Down & Out Does Not Always Mean Cheap & Cheerful

VT Tyndall North American Fund

Down & Out Does Not Always Mean Cheap & Cheerful

It can be easy for investors to assume that because an investment has gone down a lot it is now cheap. This is sometimes the case, but most of the time it isn’t, and each instance must be analysed on a case by case basis. Looking at some the areas worst affected by the ravages of the bear market in growth, might take you to look at the Ark Innovation ETF which was -66% in 2022 but is down about 75% from peak; surely the underlying assets are now cheap?

Part of the issue around identifying ‘cheapness’ of shares is that it is not a straightforward exercise and there are many more inputs than just a number to consider. Particularly when you look at growth stocks, cheapness is often elusive and most of the time the best growth stocks are actually the most expensive ones, as the market pays up for companies that are in a period of true growth. Once growth stocks become cheap they are usually ex growth and to be avoided. The value investor may be tempted by cheap large cap tech names like Intel or IBM but both have been horrific performers over the last ten years. The valuations may indeed be cheap, but they stay cheap, and this is no good for growth investors.

The macro backdrop is also important as is neatly evidenced by the last 2 years. Part of what made the profitless tech stocks such good performers in 2020 was the macro environment which was extremely accommodative with the Federal Reserve printing money and the Government wiring it straight into consumers’ bank accounts. In that environment markets are much more lenient about fundamentals and valuations and bid stocks up to crazy levels. When the Fed is tightening, and the conditions start worsening valuations come back down in very short order. Which brings us back to the Ark Innovation ETF, the posterchild for these extreme reversals of fortune. Its top holding being Tesla which itself is a car manufacturer valued as a technology company.

2nd February 2023
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Data source: Bloomberg
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