By Tim Courtney, Chief Investment Officer
Several years ago a popular study of ours was featured in Barron’s – the study examined trends in performance and how these trends manifested within Morningstar’s “stars” for funds.1 Our findings looked at a 10 year period and concluded that funds which initially showed promising performance (receiving closer to five stars in the ranking) often failed to sustain this momentum over an extended period. In fact, only four out of 248 funds that carried five-star ratings from Morningstar in 1999 retained that status ten years later1, with many ceasing operations before the end of the decade. Over those ten years, lower ranked funds on average outperformed higher ranked funds
To be fair, Morningstar has since changed its methodology and they do provide some valuable research and analytical data. But predicting trends is difficult, and often the best performing strategy over one period can be one of the worst over the next. A similar observation can be made with a recent study we conducted on the popular ARKK Innovation ETF.2 Despite its positive inception performance of about 10% annually, the fund performed best when few dollars were invested and struggled the most after it became the largest actively managed ETF. The average dollar invested in the fund returned an astonishing -21% annualized since inception. While identifying a long-term trend early is rewarding, the uncertainty surrounding the duration of these trends can create risk if investors too heavily focus their portfolios.
A case in point is the recent economic shift in China. What seemed like an unstoppable upward trajectory was quickly reversed, plunging the country into economic challenges. Meanwhile, in the U.S, despite rising concerns over spending, the strength of the US dollar persists.3 When will this trend reverse? The timing of a tipping point is elusive – it could be near, or it might take decades. Another trend we’re seeing is in AI. Companies like Nvidia have experienced remarkable growth this year4, but the future trajectory of this trend remains uncertain. AI will be more utilized in the future, but we don’t know how it will play out or who the greatest beneficiaries will be.
In conclusion, this is the way the world works. There are trends that we can spot, but they could change quickly or persist for decades. We see this in sports teams too. Some teams build dynasties that last for years. Others have brief success when everything aligns perfectly but can’t repeat the success when chemistry changes the next year. While we should pay attention as information changes, we shouldn’t allow headlines to solely dictate our decision making. If you have any questions, please contact your Exencial Advisor.
- Barron’s (7/10/10) — Lifting beyond their weight class
- Morningstar Direct, Monthly return and flow data used to calculate Investor return IRR*
- Reuters (9/23/23) — Dollar index climbs to 10-month high; yen, euro languish
- Reuters (8/22/23) — Nvidia hits record high as AI boom lifts bets on another strong forecast
PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS. Information and opinions provided herein reflect the views of the author as of the publication date of this article. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness. The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information provided in this book. There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 888-478-1971.
The internal rate of return (IRR) is a financial metric used to evaluate the potential profitability of an investment. It represents the discount rate at which the net present value of all expected future cash flows from the investment equals zero.