Choppy Water

We’re seeing a frothy market and it requires a cool head.

If you’ve been in the markets long enough you get used to the ups and the downs. As long as you have more good days than bad days, then you can keep the profits moving in the right direction. However, nothing can just keep going up forever, and we’re seeing another necessary drop being triggered out of the States.

On the whole, it’s nothing to worry about. US stocks are high and we’ve said that for some time. They can of course go higher, but they also need to drop from time to time for everyone to take another breath. It is often joked that stocks take the stairs up, and the lift down. The moves down can be painful, but it is important to only change your strategy when the overall picture has changed, and it hasn’t.

Having said that, this is only a luxury that can be afforded by those who don’t get carried away in their own hype and believe that they have the ‘Midas Touch’.

Cathie Wood’s flagship investment fund of technology stocks has fallen to its lowest level since November, with some of its biggest holdings including Tesla down a tenth or more already this month. The $21bn Ark Innovation fund, a beneficiary and barometer of investors’ enthusiasm for speculative growth companies and new technologies, has now lost one-third of its value since a February peak.

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Its decline accompanies a broader slide in shares of high-flying growth companies. These have stumbled as inflation expectations have climbed, diminishing the appeal of businesses whose profits will not materialise for years to come. The tech-heavy Nasdaq Composite fell 2.6 per cent on Monday, its biggest decline since March. “The sector rotation today is violent,” said Ted Mortonson, a technology sector strategist at Baird. “From a performance anxiety on the upside — a fear of missing out — this is now fear of getting killed.”

Ark Innovation, which is managed by Woods’ asset manager Ark Invest, is now down 14 per cent since the start of the year. Speculative biotech stocks in its portfolio have fallen more than a fifth in value so far this month, while heavily-weighted holdings including Tesla, Teladoc, Roku and Square have tumbled at least 10 per cent.

An index of unprofitable tech companies created by investment bank Goldman Sachs, which includes car-hailing app Lyft, peer-to-peer lender Lending Club and online luxury consignment shop the RealReal, has fallen 14 per cent so far this month and is down 36 per cent from its February high. Several of the bank’s other indices show a similar rotation away from speculative parts of the market that analysts had warned were frothy. Goldman indices that track recent initial public offerings and businesses that are sensitive to the price of bitcoin are both down a tenth or more over the past six trading days.

As we at The Portfolio Platform stated in our article back in February, the rotation out of big tech was inevitable. We first touched on it in October 2020, saying that it would occur throughout the first half of 2021. Andrea Bevis, senior vice-president at UBS Private Wealth Management agrees with us: “We are seeing a natural rotation away from growth and tech towards value”. Stocks aren’t going to go out of fashion, but it is an art, it’s not something that anyone can do and it’s a bit of a concern that people are trying.

Gladstone Capital, one of Europe’s top-performing hedge funds of recent years, has been hit by a rebound in stocks that suffered early in the pandemic, the latest sign of how many managers are struggling to navigate 2021’s market swings. London-based Gladstone, which manages about $2.7bn in assets, lost 10 per cent in the first quarter of this year, according to people familiar with its performance.

But behind the headline numbers, which were skewed by the performance of some smaller funds, many managers are posting far more mundane returns as they struggle to cope with gyrations under the surface of the market caused by an improving global economic outlook.

Some, such as London-based Sandbar Asset Management, have been hit as many stocks this year have failed to rally in response to strong earnings numbers or improving earnings expectations. In fact, US and European companies that have posted better than expected first-quarter results have barely outperformed markets on the day they were reported, according to research by Bank of America and Morgan Stanley.

Managers’ stock picks have actually lost investors’ money this year and have performed much worse than the average over the past 10 years, according to data from Morgan Stanley. “I think they [hedge funds] are finding it tricky,” said Graham Secker, Morgan Stanley’s chief European equity strategist. “Everyone is struggling for new ideas, long or short.”

Even the professionals find it hard from time to time but it’s important to keep a cool head. If you go too big with a position, you could suffer the consequences even if you are eventually right. Retail traders sell out if their trades go against them, it’s human instinct to fear losing capital. But if you place a trade for the right reason, sometimes it takes time to be right. Lots of small wins make a big win. Profits add up over the year, and this is how sensible money is made.

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