Why Big Funds Tend to Decline in Performance. What Becomes of ARK?

Why Big funds tend to perform worse. What becomes of ARK?

 

It is absolutely NOT true that all funds underperform ETFs. There are a few funds that seem to outperform and continue to do so. One example is UBS China A Opportunity Fund. From Nov 29 2013 to 20 Feb 2021, it achieved 24.4% per year. Schroder China Alpha A fund achieved 22.4%. The 2823 ETF only did 14.6%. Also, ETFs listed in the US that pay dividends have a 30% withholding tax, which will take a further 1 to 2 percentage points from performance depending on how much dividends they pay.

 



 

 

However, what happens when a fund gets too big? UBS China A Opportunity’s asset size is now USD2.94 billion.

 

https://www.krungsriasset.com/DataWeb/AYFWeb/th/pdf/MTF_KFACHINA-A.pdf

 



Schroder China Equity Alpha is much smaller. https://www.investing.com/funds/schroder-china-equity-alpha-class-a

 

Total asset size only USD438m and it was ranked 29th out of 174, compared to UBS China A, ranked 112. Over 1 year. But UBS was ranked No. 1 over 10 years, and 2nd over 5 years!

 

https://citywireselector.com/fund/schroder-china-equity-alpha/c437367



 

If you compare the performance in the last 3 years, UBS is doing 21.8% per year vs Schroder China equity Alpha with 25%. They both beat the ETF of 15.8%. That’s 9.2 percentage points a year!

 



 

What happens when a fund gets too big? It cannot buy into small companies that are les researched. There is a lot of slippage when they invest and sell. It takes a long time to exit a position or buy a new stock. They actually move the prices up and down. They certainly cannot cut loss and are less nimble.

 

Which reminds me of ARK ETFs. It was the star of 2020. Many of the ARK ETF did 100% returns. Their AUM is over USD30b now. There will come a time where their performance will decline unless they lock up a fund.

 

So when a fund gets too big, it becomes an ETF, a no-brainer. The ETF just buys the biggest market cap companies, making expensive companies more expensive. It’s blind investing and broad sector coverage when you have no time for research.

 

Covid Update

 

https://www.worldometers.info/coronavirus/

 



 

You will see that the Covid cases are declining sharply. The 2nd wave appears to be abating. By summer, we will see the US almost getting 100% population vaccinated, the UK and Israel too. The global economy will recover sharply, in a V-shape. Many economies may overheat and the monetary policy tighten. You may not see interest rates rising, but by end of 2021, you may see the Fed, ECB and Japan Central Bank slowing down bond purchases. When the mainstream news is good in the second half of 2021, we will see the stock markets become more volatile! It’s a contrarian approach.

 

Good news means less help from central banks, = less liquidity = more volatility for stock markets.

 

Leisure and business travel will pick up in second half. Old economy stocks will improve NOW, 6 months ahead of actual news.

 

Next 10 years, healthcare, ESG investing will still prevail. I don’t like oil & gas and think peak oil is here. Battery technology will enable the world to slowly wean off fossil fuels.

 

Comments

  1. Anonymous9 March 2021 at 03:54

    Could you share your view on Nickel I and the recent pull back in precious and industrial metals, please? RW

    ReplyDelete

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