Stocktake: Chasing hot funds is a risky business

A study found that since 1990 123 funds have gained at least 100% in a single year. Of those just 24 made money over the following three years

Investors have always chased performance so it's not surprising that money is currently pouring into active ETFs run by Ark Investment Management's Cathie Wood.

Wood has bet big on expensive growth stocks like Tesla and those bets have paid off. Her biggest fund has averaged astonishing annualised returns of 39 per cent since 2014. Investors have taken note; according to Bloomberg, assets under management have swollen from $3.6 billion a year ago to over $50 billion today.

Wood says Ark's ETFs are "filled with companies in the same position Amazon was in back in the early 2000s". Expensive growth stocks can "grow into their valuations", she says, adding that passive funds are "cheap for a reason".

We’ve heard this script before – think of investors piling into internet funds in the late 1990s, or the go-go funds of the late 1960s that crashed when the party ended.

Note too that a recent Morningstar study found that since 1990 123 funds have gained at least 100 per cent in a single year. Of those just 24 made money over the following three years. The average fund lost 17 per cent per year.

Is this time different? Maybe, but the lesson of history is that chasing hot stocks and hot funds is a risky business.