There are two paths that investors can follow, and pretty much only two.
Path One: Get Rich Slowly.
This involves three steps. Invest in a risk-aware strategy. Fund it regularly. Get on with life. There will be ups and downs but, with time, you’ll win.
Path Two: Get Poor Quickly.
This involves three steps. Obsess about how rich other people are getting. Impulsively chuck money at a magic solution (crypto, meme stocks, SPACs, bleeding-edge tech, NFTs). Watch your anxiety spike as the money you couldn’t really afford to invest becomes the money you no longer have.
The estimable Jason Zweig, fresh off a long sabbatical, made the point with characteristic style and grace. It turns out that about the most valuable investment you could have in 1917 were natural pearls, a string of which were bought for $1 million; that’s $24 million in today’s money. It also turns out that about the least valuable investment you could have five years later were natural pearls. Unbeknownst to investors, Kokichi Mikimoto had perfected the cultural pearl.
History shows that what happened to natural pearls happens to technologies, too. They fall victims to what the economist Joseph Schumpeter called “the perennial gale of creative destruction” … almost every previously disruptive technology has ended up being disrupted. (“Digital Gold? Or Digital Pearls?” Wall Street Journal, 2/24-25/2024).
One quick and cheeky way of testing how this plays out in the fund (open-ended or exchange-traded) world is to compare one set of funds that showcases discipline – typically quality-focused, lower turnover strategies – with another set that showcases their ability to give you access to life on the bleeding edge.
There are 37 funds that self-identify as embracing “discipline” or “disruption.” We simply searched using the MFO Premium screener for funds using one of those two terms in their names plus those from ARK Investments (whose slogan is “We Invest Solely In Disruptive Innovation”). In order to give the broadest sweep to the results, we limited ourselves to performance over the past three years.
The results are striking and unambiguous:
Measured by total returns, all of the top 20 funds are disciplined. Sixteen of the 17 worst funds – including all 14 funds with three-year losses – are disruptive.
Measured by returns relative to other funds in their individual peer groups, 15 of the top 20 funds are disciplined. Nine of the ten worst performers are disruptive. Of the 17 funds with negative peer-adjusted returns, 12 are disruptors.
Measured by the Sharpe ratio, all of the top 20 funds are disciplined. Sixteen of the 17 worst funds are disruptive.
Measured by downside deviation, a way of capturing “bad” volatility rather than all volatility, all of the 20 best funds are disciplined.
Measured by maximum drawdown, the greatest decline in value at any point over the last three years, 19 of the 20 best funds are disciplined.
Over the period in question, the only things that disruptive funds disrupted were their investors’ portfolios and sanity. Readers interested in other time periods or different strategies for constructing the comparison can construct their own metrics at the MFO Premium screener (still a screaming bargain at $120/year) which offers data back to 1926, a huge suite of metrics (correlation, rolling averages, up/downside capture, period returns and ratings, batting averages, benchmark comparisons, trend and momentum, Lipper Leaders, and Ferguson) and side-by-side comparisons of about 10,000 funds, ETFs, closed-end funds and insurance products.
Bottom Line
In general, the best way to lose money is to bet on high-glitz “story” strategies. At least since the 1960s they’ve followed the same pattern: an exciting story, a great two- or three-year run, followed – sometimes repeatedly – by crashing and burning. It was true of the Steadman Funds in the 1960s, the Van Wagoner Funds in the 1990s, and the disruptors today.
In general, the best long-term returns are generated by discipline: investing in high-quality companies, maintaining a long-time horizon, and a conviction that the best way to make money is not to lose money. Berkshire Hathaway is the poster child for such a strategy. There are 143 Great Owl funds in the US equity category, ranging in age from 5 – 64 years. Most (those at or below the median) have turnover ratios in the 20s or below; that is, most hold their securities for more than four years. The average turnover ratio for Great Owl US equity funds is 41%, driven by a handful of trading strategies. The average turnover ratio for US equity funds (1991-2020) was over 80%.
If you embrace discipline (I mean in your portfolios), two disciplined funds – highlighted in blue – earned MFO’s Great Owl designation for consistently top-tier risk-adjusted returns.
If you pursue disruption, you risk disruption. Mr. Z’s advice: “Learn a lesson from Maisie Plant (she of the $1 million pearls): If you make that bet, keep it small and hedge it if you can.”
Three-year performance, sort by Sharpe ratio
| APR | APR vs Peer | Sharpe Ratio | Std Dev | Downside Dev | Max Loss | |
| SEI Large Cap Disciplined Equity | 12.49 | 3.99 | 0.59 | 16.70 | 10.70 | -22.12 |
| Columbia Disciplined Value | 11.79 | 1.86 | 0.57 | 16.18 | 10.13 | -16.40 |
| John Hancock Disciplined Value | 11.79 | 2.59 | 0.56 | 16.42 | 9.98 | -15.66 |
| Allspring Disciplined US Core | 12.49 | 1.70 | 0.56 | 17.52 | 11.51 | -23.36 |
| Columbia Disciplined Growth | 12.88 | 3.96 | 0.50 | 20.49 | 13.76 | -29.18 |
| Columbia Disciplined Core | 11.48 | 0.69 | 0.50 | 17.65 | 11.69 | -24.14 |
| MassMutual Disciplined Value | 10.27 | 1.07 | 0.47 | 16.13 | 10.09 | -17.46 |
| BlackRock GA Disciplined Volatility Equity | 8.71 | -0.50 | 0.47 | 13.08 | 8.53 | -20.28 |
| Amundi Pioneer Disciplined Growth | 10.75 | -0.04 | 0.42 | 19.36 | 12.81 | -27.46 |
| Disciplined Growth Investors | 10.56 | 6.29 | 0.41 | 19.27 | 12.00 | -24.95 |
| John Hancock Disciplined Value Mid Cap | 10.04 | 2.76 | 0.40 | 18.49 | 11.21 | -18.00 |
| American Century Disciplined Growth | 10.59 | 1.67 | 0.39 | 20.46 | 14.09 | -32.08 |
| Fidelity Disciplined Equity | 10.51 | 1.59 | 0.39 | 20.12 | 13.66 | -31.61 |
| CIBC Atlas Disciplined Equity | 9.23 | -1.56 | 0.39 | 17.11 | 11.62 | -24.02 |
| MassMutual Disciplined Growth | 10.63 | 1.71 | 0.38 | 20.87 | 14.38 | -32.26 |
| Manning & Napier Disciplined Value | 7.43 | -2.51 | 0.30 | 16.03 | 10.19 | -16.89 |
| John Hancock Disciplined Value International | 7.02 | 2.70 | 0.25 | 17.36 | 11.28 | -22.65 |
| Amundi Pioneer Disciplined Value | 6.98 | -2.22 | 0.24 | 18.14 | 12.06 | -21.71 |
| American Century Disciplined Core Value | 5.64 | -3.57 | 0.18 | 16.68 | 11.38 | -21.34 |
| Allspring Disciplined Small Cap | 5.41 | 1.59 | 0.13 | 20.96 | 13.36 | -23.42 |
| T Rowe Price International Disciplined Equity | 3.13 | 0.49 | 0.03 | 16.58 | 10.83 | -26.51 |
| Fidelity Disruptive Finance ETF | 3.19 | -3.04 | 0.03 | 22.12 | 14.82 | -32.26 |
| Fidelity Disruptive Automation ETF | 0.38 | 6.80 | -0.09 | 24.39 | 17.06 | -39.65 |
| Fidelity Disruptive Technology ETF | -1.45 | 4.96 | -0.14 | 29.71 | 20.45 | -51.84 |
| ALPS Disruptive Technologies ETF | -2.91 | 3.51 | -0.24 | 22.99 | 16.30 | -38.69 |
| Fidelity Disruptive Communications ETF | -0.48 | 0.15 | -0.14 | 22.85 | 16.11 | -42.89 |
| First Trust Alerian Disruptive Technology Real Estate ETF | -0.60 | -0.05 | -0.16 | 20.66 | 14.47 | -29.89 |
| Fidelity Disruptive Medicine ETF | -3.75 | -3.54 | -0.31 | 20.41 | 15.93 | -37.33 |
| ARK Israel Innovative Technology ETF | -13.53 | -7.11 | -0.70 | 23.07 | 18.70 | -52.14 |
| Harbor Disruptive Innovation | -7.61 | -7.89 | -0.39 | 25.98 | 19.49 | -49.80 |
| ARK 3D Printing ETF | -18.04 | -11.62 | -0.80 | 25.93 | 20.92 | -54.94 |
| ARK Fintech Innovation ETF | -19.56 | -13.15 | -0.49 | 44.99 | 31.46 | -74.07 |
| Franklin Templeton Disruptive Commerce ETF | -16.76 | -16.53 | -0.64 | 30.10 | 23.69 | -62.70 |
| ARK Autonomous Technology & Robotics ETF | -13.93 | -20.43 | -0.57 | 29.07 | 21.98 | -52.06 |
| ARK Next Generation Internet ETF | -20.08 | -24.54 | -0.51 | 44.76 | 31.47 | -75.39 |
| ARK Genomic Revolution ETF | -30.27 | -30.07 | -0.82 | 40.22 | 32.21 | -75.24 |
| ARK Innovation ETF | -26.54 | -31.00 | -0.64 | 45.87 | 33.11 | -75.93 |