History Suggests ARK Innovation Investors Should Be Careful, Ritholtz Portfolio Manager Says

History Suggests ARK Innovation Investors Should Be Careful, Ritholtz Portfolio Manager Says

The ARK Innovation ETF ARKK has been a top market performer in 2020, gaining 169.7% year-to-date.

Ark Investment and fund manager Cathie Wood have risen to superstardom on Wall Street this year, but Ritholtz Wealth Management portfolio manager Ben Carlson said Wednesday that history doesn’t bode well for Wood or her fund.

In a blog post, Carlson said there are plenty of examples of investors chasing the hottest funds and fund managers. Given the ARK Innovation ETF’s assets under management are up nearly 900% in 2020, Carlson said investors should understand how these types of scenarios have played out in the past.

Former Superstar Fund Managers: Fidelity’s Jerry Tsai was the biggest superstar fund manager of the 1960s, and the number of investors in his fund jumped from 6,000 to 36,000 from 1960 to 1961. In the bear market of 1968-1970, momentum stocks were crushed. Tsai’s fund experienced the worst eight-year performance of any fund in history up to that point, and AUM dropped 90%.

Peter Lynch famously generated a 30% average annual return from the late 1970s to his retirement in 1991.

Unfortunately, Carlson said much of Lynch’s most impressive gains occurred before the majority of his investors bought in.

In addition, many of Lynch’s investors entered the fund after periods of outperformance and exited during periods of underperformance. In fact, the average investor in his fund during that period reportedly earned around 7% annually, underperforming the S&P 500.

From 2000 to 2009, Ken Heebner’s CGM Focus Fund was the top-performing U.S. stock mutual fund in the market, generating 18% annual returns during a decade in which the S&P 500 averaged a 1% annual decline.

Unfortunately, many investors flooded into Heebner’s fund in 2007 after it was up 80% and jumped ship in 2008 after the fund dropped 48%. When the dust settled on the decade, the average investor in the best-performing fund on the market averaged an 11% annual loss.

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Kurt Benson 4 weeks ago Member's comment

Some of these investors had seven years of plenty before ETF dropped.