Long-Term (LT) compounding actually:
Quote:Principal Investment Strategies
The Fund is an actively-managed exchange-traded fund (“ETF”) that will invest under normal circumstances primarily (at least 65% of its assets) in domestic and foreign equity securities of companies that are relevant to the Fund’s investment theme of disruptive innovation. The Adviser defines “disruptive innovation” as the introduction of a technologically enabled new product or service that potentially changes the way the world works. The Adviser believes that companies relevant to this theme are those that rely on or benefit from the development of new products or services, technological improvements and advancements in scientific research relating to the areas of genomics* (“Genomic Revolution Companies”); innovation in automation and manufacturing (“Automation Transformation Companies”), transportation, energy (“Energy Transformation Companies”), artificial intelligence (“Artificial Intelligence Companies”) and materials; the increased use of shared technology, infrastructure and services (“Next Generation Internet Companies”); and technologies that make financial services more efficient (“FinTech Innovation Companies”).

In selecting companies that the Adviser believes are relevant to a particular investment theme, the Adviser seeks to identify, using its own internal research and analysis, companies capitalizing on disruptive innovation or that are enabling the further development of a theme in the markets in which they operate. The Adviser’s internal research and analysis leverages insights from diverse sources, including external research, to develop and refine its investment themes and identify and take advantage of trends that have ramifications for individual companies or entire industries. The types of companies that the Adviser believes are Genomic Revolution Companies, Automation Transformation Companies, Energy Transformation Companies, Artificial Intelligence Companies,
Next Generation Internet Companies or FinTech Innovation Companies are described below:

(skip)

The Adviser will select investments for the Fund that represent its highest-conviction investment ideas within the theme of disruptive innovation, as described above, in constructing the Fund’s portfolio. The Adviser’s process for identifying Genomic Revolution Companies, Automation Transformation Companies, Energy Transformation Companies, Artificial Intelligence Companies, Next Generation Internet Companies and FinTech Innovation Companies uses both “top down” (thematic research sizing the potential total available market, and surfacing the prime beneficiaries) and “bottom up” (valuation, fundamental and quantitative measures) approaches. In both the Adviser’s “top down” and “bottom up” approaches, the Adviser evaluates environmental, social, and governance (“ESG”) considerations. In its “top down” approach, the Adviser uses the framework of the United Nations Sustainable Development Goals to integrate ESG considerations into its research and investment process. The Adviser, however, does not use ESG considerations to limit, restrict or otherwise exclude companies or sectors from the Fund’s investment universe. In its “bottom up” approach, the Adviser makes its investment decisions primarily based on its analysis of the potential of individual companies, while integrating ESG considerations into that process. The Adviser’s highest-conviction investment ideas are those that it believes present the best risk-reward opportunities.

Under normal circumstances, substantially all of the Fund’s assets will be invested in equity securities, including common stocks, partnership interests, business trust shares and other equity investments or ownership interests in business enterprises. The Fund’s investments will include micro-, small-, medium- and large-capitalization companies. The Fund’s investments in foreign equity securities will be in both developed and emerging markets. The Fund may invest in foreign securities (including investments in American Depositary Receipts (“ADRs”) and Global Depositary Receipts (“GDRs”)) and securities listed on local foreign exchanges.

The Fund is classified as a “non-diversified” investment company under the Investment Company Act of 1940, as amended (the “1940 Act”), which means that it may invest a high percentage of its assets in a limited number of issuers.

..

Take it as you will. I think the bolded sentence summarizes their strategy well. I take it as they would trade in and out of their position every time a "higher conviction" opportunity arises (which happens often in the fast changing landscape of innovation and technology). 

I think that's also similar to my personal philosophy as well (only sell when you can replace the position you are selling with a better one).

Personally, I think you might be a bit hard on her.

3. Also, no good promoter will admit they are just a promoter right? So that point is also kind of unfair.

4. Let agree to use the next 5 years to decide if she is skillful or lucky. Have a great weekend.

Peace!
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