We always have fun with the pithy acronyms and anecdotes from the finance and investing community. The acronym de jour is FANG - standing for Facebook, Amazon, Netflix, and Google - those technology companies which dominated investment performance in 2015. Here’s the rub: these companies have extremely high valuations, with price / earnings ratio in excess of 300 to 1. In other words, investors wishing to buy a stock of Netflix, for instance, are paying $300 to pay $1 worth of current revenue. There are very legitimate investment theses for buying these companies, and many investment products will hold these stocks, despite the fact that they appear expensive by common valuation metrics. However, many of the active managers which under-performed the market and peers over the past year have pointed to the limited number of highly rewarded stocks – like the FANG stocks – and explain that they would generally avoid these high-risk and high reward positions. In other words, the reasons many active managers unperformed is that they avoided the high-flying momentum driven stocks which are trading based on grand expectations of future growth or speculation on market behavior.
Well, here’s their chance to prove their investment thesis. The FANG stocks are giving back some of their relative gains thus far into the 1st quarter of 2016. For context, the S&P 500 is down approximately 10% year-to-date. Facebook is maintaining its value better than most, down only 4% thus far. By comparison, Amazon is down about 28%, Netflix is down 27%, and Google is holding pace with peers, falling about 11%. If you average these funds, the high flying FANGs are under-performing the market in the market pullback, which is what you’d expect given the reduction of global growth expectations. We will see if yesterday’s under-performers in active management can use this pullback as an opportunity to pull back on a relative basis and demonstrate better value protection for their investors.