Chasing Star fund manager performance

In December 2020, I wrote a short history of tracking the best performing funds.

At the time, Cathie Wood’s ARK Innovation fund was on fire, absolutely destroying the market:

Wood quickly became one of the most famous fund managers alive. She was on the first day every day. Her stock picks and forward-looking statements have been reported by every financial media publication in the country.

Investors took notice. Billions of dollars came in. The fund went from just under $2 billion at the start of 2020 to $18 billion by the end of the year. Some of these were price appreciation. Most were investors chasing the hot spot.

Here is what I wrote at the time:

ARKK can’t top at this rate forever. It will probably be a misstep or the style will simply fall out of favor for a period of time. Many of the investors chasing the hot spot will head for the exits at that point.

Investors don’t have a great track record when it comes to tracking the hottest fund of the day.

I hate to be that person, but I’ve seen this movie before and it ends with a behavior gap.

I assumed that ARKK must be underperforming because no one has the ability to keep up with this kind of race with money flowing in like a tsunami. I’m not sure I assumed the poor performance would be as big as it was.

These are the results since I wrote that article in late 2020:

The fund was decimated.

What makes it all the more surprising is that this happened in the middle of an AI boom (which some are already calling a bubble). An innovation fund has missed out on perhaps the biggest innovation of this decade and beyond.

As always, it’s hard to beat the market.

Assets peaked in early 2021 at nearly $30 billion:

The timing of the investors here was probably great.

You had a spectacular performance that brought in a wave of money. This was followed by a terrible performance, which was inevitably followed by money rushing to the exits.

This will likely go down as one of the biggest losses of investor dollars in history.

Morningstar’s Jeffrey Ptak reports that the fnud lost investors $7.50 billion right from the start:

Now, that doesn’t mean the fund itself has been underwater since inception. While ARKK has outperformed the S&P 500 and Nasdaq 100, the fund’s early returns are positive:

Except the investors all jumped on the boat just before a giant storm hit.

This was a textbook case of a star fund manager who was on a heater that had to end at some point. Investors could not have timed it worse.

Tracking star fund manager performance is nothing new.

It’s happened before.

It will happen again.

It’s human nature.

Michael and I talked about the history of star portfolio managers and more in this week’s Animal Spirits video:



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Further reading:
A brief history of tracking the best performing funds

Now here’s what I’ve been reading lately:

Books: