FAANGs

Updated: Oct 1

Baring their teeth or long in the tooth?

Asset manager “herd” –overweight OR underweight.

FAANGs- Baring their teeth or long in the tooth?


“It’s a market of stocks and not a stock market”, says my stockbroker friend Stan at First Sentinel. In many respects this is a challenge to the “passive” universe of investors relying on buying a specific index (buying the market) versus the “active” managers being the universe of research and intuition aimed at avoiding the volatility which indices will possess simply by being an algorithm following a limited range of data. So, to the FAANGs being an embodiment of this issue.

Michael Cain was born Michael Mickelwhite (“not a lot of people know that”) and was more successful as a name change than FAANGs (where the G for Google was replaced by “Alphabet”), leaving the rest of the mnemonic as Facebook, Amazon, Apple and Netflix. More importantly, by August 2021 the FAANGs accounted for around 19% of the S&P500 and one third of the NASDAQ. The US market itself is around 65% (or thereabouts) of the MSCI Global market equity index. According to Phil Smeaton at VAM/Sanlam- the FAANGs accounted for 40% of the return of global equity market over the last 5 years. In numbers, as of August 2021 the FAANGs were worth around US 9 trillion (yes that’s a t) with the likes of Facebook with 2.8 billion users (yes that’s a b). Lorenzo La Posta at Momentum points out (Sept 2021): “ FAANG stocks now make up almost a fifth of the US market, with a total market cap of about $9.5trn. For comparison, the entire UK market has a market capitalisation of $3.5trn. They have dominated over the past five years, growing more than twice as fast as broader US equities”.

COVID of course was a boost to the services offered by the FAANGs. As of July 2021, the worst performer from the FAANGs was Alphabet which showed a growth from the 2009 market bottom of more than double the S&P index average. Netflix is up x100 and Amazon and Apple up x50.

This means passive investors have had an easy time recently following the FAANGs and the S&P 500 being a closet tracker of the FAANGs. The graph below is copied from BMO Asset Management and is dated 4th November 2020 and suggesting that the FAANGs accounted for “virtually all” of the S&P 500 8.2% YTD return. Who needs asset manager thinking and wisdom, you only need the FAANGs (but see the expert view below).


Endorsing Stans opening remarks, Daniel Jolliffe at Quilters Cheviot has provided the graph below which shows the performance of the Top 10 stocks in the S&P 500 versus the other 490. The suggestion being that the asset manager accessing the quality of the top 10 is likely to be less weighed down by the performance of the average.


FAANGs and the experts- The Herd View.

The questions we asked our Herd of asset managers included: in respect of the FAANGs what do you see as their outlook for continued growth and prosperity? Unusually, there seems to be something of a consensus which the “passive” , “do-it-yourself” investors may consider.

Daniel Jolliffe at Quilter Cheviot takes the view that “the performance of US technology is no longer framed by the performance of the FAANG stocks. This is because, due to the impact of COVID, technology is more ingrained within our day-to-day lives than ever before. This is highlighted by how dependent companies have become on Zoom and Microsoft Teams to conduct both internal and external meetings but is also highlighted by how manufacturing companies are utilising technology to ensure that their production systems are more effective and efficient, as human error is removed from their process.”

We score this as 1-0 to waning FAANG influence vs continued FAANG influence, although this is not necessarily a slur on the technology sector. The score goes to 2-0 with Lorenzo La Posta at Momentum commenting “ Looking forward, we expect their dominance to fade and their performance to be less exciting. A lot is embedded in their share price, but it is much harder to maintain double digit growth rates at their sort of scale, leaving ample room for disappointment. “.

Phil Smeaton at VAM/Sanlam makes the score a unanimous 3-0 stating “as the core tenet of portfolio construction tells us, performance is not a guide to their future return potential and not all FAANG’s have the same bite. To those investors wanting to buy an index and some of the largest cap companies in the market, the recent cautionary tale of many Chinese retail investors putting their life savings into loans or equity in Evergrande serves a purpose a here. The allure of previous years’ share price performance, without digging and understanding the businesses and their place in a wider portfolio, can often lead to errors of judgement and financial disappointment.”

Key take-aways:

  • The FAANGs account for 20% of the US stock market, and 40% of the return on global equity markets over the last five years.”

  • In isolation, the FAANGs account for USD 9 trn plus of value compared to the UK market at USD 3.5 TRN.

  • Passive index tracking has been shaken recently by the Evergrande/Chinese equity volatility, bringing up the “too big to fail?” question.

  • Our Herd of asset manager research departments see the FAANGs as long in the tooth in terms of continued results. Phil Smeaton at VAM/Sanlam “as the core tenet of portfolio construction tells us, performance is not a guide to their future return potential and not all FAANG’s have the same bite. ….. The allure of previous years’ share price performance, without digging and understanding the businesses and their place in a wider portfolio, can often lead to errors of judgement and financial disappointment”.

  • Daniel Jolliffe at Quilter Cheviot: “ the performance of US technology is no longer framed by the performance of the FAANG stocks. This is because, due to the impact of COVID, technology is more ingrained within our day-to-day lives than ever before “.

  • Lorenzo La Posta at Momentum: “ A lot is embedded in their share price, but it is much harder to maintain double digit growth rates at their sort of scale, leaving ample room for disappointment. “.

END…

For more details, or to contact Sean Kelleher CEO, Mondial Dubai LLC, please contact us at

+971 56 2228 535

clientservices@mondialdubai.com

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