Cherry Picking

Cherry picking refers to the act of choosing top securities for investment from research that generally overlooks large amounts of data or disregards broad market metrics.

Cherry picking can be an effective way to generate returns however it is not considered to be a best practice for comprehensive analysis and investment decisions. Cherry picking can be used by both individual investors and fund managers.

Individual investors may find success in following top performing fund managers or mutual funds and choosing to invest in the best performing stocks from their portfolios. Cherry picking can be a quick way to identify stocks for investment. Since it does not require deep analysis or research from a broad universe it can reduce the amount of time required for identifying investments.

For example, an individual investor may be interested in stocks from the semiconductor market category. Rather than having to research all the stocks that deal with semiconductors within the exchanges, an investor may instead look at a few mutual funds investing exclusively in the semiconductor category. From there, they may choose to further investigate and invest in some of the best performing securities.

Fund managers are typically required to do intensive research when choosing investments for actively-managed funds. Security investment in the portfolio is typically dictated by the fund’s investment strategy which is outlined in its marketing materials and prospectus.

In some cases, fund managers may cherry pick top investments from sources they deem to be reliable. Adding these chosen securities to the portfolio is typically outside of the standard procedure for their investment strategy. Some fund managers may integrate investments and proprietary investment research across different funds from the same investment company. While intended to be a collaborative investment approach, this type of strategy can generally be viewed as cherry picking.

Ark Invest provides one example. The investment manager offers four active exchange-traded funds (ETFs). All four ETFs invest in emerging, high growth, innovative companies. The four active ETFs include: Ark Industrial Innovation ETF (ARKQ), Ark Genomic Revolution Multi-Sector ETF (ARKG), Ark Web x.0 ETF (ARKW) and Ark Innovation ETF (ARKK). The Ark Innovation ETF (ARKK) is a conglomerate fund. ARKK invests in the top performing stocks of ARKG, ARKQ and ARKW. It does not deploy its own investment strategy but instead invests in the best stocks from three of its own active ETFs.