Aussie 'Ark Invest' fund goes full circle as 2022 drawdown hits -50%

Michael Frazis’ appeared in the Australian Financial Review last January after his international equities fund returned 110% after fees to December 30, 2020.

Fast forward to today and his fund has gone full circle with an abysmal -49% calendar year-to-date return. Most of the losses came from April, where the fund gave back -26.5%.

Frazis Capital Partners is invested heavily in large cap US tech and biotech stocks such as Netflix, Tesla, Zoom and Microsoft.

Here are some key snippets from the fund manager's investment update.

How it all went wrong

“We made an early decision not to participate in the sell-off and stick to our long-term approach. This has been why we have suffered the worst of these falls, but also offers a path through this difficult environment," said Frazis.

“Our focus now is making sure we sift through the universe and identify the right companies that will perform exceptionally well on the other side.”

Lessons learnt

Frazis said his biggest regret was not "shorting the >100x EV/Sales companies we were so sceptical and knew could not be sustained." Alongside those companies with $50-100bn market caps with "no revenues and little prospects of profits."

“These would have softened our duration risk and put us in a very different situation today.”

Waiting for a bottom

The market selloff has been exacerbated by many large funds liquidating their positions, with Frazis pointing to names like Softbank - having closed their growth fund, and Melvin Capital - which announced a wind-down last week.

"These closures are likely behind the last two months of severe volatility in price action and why companies have sold down to such low levels. Someone selling a company for less than cash is generally a forced seller."

Frazis said that 'when' the markets make a low, "then the one strategy that is most toxic – which this time around is long term investment in growth and technology – will likely have its best years off an incredibly low valuation base and absence of institutional ownership."

The question is, how much is the fund willing to lose in search of a bottom?

Food for thought

The shortcomings of a lot of these 2020-21 superstar funds ultimately comes down to risk management.

Funds and institutions tend to cling onto their financial models and ratings for dear life, as though the market isn't some form of living and breathing discounting mechanism.

When things are going good, like in 2020-21, the funds are in control. They're adding new stocks to their portfolio, averaging up on existing positions, buying the dip, upgrading price targets and so forth.

But now that things are starting to go sour, they're at the mercy of the market. After copping such a massive drawdown, all they can say is 'hey we're long-term investors now and they'll be better days ahead.'

Frazis' fund is down -49% year-to-date. A near 100% bounce is now needed to breakeven.

If the selldown continues, and the fund finds itself down, say -75% for example, then he'll need a 400% rally to breakeven. Yikes.