Dan Solin, one of my favorite financial authors/thinkers, often points out the true purpose of active investment management… the transfer of wealth from investors to fund managers.
Cathie Wood’s ARK Innovation ETF (ARKK) offers a great example of this transfer phenomenon. Per this article in the Financial Times, ARKK has gathered over $300 million in fees over its 9 year lifespan. But how have the the investors in ARKK fared?
Well, collectively, ARKK’s investors have lost over $9.5 billion! That equates to a dollar-weighted return of around -27%. That is, on average1, every dollar that was invested in ARKK is now worth only 73 cents.
Think about that for a minute. Even after ARKK’s managers evaporated $9.5 billion of investor wealth, they got paid $300 million for the effort. As the saying goes, “nice work if you can get it!”
Now for the worst part. Many investors in ARKK refuse to cut and run. They are sticking with the fund even after suffering huge losses and most likely a permanent impairment of their capital.
Buy why are they choosing to stay even after ARKK has plummeted 75% from the highs? I don’t really know.
Perhaps they are collectively suffering from Stockholm Syndrome.
Or perhaps they believe that ARKK’s portfolio of hyper-growth companies will rise again like a phoenix from the ashes. Anything can happen of course. However, with about $7.5 billion of assets under management, ARKK needs to return 127% just to get investors collectively back to even. If you invested in ARKK near its peak and are sitting on a loss of 75%, then you’ll need a 400% return to break even. Cathie Wood and her team certainly have their work cut out for them.
Even though active investment managers take most of the blame in these situations, the real “bad guy” is not really Cathie Wood or her team. The main fault lies with ARKK’s investors and their bad behavior. There is TONS of evidence going back 50+ years demonstrating that the odds of success in active investing are abysmal. ARKK’s investors failed to heed the warning of this research and “rolled the dice” on a winning investment manager. Unfortunately, things have not really worked out as they have hoped.
1 Some of ARKK’s early (or pre-2021) investors have no doubt done a good bit better, and any investors that came on board in 2021 or after have likely fared much, much worse.
