FAANG leadership in question as firms fail to deliver

Funds are trimming positions, while analysts and investors cast a more critical eye on individual performance

FAANG leadership in question as firms fail to deliver

The tech sector is hitting its stride in Canada, but things appear decidedly less rosy for its largest representatives south of the border.

With the exception of Google parent Alphabet, members of the vaunted FAANG firms have stayed far below their records following a selloff that erased billions of dollars in market value, reported The Wall Street Journal. A sharp rebound in the first half of the year has been of little help in FAANG members’ quest to reclaim their highs; it’s been much the same for the S&P 500 and other major indexes.

“The S&P 500 is flat since mid-2018 despite a 14% jump from December,” the Journal said, adding that FAANG stocks represent nearly 20% of the S&P 500’s value. It’s small wonder that they played a major role in much of the decade-long bull run in stocks, and became the most popular trade among big money managers through the majority of 2018. As of August last year, their combined market value amounted to US$3.7 trillion.

But since then, the stocks have shed nearly US$463 billion in value. A monthly fund-manager survey conducted by Bank of America also revealed investors shifting to other bets based on calls for a strengthening U.S. dollar and a rise in U.S. Treasury prices.

“For several years, investors reliably bought the shares for the companies’ massive growth potential and dominance over their respective industries,” reported the Journal. But the early narrative painting them as upstarts with apparently limitless expansion potential has run its course. Investors are increasingly pricing in scenarios of slower growth, greater costs, and greater government oversight.

Based on data from Bank of America Merrill Lynch, mutual funds have slashed their positions to Facebook, Amazon, Netflix, and Alphabet to one of the lowest levels since hitting a high in 2016. Goldman Sachs data, meanwhile, shows that Facebook, Amazon, Netflix, and Apple are among mutual funds’ most underweight positions relative to their benchmarks; among the FAANG firms, Alphabet is the only overweight remaining for many managers.

Goldman Sachs’ Technology Opportunities Fund has reportedly scaled back its holdings of Facebook shares while maintaining a lower exposure to Apple. Brook Dane, a co-portfolio manager of the fund, told the Journal that FAANG stocks “broadly haven’t done a whole lot the past year,” particularly as their growth rates get reassessed due to various issues.

Facebook stumbled last year amid revelations of improperly shared user data; it has risen 36% this year thanks to solid earnings, but share prices are still down 22% from their July 2018 high of US$217.50. Netflix has declined 21% since June following its first decline in U.S. users in nearly a decade, as well as news of several big rivals launching their own streaming services. Amazon’s streak of record quarterly profits snapped in July due to rising costs, and Apple investors are shifting their focus from the company’s consistent rollout of new phone, tablet, and accessory products to its service business.

Other analysts are also raising doubts about FAANGs’ influence, citing instances when the stock market has accelerated to new highs even as sector leadership shifted. In the late ‘90s, Microsoft, Intel, Cisco Systems. and Oracle were dubbed the “Four Horsemen” as they accounted for nearly 14% of the S&P 500’s capitalization; even as the four stocks stopped rising in lockstep, the index powered to new highs.

“The fundamentals of these businesses matter a lot more now for these stocks,” said Dane from Goldman. “It’s healthy the market is starting to discriminate more and the FAANGs are no longer a one-directional buy process.”


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