META Meta Platforms Inc

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)

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