By Danielle Chemtob
There's a silver lining when the stock market's most popular
technology stocks stumble: many large-cap mutual funds
outperform.
Those funds have fared better than the S&P 500 on most days
when one or more of the FANG stocks--the collective name for
Facebook Inc., Amazon.com Inc., Netflix Inc. and Google parent
Alphabet Inc.--has declined by 5% or more, according to a Goldman
Sachs analysis.
That's because the average large-cap mutual fund is underweight
three of the four FANG stocks, Goldman says. Those stocks have
propelled much of the U.S. stock market's gains this year, but the
bank's research suggests mutual funds are growing more skeptical of
the crowded trade, as The Wall Street Journal's Markets newsletter
noted Tuesday.
The average large-cap mutual fund holds 1.3% of its portfolio in
Facebook, 0.2 percentage points less than its benchmark; 2% in
Amazon, compared with the benchmark's 2.4%; and 0.3% in Netflix,
versus the benchmark's 0.5%. The funds are overweight only in
Alphabet, by 0.19 percentage points.
Those slim allocations helped shield the funds from the recent
losses suffered by Facebook and Netflix that bled over into the
broader tech sector and S&P 500. Large-cap growth funds have
outperformed the broad stock market index over the past month and
year to date, rising 3.9% and 11% over those periods, according to
Morningstar. That's versus gains of 3.3% and 6.6%, respectively,
for the S&P 500.
Facebook shares slumped 19% on July 26, losing $119.1 billion in
market value, after the social media giant warned of slowing growth
on its earnings call. That followed a 5.2% decline in Netflix
shares on July 17, the day after the streaming video company
reported weaker-than-expected subscriber growth.
Netflix shares have continued slumping, bring their losses for
the past month to 14%, while Facebook has recovered some of its
losses and is down 8.6%.
"There's definitely a feeling that it might be a decent time to
take profits and take some of that trade off the table," said Phil
Bak, chief executive of Exponential ETFs.
Mutual funds, particularly growth-oriented funds, have reduced
their exposure to the FANG stocks in recent years, according to
Goldman. They first dramatically cut their positions in the fourth
quarter of 2016 after Facebook shares lost more than 10% of their
value in the wake of scrutiny following the 2016 election, a period
when the S&P 500 surged. And the funds have generally continued
trimming their holdings since then.
Mark Stoeckle, senior portfolio manager of Adams Diversified
Equity Fund, said his fund cut its holdings in Facebook this spring
shortly before Chief Executive Mark Zuckerburg's testimony before
Congress and the European Union's privacy law went into effect.
"For us, it was managing risk relative to an unknown," he
said.
Brian Milligan, portfolio manager of the Ave Maria Growth Fund,
said his fund has never owned any of the FANG stocks--he says there
are inefficiencies in the business models of Facebook and Netflix
and not enough information about Amazon to properly value the
company.
"If you don't know why you own it from a fundamental standpoint,
how do you know what to do when it starts going down?" he said.
Despite their recent slide, the FANG stocks are still relatively
expensive compared with the S&P 500. The cheapest among the
group are shares of Facebook, which trades at a forward
price-to-earnings ratio of 23.7, versus 16.7 for the S&P 500.
Alphabet trades at 27.3, while Amazon and Netflix are at 85.4 and
94.8, respectively.
"At the type of valuations that the FANG stocks trade at, its
hard to rationalize trading them," said Mark DeVaul, equity
portfolio manager of the Hennessy Equity and Income fund, which
owns shares of Alphabet but none of the other FANG names.
To be sure, the funds that passed on the stocks have missed out
on significant gains. Despite their recent losses, shares of
Netflix have soared 83% in 2018, while Amazon has gained 58% and
Alphabet has risen 17%. Facebook is up a more modest 5.2%.
"If you didn't own some of these stocks last year, it was really
hard to outperform," Mr. Stoeckle said. His fund is still
overweight all of the FANG stocks, except for Netflix.
But as the bull market continues in its ninth year, some fund
managers are wary that slowing growth will leave the big technology
names particularly vulnerable.
"When you get into a market where multiples are starting to
compress, the stocks that led in the past will often become
laggards," Mr. DeVaul said. "At these types of valuations, [FANG
stocks] just don't offer the downside protection you would need in
that type of market."
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(END) Dow Jones Newswires
August 07, 2018 08:14 ET (12:14 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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