Chasing Returns & The Destruction of Wealth
Every few hours, an article pops up citing something about Cathie Wood and her ARK funds. Sample headlines include:
Cathie Wood Goes Bargain Hunting: 3 Stocks She Just Bought – The Motley Fool
ARK Invest's Cathie Wood Predicts $1M+ Bitcoin Price – Yahoo Finance
ARK Invest's Cathie Wood Sells Nvidia Stock. Should You? – The Street
Links to the above items were intentionally omitted because the content isn’t important. They are all terrible and you shouldn’t read them. I include them here only as evidence that they exist and continue to multiply, seemingly for no other reason than to trick investors desperate to believe someone has figured out a low-risk way to consistently outperform the market.
Unfortunately for these investors, Cathie Wood isn’t that person. For example, on Feb. 2nd, Morningstar published an article by Amy C. Arnott, CFA, “15 Funds That Have Destroyed the Most Wealth Over the Past Decade” which reads in part:
ARK [Cathie Wood’s firm], home of the flagship ARK Innovation ETF ARKK, tops the list for value destruction. After garnering huge asset flows in 2020 and 2021 (totaling an estimated $29.2 billion), its funds were decimated in the 2022 bear market, with losses ranging from 34.1% to 67.5% for the year. Many of its funds enjoyed a strong rebound in 2023, but that wasn’t enough to offset their previous losses. As a result, the ARK family wiped out an estimated $14.3 billion in shareholder value over the 10-year period—more than twice as much as the second-worst fund family on the list. ARK Innovation alone accounts for about $7.1 billion of value destruction over the trailing 10-year period.
Readers with long memories may recall a similar Morningstar article from the same author I wrote about in Jan. of 2022, titled, “ARKK: An Object Lesson in How Not To Invest” The gist of this earlier piece was that even when Cathie Wood’s funds were doing well, her average investor was not:
“Over the past five years, for example, the fund’s [ARK Innovation ETF] 41.3% annualized return places it among the top five best-performing U.S. equity funds and ETFs, and it trounced the S&P 500 (the benchmark listed in its prospectus) by more than 15 percentage points per year.After the adjusting for the timing of cash inflows and outflows, though, we estimate that investors earned less than a fourth of that return.ARKK’s estimated 9.9% investor return over the past five years lagged its benchmark by about 8 percentage points per year.”
I don’t bring this up to single out Cathie Wood or ARKK. My goal is simply to emphasize three important points.
The dominant determinant of real-life, long-term investment outcomes is not investment performance; it's investor behavior.
Although there is not, and will never be, a greater destroyer of invested wealth than mindless panic, performance chasing runs a close second.
Be careful what you read.
As always, if you have questions about this or anything else, please reach out to us.