Many Wall Street careers have been built touting the exceptional capacity of Big Tech stocks including Amazon.com Inc. and Alphabet Inc. to outrun everything else in the market.
Yet a recent study from the Singapore Management University argues the superpower of the Faang cohort is exaggerated.
The bulk of their gains since 2013 came thanks to a broader market appetite for large companies and those with strong earnings growth, according to Roger K. Loh, an associate professor of finance who studied how investment factors influence returns. The intrinsic magic or otherwise of the Faang label—which includes the company formerly called Facebook Inc., Apple Inc. and Netflix Inc.—has little to do with it.
Loh found that the group’s impressive total returns, at 2.6% a month, dwindled to an actual outperformance of as low as 0.4% when controlling for the impact of favorable trends in the rules-based world of factor investing.
“If we account for the fact that Faang stocks belong to the large-cap group (size factor) and the growth-stocks group (value/growth factor), the majority of the abnormal performance post-2013 can be explained,” Loh said in an interview. “Their standout performance is less ‘standout’ once you see that stocks with the same styles were also standout in the post-acronym period.”
The good news: It suggests active managers struggling with the Faang oligarchy can match or outperform benchmarks by buying other stocks similarly powered by the size and growth factors.
Also lifting the Faangs, Loh found, is the Covid-19 outbreak, an event that has exacerbated the appeal of companies catering to stay-at-home demand. Excluding the pandemic period, their above-factor alpha weakened further.
To Faang devotees whose criteria of success is price gains, it may not matter much what exactly is driving their share returns. Yet for managers whose performance is tied to the S&P 500, it really does matter. The growing weight of the Faang group in the index has created headaches for active funds who have underperformed because of their broader market exposures.
Whether because of concern over stretched valuations or regulatory strictures, these managers have been chronically underweight the tech cohort.
The paper, which crunched data from February 2013 to August 2021, provides hope for them in the following way: If Big Tech outperformance is increasingly determined by quant factors, then investors can net big returns by holding a diversified portfolio of stocks with similar growth bets.