I’ve seen a number of articles recently, at least two referencing industry authority Morningstar, pointing out the weak performance of the ARK group of ETFs over recent years. The ARK flagship, AARK, the ARK Innovation ETF, is up in total by about 10% over the past five years, a span which includes the pandemic (when ARKK was a moonshot) and the subsequent economic recovery.

Compared with major stock indices, the five-year record is as follows:

NASDAQ +110%

S&P 500 +81%

ARKK +10%.

ARKK has fallen by about 2/3 in price since its top in early 2021. Unfortunately–but not unusually for products directed at retail investors–a very large chunk of the share total is money that came in at the very top. The result of this is that, as I look at the situation, the largest single asset of ARKK is the tax value of the accumulated losses incurred since then.

In a more conventional situation, a new portfolio manager would be named, ideally someone with turnaround experience and most likely from outside the organization.

As it turns out, I’ve been the “new guy” twice in my investing career. Although it’s risky to generalize from two instances:

–it’s important to use the tax losses as soon as possible. This is also a luxury, because it allows the manager to trade aggressively without having to worry about distributing taxable short-term profits to shareholders. This is much less important than fixing the overall portfolio but it’s still a potential extra source of return

–my experience has been that shareholders who have losses tend only to sell when they are back to breakeven. This makes no economic sense, in my view, but it’s what happens. This isn’t all bad, both because it’s part of the healing process and because strong performance will ultimately attract new shareholders.

I have no idea what will happen in the ARK case, but it will be interesting to see.

an unrelated reminiscence

On the trading point and taxes, I was running (another turnaround) a successful small-cap global fund years ago, when I was asked to relinquish it to a “stellar-performing” small-cap specialist from the firm’s pension arena, as part of the asset management company’s restructuring. My largest holding at the time was Qualcomm, a stock that went up 10x over the following two years. The new manager sold it immediately, commenting that my former portfolio was riddled with “trash” like this. His efforts resulted not only in steep underperformance but also a taxable distribution equal to a third of the fund NAV. The fund ended up being closed. The inept manager left the firm as he was about to be fired: an outside consultant discovered that the performance reports he’d created over the years, portraying him as an outperformer, actually disguised the fact he was perennially in the bottom decile. The CIO he’d reported to was booted at the same time for having been deceived for so long. What I find particularly amusing is that this manager is still working in the industry and even appears as an expert on CNBC from time to time.