Investing in Hype versus Investing in Profitable Innovation
An op-ed by The Singularity Group’s (TSG) Co-founder and board member, serial entrepreneur Dr. Tobias Reichmuth. Also featured on finews.ch.
Two days ago, Ark Invest’s figurehead and CEO Cathie Wood made an appearance in Zurich, and even matured finance professionals turned into fanboys and -girls asking for selfies and going wild on LinkedIn about it. This is an epitome of what’s going wrong in the world of investing where media frenzy and status matter more than solid strategies. In a recent Morningstar ranking, the Ark product family tops the list for value destruction over the past decade. Throughout the years, many huge wealth managers without hesitation trusted questionable investment products and channeled unfathomable amounts of money towards castles in the air: hyped technologies without any use cases or cash flows backing them up. In the meantime, spurred by negative interest rates and non-existant inflation, solid investment approaches focusing on earnings fell out of sight and out of mind.
Morningstar’s Amy C. Arnott recently came up with a list of “15 Funds that Have Destroyed the Most Wealth over the Past Decade”. Out of the 15 products analyzed, 14 were Exchange Traded Funds (ETFs). ETFs are known for their low fees. However, everything in life comes at a price: These passive investment approaches don’t screen for quality or profitability, they are merely equity “buckets”, and more often than ever, the names and titles get more diligence and attention than the portfolios themselves.
Zooming into the Morningstar analysis, Arnott comes to a catastrophic conclusion: “Ark, home of the flagship ARK Innovation ETF ARKK, tops the list for value destruction. The Ark family wiped out an estimated $14.3 billion in shareholder value over the 10-year period — more than twice as much as the second-worst fund family on the list. Ark Innovation alone accounts for about $7.1 billion of value destruction over the trailing 10-year period.”
The Singularity Fund outperforms Ark Innovation by 64% since inception
In other words: just because there’s “innovation” written on it, it doesn’t necessarily contain true, applicable, profitable innovation. Shockingly, even experienced investors tapped into the Ark trap of assumed innovation, most of them buying into the peak of its nearly exponential performance. At TSG’s core lies the understanding of applied, doable innovation through rigorous evaluation of its value chain. As a result, investment products relying on TSG’s applied innovation screen, are never rooted in hype and hear-say but always in value generation driven by the relevant innovations at any point in time. We filter for quality and profitability.
Another part of the equation lies in pricing. Here, a simple comparison after fees can help investors make a conclusion: Since inception on October 1, 2018, the Singularity Fund, which has become the gold standard in applied innovation investing, gained +61.5%. The Ark Innovation ETF, during the same timeframe made -2.7%.
Glorifying entities for the wealth they built on clients’ expense questionable
“Investors should be mindful of whether an ETF comprises genuine innovation or hyped themes — because ultimately, for long-term performance that doesn’t flip investors’ portfolios upside down overnight, companies should be able to make money,” my Co-founder and TSG CEO Evelyne Pflugi says. For a more granular look into the Singularity Indexes’ exposure to applied innovation in comparison to other global benchmarks have a look at this analysis in the Research Hub.
There is no harm in coming up with new investment strategies. Choice of product as well as timing is every investors’ own decision. Cathie Wood surely has no ill intent towards her clients or the financial community, and Ark Invest truly is one of the biggest success stories in asset management. However, given the disastrous outcome, it is questionable that the main entity benefiting from it is being glorified and applauded for to this extent — even today.
