Today, we delve into how the ARK Innovation ETF retells an old cautionary tale of what happens when investors chase performance. Plus, a look at why U.S. employment numbers might finally live up to the hype.
FILE PHOTO: Cathie Wood, CEO of Ark Invest, speaks during an interview on CNBC on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., February 27, 2023.Brendan McDermid/Reuters
Some investors can’t help themselves
It happened again. No matter how many times investors are warned against chasing hot performance we still get situations like the ARK Innovation ETF (ARKK-A), which managed to make US$7.5-billion in investor assets disappear.
The year 2020 made the fund’s manager, Cathie Wood, a rock star thanks to the fund’s 153 per cent calendar year return and Yoda-like pronouncements about the future of technology. The stock selection method skirted conventional valuation metrics and diversification in favour of what in hindsight were comically optimistic profit growth forecasts.
Fund assets soared ninefold to US$18-billion in 2020 alone, reaching just under $28-billion by late February 2021.
Performance in 2021 must have shaken confidence as the ETF fell 23.4 per cent. Investors that stayed with the fund then lost 67 per cent in 2022. The combination of breaking the investment rules to chase performance, followed by obeying the rule to not panic and sell, would have caused the worst portfolio damage for an investor.
Ritholtz Wealth Management’s Ben Carlson (in a good column that inspired this one) cited Morningstar analysis estimating that between fees and negative performance, the ETF erased about US$7.5 billion in assets between inception in late 2014 and the end of January 2024. This is despite positive returns for the period.
The ETF returned 67.6 per cent in 2023 but that likely came as little solace to investors that white-knuckled their way through the big losses in the previous two years. $100 invested at the beginning of 2021 would have dropped to US$25.30 by the end of 2022, so a 60-plus per cent jump to $42.30 in 2023 still left an investor deep in the hole.
To the extent that investors chasing the 2020 performance were young or inexperienced and haven’t internalized the ways to guard against behavioural biases in investing I suppose is forgivable. It implies that every generation has to learn the rules of investing the hard way, through financial pain.
The experienced investors that got caught up in the ARK fervour provide more evidence of the power of human psychology, with greed in this case, wrecking a portfolio.
OLIVIER DOULIERY/AFP/Getty Images
Economy
Payrolls might actually move the market this time. Maybe a lot
Much of the hype around monthly U.S. non-farm payrolls is tongue in cheek with industry professionals because most are aware the numbers are subject to large-scale revisions and are not necessarily a leading economic indicator. This Friday, however, the drama might be real.
Signs of weakening growth, particularly a steady decline in economic surprise indexes, took much of the blame for the market hiccup in early August. The data has since stabilized but the Citi economic surprise index only improved to mid-June levels.
Morgan Stanley chief investment officer Michael Wilson reports that his firm’s economists predict a payroll number above the consensus guess of 165,000. If that’s the case, the rally off the August 5th lows can continue.
The problem is that U.S. stocks are expensive. Mr. Wilson lists the forward price-to-earnings ratio at 21 times – the top decile of its historical range - but Bloomberg puts it higher than that at 24 times. A big miss on Friday could kick off another downward slide in stock prices as investors lock in profits.
BMO chief economist Doug Porter believes weakness in U.S. employment data is inevitable, writing, “Our view is that the jobless rate is almost certainly headed higher from its current 4.3 per cent perch, if not next week, then in the months ahead.” That may also be the case for market volatility.
Diversions
Feeling lonely?
George Mason University professor Tyler Cowen’s website recently relayed the publication of a European Union survey concluding that Ireland is the loneliest country in Europe. The survey found that 20 per cent of the Irish reported feeling lonely most or all of the time. Luxemburg, Croatia and Austria come next.
The survey results are interesting but I always wonder whether cultural conventions of speech and greetings affect the results.
The essentials
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Globe Investor highlights
There was a time when Canada’s public markets did a marvellous job of turning startups into billion-dollar companies. No longer. Tim Shufelt and Sean Silcoff have a deep-dive on what went wrong.
Rob Carrick looks at what’s currently in investor portfolios in Canada - and finds some surprises.
David Rosenberg has a unique investment idea that he says promises 30 per cent returns without a lot of risk. Also from the economist’s research firm is an argument for buying defence stocks and a detailed look at which sectors will do well and poorly depending on the U.S. election outcome.
What’s up next
August U.S. employment numbers on Friday are the big deal this week as noted above. The report on Canadian employment data for August – referred to as a random number generator by Mr. Porter earlier this year – also comes out Friday with 26,500 new jobs expected. The split between public and private new jobs will be important because public hiring has been dominating in recent months
The domestic unemployment rate for August will also be released Friday – 6.5 per cent is expected.
Also in the U.S., initial jobless claims is out Thursday as usual with 230,000 the consensus forecast.
See our full economic and earnings calendar here (You can bookmark the page - it gets updated weekly)