Investing Beyond FAANG
This material is directed at investment professionals and qualified investors (as defined by MiFID/FCA)
FAANG: Facebook, Apple, Amazon, Netflix and Alphabet’s Google
The FAANG companies have created large opportunities for themselves and they continue to successfully exploit them. But we are very excited about this simultaneous wave of innovation that’s reshaping the global economy. Client Portfolio Manager Kevin Collins discusses the recent observation that Alger’s Large Cap Strategies have been underweight FAANG stocks and why that may be beneficial for investors.
ALEX BERNSTEIN: Hello, I’m Alex Bernstein and you’re listening to The Alger Podcast, Investing in Growth and Change. Innovation and change are typically buzz words here at Alger and never more so than in the past year as we’ve seen the continuing trend of rapid digital transformation. So, we were a little surprised when some of our internal analyses showed that our large cap strategies have actually been underweight FAANG stocks year to date. Here to clarify why that idea may be important to investors is Alger Client Portfolio Manager Kevin Collins. Kevin, thanks so much for joining me today.
KEVIN COLLINS: Thanks, Alex.
ALEX: So, just to start off, Kevin: For the investors who don’t know what we’re talking about, what are the FAANG stocks?
KEVIN: The acronym FAANG stands for Facebook, Apple, Amazon, Netflix and Google. FAANG is a moniker that was coined probably five to ten years ago that represents some of the very largest tech platform companies. These five stocks comprise about 25 percent of the Russell large cap growth indexes. And their market share is so large because these companies have created very large opportunities, large markets, to which they sell their products and services.
ALEX: Not only have these names come to dominate the markets over the past 20 years, they’ve really changed the direction of our economy.
KEVIN: Yes, that’s absolutely true, Alex. And I think that represents the power of aligning with change and it shows you how powerful the opportunity set, or the investment philosophy of investing in Positive Dynamic Change can be, that these companies, many of which are 20 and fewer years old, now represent such a substantial portion of the American economy and stock market.
And that speaks to the concept of digitization and the changing nature of the American economy that’s now represented so much more by intellectual property and intangibles than it is in productive brick and mortar type factory production companies.
ALEX: So, what you noticed, is that Alger, which has been so focused on change and investing in innovation and has certainly invested heavily in the FAANG stocks at one point or another, has been surprisingly underweight FAANG in our large cap portfolios for some time now?
KEVIN: Yes, these companies, their prominence has risen substantially in line with their effect and presence in the economy. It hasn’t been a surprise though when we talk about the relative exposure in the Alger large cap growth portfolios to FAANG. Our weightings to these companies through the years have gone from an overweight over the last five years to an underweight currently. And that’s not because we’re not excited about these companies and their growth prospects, because we could conceivably, in the coming quarters move to an overweight.
But currently, we are very, very excited about this simultaneous wave of innovation that’s reshaping the global economy, that’s recasting whole industries. And those changes include 5G, artificial intelligence, cloud computing, cloud software, genetic-based medicines and testing, e-commerce, autonomous vehicles, electric vehicles and digital payments. And these innovations are happening across the economic spectrum and all at once.
So, we believe no industry is immune and Dr. Ankur Crawford told our clients that this wave of innovation is revolutionary; it’s not evolutionary. We’ve got a great white paper called The Age of Connected Intelligence that supports that notion. Patrick Kelly, the co-manager of these large cap growth strategies, for 15 years, he’s witnessed this personally, the evolution of these innovations. He’s saying that spending on innovations is no longer discretionary. It is table stakes. So corporate America is digitizing and board room executives that can’t or won’t digitize, I think they’re jeopardizing their companies’ survival and their own job security.
And coronavirus has actually accelerated the adoption of innovations, both in a distributed workforce environment and as we all sit at our homes.
ALEX: Kevin, some investors might be wondering–what might be the benefit of being underweight these names?
KEVIN: Well, we are active managers and I believe we are discovering very exciting opportunities outside of FAANG.
Within the portfolio, we’ve got digital payments companies, 5G wireless carriers. We have very exciting significant software companies that enable corporate America to turn their data, and you’ve heard the expression “data is the new oil”, into more productive solutions via cloud software that allows these companies to insulate their business from digital entry and competition and technological obsolescence.
We also have very exciting semiconductors that support this vast data crunching and the computer power behind that and life sciences tools companies as well, which enable this wave of spending on drug discovery to be employed in a productive fashion and increase the probability of positive healthcare outcomes. So, we’re very excited by the FAANG companies, but we do see those tremendous opportunities outside of FAANG as well. So, our current underweighting in these FAANG names is more about the beneficial exposure to other powerful innovators that we just talked about.
ALEX: Kevin, can you give us a couple examples of non-FAANG companies that the large cap portfolios might be interested in?
KEVIN: Absolutely. And stocks don’t need to replace FAANG in order to be successful and have a beneficial impact on Alger’s investors. So, these innovations don’t necessarily have to replace FAANG or become as large as FAANG. Many of these companies are smaller today by orders of magnitude but we believe have very bright growth futures and are still large enough to have a sizeable presence in the Alger portfolios.
One company, which is a very large telecommunications company, has yet to be even included in the Russell 1000 Growth Index and our bottom up fundamental analysts have identified this company as a primary beneficiary of the dynamic change associated with 5G. I think they’ve got a unique raw material in the form of their wireless spectrum that allows them an advantage position to grow in this new 5G world.
Additionally, I think a life sciences tools company with a leading industry position in tools that are utilized for drug discovery has an avenue of growth ahead of it that is quite attractive.
ALEX: And I’m guessing there’s an abundance of names to consider at this point? Is that right?
KEVIN: Yes, I think that you’ve encapsulated it quite nicely, Alex, that there is an abundance of opportunity that we see out there. While FAANG companies typically capture the headlines and garner a lot of attention, many of the companies that we’ve discussed today possess very exciting growth futures and it is our hope that our clients will benefit from their association with them.
ALEX: Do you think we’re likely to be overweight FAANG again, at some point?
KEVIN: I wouldn’t discount that. The FAANG companies are quite exciting. They’ve created large opportunities for themselves and they continue to successfully exploit them.
ALEX: Kevin, one last question. It’s certainly been a long, complicated year for everyone. How have you been holding up with all of the changes?
KEVIN: Well, nearly eight months into my quarantine, I’m still married. I view that as an accomplishment. And further, I did get to spend a lot of time with my kids before they went back to school late this summer, so it was nice to reconnect with them over the period of a few months and so it was really nice to be around my family.
ALEX: Kevin,great talking with you.
KEVIN: Alex, thanks a lot. It’s always a pleasure to speak with you.
ALEX: And thank you for listening. For more information on Alger large cap strategies and for more of our latest Insights, please visit www.alger.com.
Risk Disclosures: Investing in the stock market involves risks, including the potential loss of principal. Growth stocks may be more volatile than other stocks as their prices tend to be higher in relation to their companies’ earnings and may be more sensitive to market, political, and economic developments. A significant portion of assets will be invested in technology and healthcare companies, which may be significantly affected by competition, innovation, regulation, and product obsolescence, and may be more volatile than the securities of other companies. Investments in the Consumer Discretionary Sector may be affected by domestic and international economies, consumer’s disposable income, consumer preferences and social trends. Foreign securities involve special risks including currency fluctuations, inefficient trading, political and economic instability, and increased volatility. Short sales could increase market exposure, magnifying losses and increasing volatility. Leverage increases volatility in both up and down markets and its costs may exceed the returns of borrowed securities. Assets may be focused in a small number of holdings, making them susceptible to risks associated with a single economic, political or regulatory event than a more diversified portfolio. Active trading may increase transaction costs, brokerage commissions, and taxes, which can lower the return on investment. Please visit www.alger.com for additional risk disclosures. Past performance is not indicative of future performance. Investors whose reference currency differs from that in which the underlying assets are invested may be subject to exchange rate movements that alter the value of their investments.