Chasing Top Fund Managers (EP.136)

Episode Summary

Executive Summary: The episode covers behavioral investing through a book review of Adam Grant’s Think Again, commentary on GameStop/meme stocks and ARK’s explosive growth, and a deep historical case study showing how star fund managers often attract assets after great runs only to underperform later. It concludes with a discussion of the Financial Education Initiative at the University of Chicago and the importance of starting money conversations early and thoughtfully.

Main Topics: Book of the week: Think Again and intellectual humility: The hosts recommend Adam Grant’s book for its argument that people should question beliefs more often, reduce overconfidence, and think like scientists. They connect the message to humility, curiosity, and being willing to be wrong as a path to learning. GameStop/meme stock episode and market efficiency: They discuss the GameStop/AMC surge as a social-media-driven trading phenomenon, noting it does not overturn market efficiency but does highlight feedback loops, disagreement, and speculative behavior in asset prices. ARK’s rapid asset growth and concentrated innovation bets: The hosts review ARK Invest’s dramatic AUM growth and performance, using it as a current example of a hot thematic manager that has attracted huge inflows amid exceptional returns. Historical star fund managers and mean reversion: A long segment reviews past superstar managers in electronics, growth, and internet eras, showing how early success, media adoration, and inflows often preceded severe underperformance for investors who arrived late. Asset pricing, valuation, and why expensive growth can underperform: They argue that great companies can still be poor investments if purchased at too high a price, citing data showing small cap value outperformed high-priced growth over long periods despite the latter’s glamour. Fund flows, skill, and decreasing returns to scale: They summarize academic evidence that investors chase past performance, but fund performance tends to mean revert. A key theoretical explanation is that skilled managers attract inflows until fund size erodes their ability to generate alpha. Talking Sense and financial education: The episode features Rebecca Maxey from the University of Chicago’s Financial Education Initiative, discussing a curriculum and card deck designed to normalize money conversations among parents, students, and teachers.

Key Arguments: Questioning beliefs and embracing uncertainty are essential because information volume is much higher than in the past and blind spots are common. The GameStop episode is dramatic but does not invalidate market efficiency; it is better understood as a short-lived anomaly amplified by social media and speculation. ARK’s success reflects both strong thematic exposure and investor appetite for high-growth narratives, but history shows popular funds often attract assets after returns have already been earned. Star managers repeatedly appear in new technological regimes, but high returns often coincide with high valuations; paying too much for growth lowers expected returns. Long-term evidence favors low-priced, value-oriented equities over high-priced growth stocks despite short-term periods when glamour stocks dominate. Mutual fund performance often mean reverts because of luck, skill dispersion, and especially decreasing returns to scale as funds grow larger. Investors generally cannot capture the full value of manager skill because inflows and higher fund size transfer much of the economic benefit to managers via fees, not to clients. Financial literacy is not just about numbers; it is about creating comfortable, ongoing conversations about values, money behavior, and decision-making at home and in school.

Data Points: Information consumption today vs. 25 years ago: 5x more - Used in the Think Again discussion to illustrate how much more information people now absorb, increasing the need to question beliefs. ARK AUM: $50 billion - ARK Invest’s assets under management after rapid growth. ARK AUM a year earlier: $3 billion - Shows the scale of ARK’s one-year asset expansion. ARK year-to-date inflows in 2021: approaching $10 billion - Illustrates strong investor demand for ARK funds. ARK Innovation Fund 2020 return: 152% - Highlights the extraordinary performance that helped fuel inflows. ARK Innovation Fund 5-year compound return: 45% - Longer-term performance cited in the discussion. ARK holding concentration: 43% of total equity holdings - Share of ARK’s equity holdings in stocks where the firm owns at least 10% of shares outstanding. Steve Jobs iPod-to-phone reaction: "the dumbest idea I've ever heard" - Used as an example of how even iconic innovators can initially dismiss transformative ideas. Manhattan Fund first-year return: 39% - Early success of Gerald Seide Jr.’s fund before later collapse. Enterprise Fund annualized return, 1961-1966: 17% annualized - Fred Carr’s strong pre-1967 track record. Enterprise Fund return in 1967: 117% - Peak performance that attracted assets. Enterprise Fund return in 1968: 44% - Continued strong performance before weakening. Enterprise Fund assets in Feb. 1969: over $1 billion - Demonstrates how performance drew large inflows. Von Wagener Emerging Growth Fund return in 1999: 291% - The huge year that triggered asset inflows. Von Wagener fund assets added in 1999: $506 million - New investor money attracted mostly late in the year. Von Wagener fund decline 2000-2002: -21%, -60%, -64% - Illustrates rapid mean reversion after the hot year. Value of $100,000 invested in Von Wagener fund from 2000 to 2008: $35,000 - Outcome for investors who stayed through the manager’s departure. Investor loss rate for post-1999 entrants in Von Wagener fund: -24.87% per year - Shows how badly late investors fared. Kinetics Internet Fund return in 1998: 190,096% - Extraordinary performance under Ryan Jacob at Kinetics. Kinetics Internet Fund return in 1999: 216% - Another massive gain before capital flooded in. Kinetics Internet Fund assets: from $22 million to $1.2 billion - Asset growth from 1998 to 1999. New money into Kinetics Internet Fund in 1999: over $700 million - Major inflows after the big performance year. Jacob Internet Fund losses 2000-2002: -79%, -56%, -13% - Severe drawdown after the manager launched his own fund. Value of $100,000 invested in Jacob fund from 2000 to 2002: $8,000 - Illustrates how badly late investors were hurt. Jacob Internet Fund return in 2020: 123% - Shows the manager later had another strong year. Jacob fund long-run return since 2000: 3.09% annualized - Compared with the broader market over the same period. Broad U.S. market return over same period: 7.04% annualized - Benchmark for comparison to Jacob fund. NASDAQ 100 return Apr. 1999-Dec. 2020: 9.47% annualized - Used to show how high-priced growth can still outperform for long stretches. NASDAQ 100 excess vs U.S. market: 1.91% annualized - Performance edge over the same period. MSCI U.S. Small Cap Value vs NASDAQ 100: +26 bps annualized - Small cap value beat NASDAQ 100 from Apr. 1999 to Dec. 2020. Small cap value vs large cap growth since 1926: +4% annualized - Long-run asset class premium cited in the discussion. Rolling 10-year outperformance frequency: 83% - Small cap value beat large cap growth in 83% of rolling 10-year periods since 1927. Pension sponsors studied: 3,400 - Study on selecting and terminating investment managers. Top-quartile funds retained over 4 years: 9 of 556 (1.6%) - S&P persistence scorecard statistic showing low persistence of top performance. Alpha decline from doubling fund size: about 20 bps per year - From the scale/skill paper showing larger funds struggle more to beat benchmarks.

Pivotal Quotes: "Try having humility over pride in how you think. Try having more doubt over certainty. Try having more curiosity over closure." — Benjamin/Cameron paraphrasing Adam Grant: Summary of the core lesson from Think Again. "The market portfolio is no longer the tangency portfolio. It’s no longer the optimal efficient portfolio." — Benjamin Felix: Discussing how disagreement and misinformed investors can alter asset-pricing intuition in the GameStop context. "What the manager gets with increasing skill is an increasing capacity to absorb fund flows while still having a chance at delivering alpha at the margin." — Benjamin Felix: Explaining the Burke and Green model of skilled managers, fund inflows, and decreasing returns to scale.

Implications: Listeners should be wary of chasing hot funds or narratives. Long-run outcomes depend on valuation, not just innovation, and manager skill is hard to capture after inflows. Financial education should focus on conversation, behavior, and humility, not just math.