Hot Today, Gone Tomorrow
Key Takeaways
Research shows that ‘Super hot’ or popular funds often fail to deliver after money begins to pile in. ARK is an international example, but some local examples are:
Lion‑OCBC Hang Seng TECH ETF (HSS) — one of SGX’s most traded ETFs, suffered a -75% peak to trough.
S‑REITs & REIT ETFs, e.g Lion‑Phillip S‑REIT ETF (SREITS), have earned close to 0% over the past 5 years compared to over +50% returns using one of our flagship globally diversified funds as a comparison.
As we’ve always said, what works is a goals‑based plan, global diversification, risk‑first sizing, and disciplined review — not chasing last quarter’s hero.
The investor’s chief problem — and even his worst enemy is likely to be himself.
— Benjamin Graham,
author of The Intelligent Investor
Who doesn’t love a winner? When a fund posts eye‑popping returns, it’s tempting to jump in. Yet the data is stubborn — it shows that the hotter the fund, the higher the risk of future disappointment. Morningstar’s recent analysis shows that funds attracting hyper‑inflows after periods of outperformance frequently see their subsequent results fall back toward (or below) their benchmarks. Popularity isn’t a sin but it’s often a warning sign.
Popular trades which have been pulling in the highest assets over recent history are all related to technology, AI, and the digital economy. It is based on two premises — the allure of a high future growth rate, and the corresponding return of the companies related to these themes. The question that investors should consider is whether the reason these stocks did well because money was pouring in and creating a self-reinforcing loop.
In our investment philosophy, we’ve long cautioned against performance‑chasing. Our own writing emphasises the predictable failure of forecasting, the siren call of fads, and the primacy of asset allocation and risk control over manager roulette. So, what can investors do? With Morningstar’s key findings as a guideline, we lay out a practical playbook that aligns with what we’ve advocated all along: build a plan, allocate sensibly, size risk, and stick to disciplined risk management.
The Morningstar article examined more than two decades of US fund data and found that ‘hypergrowth’ funds — defined as funds which enjoyed surging inflows after strong performance, often lagged later. The mechanics are intuitive: a significant rise in the fund’s assets can make strategies harder to execute, and investors tend to pile in at the wrong time, effectively buying high.
The “Tech Hero” That Became a Turnaround Project
Lion‑OCBC Hang Seng TECH ETF (HSS) rode the China tech boom story and quickly became one of SGX’s most traded ETFs. However, investors who chased earlier strength have endured a tough subsequent stretch with the fund suffering a -75% peak to trough recently and many investors are still nursing losses. It is important not to chase themes for the sake of it, and to know what you are buying. The index targets 30 HK‑listed tech names, a niche and narrow sector which can be volatile and policy‑sensitive — great on the way up, just as painful on the way down. The lesson here? Popularity and liquidity do not equate to persistence of returns.
Beloved Yield Trade Gets Rate Shocked
S‑REITs & REIT ETFs like the Lion‑Phillip S‑REIT ETF (SREITS) are household names for income seekers. Assets in REIT ETFs have grown briskly over the years, but have stagnated since 2019 — first being affected by COVID-19 and then in 2022 as interest rates climbed and financing costs rose, showing how even popular, high‑dividend segments have cycles.
From a total return perspective (including dividend received + change in investment price), investors have earned close to 0% over the past 5 years compared to over +50% returns if invested in a diversified group of global stocks, using one of our flagship funds as a comparison (S&P Singapore REIT Total Return Index vs United G Strategic Fund).
“Safe” or “popular” does not mean “risk‑free.” Investing in a narrow sector or segment of the market will expose you to risks that investors may not see coming, in this case, interest rate sensitivity. Coupled with the fact that we had been in such a low-interest rate environment for so long since 2008, dulled investors to the fact that such cycles can reverse the recent past quickly.
A Better Way:
Plan → Allocate → Size Risk → Manage Risk
Instead of chasing popular themes and investments, consider this systematic approach instead:
1) Build a Proper Investment Plan
Start with goals and constraints, not products. A well-thought-out and designed plan, something that we initiate at the investment plan meeting, will help to anchor decisions and reduce impulse trades driven by headlines.
2) Asset Allocation First
Decades of research (and our own materials) highlight that asset mix explains most long‑term outcomes. Diversify globally; don’t bet the farm on one sector, theme, or country. This process will be incorporated during the investment plan meeting.
3) Size Your Risk (Before You Size Your Return)
We favour a risk‑first approach: to always bring upfront and highlight to all clients how much you can possibly lose in a plausible drawdown (Value‑at‑Risk framing). This is to ensure that potential losses are tolerable both financially and emotionally.
4) Disciplined Risk Management
Rebalance to your target mix (sell some winners, add to laggards) and review on a schedule, not in reaction to market noise. Incorporating this with our systematic risk matrix and other risk management strategies in the core equity funds will help to ensure that capital is protected as best as possible during market downturns.
When Assessing “Hot” Funds or Themes of the Day
Morningstar’s data shows a pattern that happens time and time again; after investors stampede into recent winners, subsequent relative performance tends to fade. The examples used in the Morningstar article were international, but we know of many Singapore investors who were also caught in investment vehicles run by ARK. Some of the more local examples we highlighted earlier also reinforce this lesson.
What works instead is exactly what we’ve been writing about for years and also highlighting during regular progress meetings: a goals‑based plan, global diversification, risk‑first sizing, and disciplined reviews — not chasing last quarter’s hero.
