How could an equity manager that has been in the game for over 30 years and relatively unheard of suddenly make a splash with Ark? What was she doing before Ark? I have been able to dig into her past performance and the results of which are below.
- She has a long history of running funds that fit under “discovery growth” or “global thematic” styles.
- Cathie has a great track record outperforming the S&P 500, but much of this has been due to outperformance of growth style. Also, this assumes you catch the very early cycles of her outperformance.
- When compared to category style, almost all of Cathie’s major outperforming years come during special periods in the market cycle, particularly in the periods following a market crash. With one other period of great performance during the 2017 BTC bubble craze.
- Outside of those special events, Cathie’s funds generally underperform equivalent style peers on a year-by-year basis.
- She has a history of leaving a fund during or following a period of underperformance, then “rebooting” in another fund. This includes a short stint in a hedge fund that lost over 80% of it’s AUM.
Before getting into the deep dive, a quick note on benchmarks. Cathie’s investment style fits into one of two flavors: US growth and global growth. The S&P 500 is not an appropriate benchmark at all for a growth-oriented or global oriented fund. Instead, for the years available, I will benchmark her to the Russell 1000 Growth and MSCI World Large Cap Index, as these fit her investment universe and demonstrate whether an investor would have been better off with a passive index fund.
Additionally, I’m going to compare her performance to some matching T Rowe Price Funds. Why T Rowe Price? First, their security selection universe is similar to Cathie Woods: they tend to prefer growth-oriented companies (i.e. think Amazon rather than Phillip Morris). Secondary, they have been around for a while and their funds have history dating back earlier than the indices I will be using.
Finally, for another reference point I will benchmark against Yahoo Finance’s category averages for years where no index data is easily available.
- To benchmark her “discovery growth” funds, I am going to use the i-shares Russell 1000 Growth Index (IWF) (subject to years available) as well as T Rowe Price’s New Horizon Fund (PRNHX).
- To benchmark her “global ” fund, I am going to use Vanguard Total World (VT) (subject to years available) and T Rowe Price’s Global Stock Fund (PRGSX).
- For years where no index data is easily available, I will instead use Yahoo Finance’s category averages (average of of active fund performance, after fees).
1980-1998 (Jennison Associates)
This is the one period for which I could not find any performance data, as there are only a handful of surviving funds from that period. She was apparently a portfolio manager and chief economist. I tried looking up fund history on the SEC website but could not find anywhere she is listed as a manager, even after searching shareholder reports for the period. It’s possible whichever funds she worked on are no longer around…so unfortunately we need to skip this period.
1998-2001 (Tupelo Capital Services)
Cathie co-founded this hedge fund in 1998..right as the dotcom bubble was building steam. ARK’s company profile boasts that she managed $800 million in assets in 2000. Interesting that they give this figure for the very height of the market bubble. In 2001, as the market bubble crashes, Cathie leaves Tupelo Capital.
Unfortunately there is no accurate performance history for this hedge fund, but I have found AUM filings from the SEC.
In Q4 1999, the fund’s AUM reached $1.0 billion.
In Q1 2000, the fund’s AUM then reached $1.3 billion.
By Q4 2000, the AUM shrank to ~$800 million: matching Cathie’s stated figures.
Finally, by the end of Q1 2001, the AUM shrank to ~$200 million.
In other words, the fund’s AUM shrank roughly 80% over 2000 and 2001. Note that this would have been due to a combination of asset losses as well as investors pulling out, so it’s not possible to know how much of that is due to actual equity losses.
By comparison, T Rowe’s Global Equity Fund lost 17% across 2000-2001, roughly in line with the category average. Unfortunately Vanguard’s Total World index (VT) did not exist during this timeframe.
2001-2013 (Alliance Bernstein)
After Cathie left Tupelo Capital Services, she joined Alliance Bernstein. During her tenure she managed three funds that I could find:
- AB Discovery Growth (CHCIX): A discovery/growth oriented fund.
- AB Sustainable Global Thematic Fund (ALTFX)
- AB Strategy Research Portfolio: Note that this is a Separately Managed Account (SMA) not an open mutual fund. I will use the acronym ABSRP.
All further sources will be at the bottom.
2001: Cathie OUTPERFORMS Category, UNDERPERFORMS T Rowe
- ABSRP: -13.81% (before fees)
- PRNHX: -2.84%
- Category: -19.98%
ABSRP beats it’s category as the 2001 recession unfolds, but loses to PRNHX. Note that Cathie joined some time in 2001, so it’s uknown how much of a contributing factor she was during this period.
2002: Cathie OUTPERFORMS Category, OUTPERFORMS T Rowe
- ABSRP: -20.89% (before fees)
- PRNHX: -26.60%
- Category: -27.24%
2003: Cathie UNDERPERFORMS Category, UNDERPERFORMS T Rowe
- ABSRP: 36.44% (before fees), 32.69% (after fees)
- PRNHX: 49.31%
- Category: 35.96% (after fees)
2004: Cathie OUTPERFORMS Category, OUTPERFORMS T Rowe
- ABSRP: 20.20% (before fees)
- PRNHX: 17.90%
- Category: 13.23%
2005: Cathie UNDERPERFORMS Category, UNDERPERFORMS T Rowe
- ABSRP: 10.45% (before fees), 7.21% (after fees)
- PRNHX: 11.90% (after fees)
- Growth Category: 9.84% (after fees)
2006: Cathie UNDERPERFORMS Category, UNDERPERFORMS T Rowe
- ABSRP: 4.23% (before fees)
- CHCIX: 1.85%
- PRNHX: 7.39%
- Growth Category: 9.00%
Note: Cathie started managing AB Discovery Growth (CHCIX) in 2003, but performance data is only available from 2006.
2007: Cathie UNDERPERFORMS Category, OUTPERFORMS T Rowe
- ABSRP: 14.28% (before fees)
- CHCIX: 12.31%
- PRNHX: 6.25%
- Growth Category: 15.09%
2008: Cathie UNDERPERFORMS Category, UNDERPERFORMS T Rowe
- ABSRP: -45.12% (before fees)
- CHCIX: -48.28%
- PRNHX: -38.78%
- Growth Category: -43.77%
Notes: During the 2008-2009 market crash, Cathie exits CHCIX and starts to manage the AB Sustainable Global Thematic Fund (ALTFX), with some period overlapping while new management is onboarded for CHCIX. I have no information as for the management shuffle, only what I see on Morningstar.
2009: Cathie OUTPERFORMS Category, OUTPERFORMS T Rowe
- ALTFX: 55.53%
- VT: 33.62%
- PRGSX: 44.77%
- ABSRP: 44.57% (before fees), 40.39% (after fees)
- PRNHX: 43.87% (after fees)
- Growth Category: 39.11% (after fees)
2010: Cathie MIXED against Category, MIXED against T Rowe
- ABSRP: 25.30% (before fees), 21.65% (after fees)
- Growth Category: 24.61% (after fees)
- PRNHX: 34.67%
- ALTFX: 18.42%
- VT: 13.05%
- PRGSX: 12.45%
In 2010, Cathie’s Separately Managed Account (SMA) underperforms, whereas her global fund outperforms.
2011: Cathie UNDERPERFORMS Category, UNDERPERFORMS T Rowe
- ALTFX: -23.71%
- VT: -7.71%
- PRGSX: -11.55%
Unfortunately no more data available for ABSRP starting this year.
2012: Cathie UNDERPERFORMS Category, UNDERPERFORMS T Rowe
- ALTFX: 12.96%
- VT: 17.33%
- PRGSX: 16.39%
*Unfortunately no data available for SREMAC for this year
2013: Cathie UNDERPERFORMS Category, UNDERPERFORMS T Rowe
Notes: Cathie left Alliance Beinstein in early 2013. Full year performance is still shown as it’s likely that some or most holdings from Cathie’s tenure were kept by the new manager.
- ALTFX: 22.62%
- VT: 22.98%
- PRGSX: 32.55%
2014-2020: Ark Years
For the Ark era, I am going to use ARKK to evaluate her performance. I’m using ARKK because first and foremost it is her flagship fund, and secondly because her specialty funds, while interesting, are nearly impossible to benchmark against. For another comparison, I am also going to add another passive fund to the mix, Vanguard’s VGT (Technology Index), in addition to the Russell 1000 Growth.
There is no full-year history for ARKK in 2014.
2015: Cathie UNDERPERFORMS T Rowe, UNDERPERFORMS Passive
Benchmarks I am using for ARKK are IWF (IShares Russell Growth 2000) and VGT (Vanguard Technology ETF) as a secondary benchmark. It turns out to not make a difference whether a year is a underperform or an outperform.
- ARKK: 3.76%
- VGT: 5.02%
- IWF: 5.50%
- PRNHX: 4.50%
2016: Cathie UNDERPERFORMS T Rowe, UNDERPERFORMS Passive
- ARKK: -1.96%
- VGT: 13.73%
- IWF: 7.01%
- PRNHX: 7.79%
2017: Cathie OUTPERFORMS T Rowe, OUTPERFORMS Passive
- ARKK: 87.38%
- VGT: 37.07%
- IWF: 29.96%
- PRNHX: 31.49%
Summary: This is without a doubt the breakout year for Cathie Wood. How was this done? Can you guess what was the biggest contributor to her outperformance? Hint – it wasn’t an equity holding. A position in Bitcoin Investment Trust is by far her top contributor, netting her 635, 748, 655 basis points of compounding outperformance in Q2, Q3, and Q4. Check out their quarterly reports and you’ll see it’s not even close. Note that the contribution of this is more than simply the compounding of 1.0635 * 1.0748 * 1.065..because this compounding is based upon the base of all assets. In other words..I estimate her actual returns without bitcoin would have been about 57%. Still great, but brings it down a bit more towards earth.
Q1 Return: 19.2%
Q2 Return 20.9% (14.55 without BTC)
Q3 Return 18.3% (10.82 without BTC)
Q4 Estimated Return 9.9% (3.35 without BTC)
56.3% return without BTC (estimated)
87.4% return with BTC included.
2018: Cathie UNDERPERFORMS T Rowe, OUTPERFORMS Passive
- ARKK: 3.58%
- VGT: 2.52%
- IWF: -1.68%
- PRNHX: 4.04%
2019: Cathie UNDERPERFORMS T Rowe, UNDERPERFORMS Passive
- ARKK: 35.73%
- VGT: 48.68%
- IWF: 36.08%
- PRNHX: 37.71%
2020 Cathie OUTPERFORMS T Rowe, OUTPERFORMS Passive
- ARKK: 152.52%
- VGT: 45.94%
- IWF: 38.21%
- PRNHX: 57.72%
2020 bears no explanation. We all lived through the fun in the market last year. In case it isn’t obvious, her biggest contributor for the year was Tesla, however there were many others as well and overall it was a much more balanced return profile versus that of 2017.
My take on ARK
The following comes directly from ARK’s own FAQ:\ “ARK’s funds are fully invested and do not hold a material amount of cash. ARK generally will not use cash in a tactical manner.”
Let me explain in layman speak what this means. Here the algorithm Cathie follows to buy or sell:
- When Cathie receives inflows, she buys
- When Cathie receives outflows, she sells
Sounds a lot like the algorithm for a passive fund. You see, unlike most active funds…Cathie is not tactically using cash nor thinking of limiting inflows..even as she now sits with many billion AUM, and continuing to pump money into existing positions.
Unlike Cathie, top active shops tend to hold higher cash positions during times of market euphoria and close funds when they are performing too well. The exception to this are mega-cap blue chip funds, but Cathie is not running a mega-cap blue chip fund. The T Rowe Funds in my benchmarks for example are currently either closed or restricted to new inflows. Fidelity has done the same with very successful small or mid-cap funds. Let me quickly summarize what IMO are some of the best virtues of a good active manager:
- Keep cash onhand and deploy it only when there is a reasonable risk/reward tradeoff.
- Sell if the risk/reward tradeoff is no longer to the best interest of your clients, even if this means selling to a cash position.
- If your cash grows too large or if your fund performs too well..you should consider closing the fund as otherwise it attracts short-minded performance chasers.
- If there is a great buying opportunity (i.e. a market crash) and your fund is closed, you should open your fund to solicit new inflows.
- You should try to keep your Assets Under Management (AUM) small if possible. The larger your AUM, the more difficult it is to make a winning bet on a small cap. Let’s say for example you wanted to bet 5% of your portfolio on San Jose Water Company (SJW), an infrastructure holding of mine. Well…their total market cap is less then $2 billion. If your AUM was $100 billion, you’d need to buy the entire company outright just to make a small dent in the portfolio.
- Your marketing to your clients should be reasonable and not overpromise. Telling your clients “your goal is to beat the S&P 500 on a risk adjusted basis” is fine as long as you are clear about risks involved.
I do not see Cathie following any of the above. Instead I am seeing a combination of dangerous behaviors:
- Actively soliciting more inflows even when total AUM across Ark funds exceeded $50 billion. This is forcing more purchases into existing overcrowded positions.
- Advertising that ARKK should double your investment in 5 years.
- Regularly putting out videos, promotional materials, interviews, etc. promoting the house holdings with price targets significantly above most industry targets.
I do not believe Cathie is acting in her investors best interests. Intentionally or not, I believe Ark is essentially a pump scheme:
- Buy companies with a marketable story and small revenue base but large revenue growth.
- Promote the companies heavily: sell investors on the story.
- Solicit inflows, use to buy more into those positions…sometimes owning up to 10% of the company. My theory is that this in itself is jacking up the price of those companies…
- Sit back and watch the stock’s price grow at a faster rate than revenue growth. This is not sustainable.
- Until…well until what? You now hold a basket of companies trading at very high P/S ratios. Some of them might become the next Google, but surely they all won’t become the next Google. You can try selling them to some greater fool, but good luck doing that with 10s of billions in AUM.
Edit: lots of posts about how ARK cannot control inflows because it’s an ETF. This is true and not Cathie’s fault, but nonetheless it’s a problem…or at least it’s fair to say it’s a flaw in the structure of active or concentrated ETFs. ARK is now suffering from the big AUM problem. Too much capital to chase after too few opportunities, victim of its own success.