Volatility Equities Chart

FAANG Is Dead: A Timeless Lesson for Equity Investors

23 May 2022
3 min read
James T. Tierney, Jr.| Chief Investment Officer—Concentrated US Growth
Michael Walker| Co-CIO—Concentrated Growth
Defanged: US Mega-Cap Stock Correlation Has Recently Broken Down
Line chart on left shows the correlation of six US mega-cap technology stocks since March 2020. Line chart on the right shows the relative performance of each of these six stocks versus the S&P 500.

Past performance does not guarantee future results.
As of April 29, 2022
*Based on weekly returns for six stocks—Alphabet Inc. (Google), Amazon.com, Apple, Meta Platforms (Facebook), Microsoft and Netflix—using closing share prices for Friday each week. Weekly return dispersion calculated using the covariance Excel function (VAR.B), to which a trailing three-month rolling average was applied
Source: Bloomberg, S&P and AllianceBernstein (AB)

For several years, the largest US technology and new media companies were widely seen as a cluster of similar stocks. Not anymore. The recent divergence of the so-called FAANGs reminds us why fundamentals should always trump fads for long-term equity investors.

It’s one of the most widely known acronyms on Wall Street in recent years, even as it became clumsier to pronounce. First came the FANGs—Facebook (now Meta Platforms), Amazon, Netflix and Google. Apple later joined to create the FAANGs, and more recently, a revitalized Microsoft came aboard to the FAANMGs. The acronym reflected a popular view that these stocks were made from the same mold. And their performance was highly correlated, especially during the pandemic, when demand for digital services surged. As a result, these six stocks comprised nearly 39% of the Russell 1000 Growth Index, and 24% of the S&P 500 at the end of 2021.

Market Correction Amplifies Differences

Much has changed during this year’s correction. While all six stocks have declined, Netflix and Meta fell harder than the others. The correlation has faded, and returns have diverged (Display).

In recent years, we’ve frequently warned of concentration risk in US equity markets. When the FAANGs rose in tandem, passive investors enjoyed handsome returns but also accumulated a hefty weighting in the priciest US mega-cap names. In our view, each company should be researched and held based on its merits, using a disciplined investing approach and at measured weights.

Evaluating Strengths and Weaknesses

Even after the declines, US mega-caps are still large components of US indices, so they can’t be ignored. But an active approach is essential to find those offering profitable, sustainable growth at the right price. The technology and media industries offer an array of business opportunities from cloud computing, search engines and social media to streaming, hardware and online shopping.

Since each segment faces different dynamics and regulatory pressures, business outcomes will differ. Media streaming is seeing signs of saturation while also becoming much more competitive. Social media incumbents are fending off new competitors. Unprecedented inflationary pressure is adding hurdles to e-commerce. The cloud is being elevated by the digital transformation boom. Smartphones have become an indispensable, regularly upgraded utility.

Of course, all this was true before 2022. But now the market is making the distinction that there will be winners and losers, unlike the last five years where everyone was seen as a winner. Evaluating the fundamental strengths and weaknesses of each company is the key to investing successfully in the right mega-cap growth companies for a more challenging macroeconomic and market environment.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.

References to specific securities are presented to illustrate the application of our investment philosophy only and are not to be considered recommendations by AB. The specific securities identified and described do not represent all of the securities purchased, sold or recommended for the portfolio, and it should not be assumed that investments in the securities identified were or will be profitable.

About the Authors

Prior to joining AB in 2013, James T. Tierney, Jr. was CIO at W.P. Stewart & Co. From the beginning of his career at J.P. Morgan Investment Management to his current role as CIO of Concentrated US Growth, quality and “sky-high conviction” characterize his investment strategy.

Tierney and his team prioritize deep research, mining not only proprietary technology but “walking the factory floor.” Working with a select group of companies means that his team gains a thorough knowledge of the culture, the physical space—from the parking lot to the break room—and especially the management teams they select for the portfolio. Tierney focuses on secular growth companies: the companies that are being driven by long-term trends that will drive growth well above the overall economy.

This crucial differentiator helps build high-conviction, “sleep at night” investments.

“These are high-quality growth businesses,” Tierney says of the companies in his portfolio. “We are not worried.”

Michael Walker is a Senior Vice President and Co-CIO for Concentrated Growth and is responsible for the technology and business services sectors. Before joining AB in 2013, he was a portfolio manager/analyst on the US equity research and portfolio-management team at WPS Advisors. Prior to that, Walker was the technology sector analyst for the large-cap growth fund at Ark Asset Management. He had previously spent nine years as a senior research analyst covering the IT hardware and electronics supply chain sectors, first at Donaldson, Lufkin & Jenrette and then at Credit Suisse First Boston. In 2006, Walker was ranked the top analyst in his sector in the Institutional Investor All-America Research Team survey after having ranked third in 2004 and 2005. He began his career as an IT consultant with Deloitte Consulting. Walker holds a BS (magna cum laude) in Economics from the Wharton School at the University of Pennsylvania. Location: New York