Structure Matters: Goldilocks vs the Three Bears

What is Goldilocks?

Who knew the fairy tale Goldilocks has three versions? (History of Goldilocks) Funny truth, on “Wall Street” as views change around the economy, there are many more! Stay tuned investors! Keep your rainy-day money safe with an umbrella! What we want may not be perfect. What we get may need to be a slow balancing act by investor sentiment that is led by “Fed Speak” about the dot plots is to see a stabilizing market for Long Duration Growth Equities.

However, in this fourth quarter while you review year-end tax selling around growth and thematic investing, think clearly around what opportunities you are most confident in owning as a clear winner and don’t be biased by short term media negative headlines. We all know that the agenda on social media, and the media in general, is about attracting attention as the tree in the forest – so don’t get too lost from your end goal.

What is meant by “Long Duration Equity”? Back in April 2021 Sam Peters at Clearbridge pointed out the risks associated with such strategies when he wrote Tell Me Once And We’ll Remember . If you are on Twitter, you may have caught this great article. More to the point, as we finally see $800 million of outflows out of Ark Innovation ETF (ARKK), about 10% of the fund’s assets, we are reminded that portfolio managers who are defined by their discipline are human and should not be blamed by short-term thinkers around themselves maintaining a positive outlook towards their search for innovation and vision. The question, of course, is whether long term investors will again reward profitless disruption by companies without a plan to see positive cash flows in 2023 and beyond? Similar to the Goldilocks story it would seem fair to assume that interest rates in years to come may be both lower or higher! Meaning – don’t blame the portfolio manager for staying true to their fundamental beliefs and styles. Style drift is worse than zealous passion. Optimism should be expected.

Don’t fall asleep on the need for diversification and the basic due diligence process. Careful you might find big Bear (Papa Bear!) screaming at you because the style is simply way too expensive and has no downside support! “’Someone’s been sleeping in my bed and she’s still there!’ exclaimed the Baby bear.”

Cathie Wood’s flagship ARK Innovation ETF (NYSEARCA: ARKK) is emblematic of much innovation in the Asset Management industry as well as for companies which seek to define themselves as innovators in terms of thematic investing and industry disruption. For this reason, Cathie and the funds she manages deserve respect. The question is how they and other thematic growth opportunities fit in an overall allocation. As many say, hope is not a strategy, so investors should not be surprised when a portfolio manager shows no sensitivity to extended forecasts around breakeven or earnings in the future. Afterall, if cost of capital remains relatively high as compared to the recent past, these types of strategies should be expected to carry more short-term risk and volatility, so the porridge size needs to be better managed. Conversely, investors may also need at some point to review their own appetite for such high-risk strategies because stable interest rates could change all things very suddenly and buying such strategies after many bear market whipsaws will be very difficult to execute on. Remember, investors tend to anticipate changing conditions, so being early is a challenge.

To that point, feel free to use the ETF Think Tank Comparison Tool to compare ETF overlaps, volatility fundamental KPIs, and overlapping holdings. See the snapshot below. In addition to the high overlapping positions below, outperformers in 2022 include ALPS Disruptive Technologies ETF (DTEC), Innovator Loup Frontier Tech ETF (LOUP), Main Thematic Innovation ETF (TMAT), and Future Tech ETF (BTEK).

Follow up on Alternatives and Commodities

Following up on a research piece about alternatives by my colleague Cinthia Murphy, Diversification The Power of Alternatives, we think it is worth highlighting a key slide that we focus on during the ETF Think Tank. While we recognize that past performance is not indicative of future outcomes, we think a focus on agricultural market as a hedge against the risks associated with drawdowns in equity and bond prices given current market conditions. While price may have a factor in leading some to conclude that a pullback in the wake of equity and bond markets declining (1) people need to eat, (2) supply isn’t necessarily easily or immediately fixed (lesson learned from the recent past; especially as the war continues and the wake of the energy crisis), and (3) the performance by markets are driven by liquidity and commodities remain under-owned by most investors. Lastly, we often speak about the fact that in seeking diversification that you expect something not to work while other things are working. What this means is that if equities work and bonds stop going down in value, it probably is because inflation is under control. Under that scenario, that also means your food bill is lower, your energy bill is lower, and products that might be in short supply because they cannot be produced with a reasonable profit margin are no longer in short supply. Most investors would welcome such conditions.


The Goldilocks scenario may be wishful thinking and is a balancing act into a risk of higher interest rates and lower earnings adjustments for 2023. However, markets tend to anticipate change months in advance. Given that bonds and equities today are tied to one another, we again emphasize a solid allocation towards alternatives.

Don’t think alone! Call us to learn more about our current thinking.


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Get Think Tanked Distilled with Phil Bak

Get Think Tanked Distilled with Phil Bak

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