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Miton’s Grieves: The biggest risk facing most US investors

Hugh Grieves, co-manager of the CF Miton US Opportunities fund, tells FE Trustnet why investors’ overdependence on ‘FANG’ stocks could be endangering their portfolios.

Lauren Mason

By Lauren Mason, Senior reporter, FE Tru...
Thursday August 10, 2017

An increasing dependence on ‘FANG’ stocks could start to spell trouble for US equity investors, according to Miton fund manager Hugh Grieves (pictured), who warned that there are several headwinds on the horizon for the increasingly popular group of growth stocks.

The FANGs (or Facebook, Amazon, Netflix, Google) have performed markedly well year-to-date as disappointment from US president Donald Trump and his inability to push through taxation and legislation policies has intensified the hunt for growth.

Facebook, Amazon and Alphabet (the parent company of Google) are three of the 10 largest constituents of the S&P 500 index and Grieves, who co-manages the CF Miton US Opportunities with Nick Ford, believes investors need to ensure they aren’t subjecting themselves to larger-than-expected individual stock bets.

“It is something investors very much need to be aware of and it’s not just S&P 500 trackers, these stocks have found their way into an awful lot of ETFs [exchange-traded funds] as well that you wouldn’t necessarily expect,” he said. “This is because the people who have designed these products want them to do well and so they find a way of including the FANGs in them, in many cases. 

“People might find that they own far more of these than they actually expect. Of the world’s 10 most valuable companies, today seven of them are technology companies. The last time this happened was in 2000.”

Grieves said there are several reasons to be cautious about FANG stocks. Firstly, he warned their recent run of success and their large weightings in the index have caused fund managers to crowd into them because, if they don’t hold them, they could well underperform both their benchmarks and their average peer.

If the performance of these stocks changes at any given point, the manager said this could lead to significant problems for investors in US equities.

Performance of index in 2017

 

Source: FE Analytics

“Some of these stocks are looking quite expensive and are pricing in big assumptions about future growth. Now that these companies have delivered this growth in the past, how are they going to extrapolate that growth out into the future?” he said.

“Is that always a good thing to do? Disney released its results last night [Tuesday evening]. Disney obviously provides a lot of content to Netflix and it announced that it will no longer provide content to them after 2019. Instead they will set up their own version of Netflix with their own content in direct competition.

“This is in combination with results from CBS which we also saw yesterday [Tuesday]. It has launched a direct competitor product in the US which has more than four million users already and it is now going to launch overseas later this year.

“You’ve seen [US broadband provider] AT&T buy Time Warner because it knows it needs to own its own content. You’re starting to see cracks appear with Netflix.” 


When it comes to Facebook and Google, Grieves pointed out that both business models are dependent on revenue from advertising. While there has indeed been a dramatic shift from traditional media – such as print and broadcast – into online advertising, the manager said this “headlong rush” into the space could start to cool down over the medium term.

“You are now starting to see companies such as P&G and Unilever – the biggest advertisers in the world – pull back on their digital spending. What they’re upset about is what they have to pay for,” he explained.

“If half an advert appears on your screen for more than one second, P&G pay for it. If half a video appears on your screen for more than two seconds, Unilever has to pay for it. Obviously, these firms are not particularly happy about that so they’re pushing back against the advertisers and they’ve cut some budgets.

“Obviously, this is very early on but I think you have seen the end of a headlong rush into digital, I think advertisers are being more thoughtful and have realised that digital isn’t necessarily the be-all and end-all.”

The final stock in the ‘FANG’ group, Amazon, has been cited by many fund managers as a reason to steer clear from consumer goods stocks, as the e-commerce giant has become the market leader across numerous areas of the space. 

Even when it comes to Amazon, though, Grieves warned that investors need to tread carefully given its high valuation and whether its current level of growth is sustainable over the long term.

“At the moment it seems that Amazon can do no wrong and that whatever it touches will turn to gold. That’s always dangerous, when people have a perception about a stock sooner or later something trips up,” the manager reasoned.

“I worry that the acquisition of Wholefoods could be a step too far. The grocery business in the US – as it is in the UK – it horribly intense. Online is very hard to do.

“At the moment investors are giving it the benefit of the doubt and assuming that this is possible and it will make a success of it. It’s a bit more of a jump for me to say that this is guaranteed and there is a risk that it could have to plough more and more money into it without a guarantee of success at the end of it.”

Last quarter, for instance, he said Amazon’s margins were lower than many investors expected.

“At the end of the day, Amazon does have to turn a profit,” he continued. “It’s not too dissimilar to 1999 to 2000 when, as long as a company was growing, who cared about profits? The share prices kept going up and then suddenly people started to worry about the profits.


“To justify Amazon’s current valuation, it has to win everywhere and it is now competing in more complicated and more difficult markets. Therefore, we have to question whether its success will continue.”

Despite these concerns, Grieves said FANG stocks account for approximately one-third of the entire S&P 500 index. He said these stocks have done particularly well over the last year or so because growth outside of these companies in the US has been tepid.

During the last financial quarter though, the manager said earnings growth in the US started to accelerate and argued that, if the US economy maintains this momentum, corporate earnings growth outside of FANG stocks will remain strong and investors will move to cheaper areas of the market to find growth.

“If you compare the performance of the Russell 1000 Value versus the Russell 1000 Growth indices year-to-date, the growth index is up 18 per cent and the value is up 6 [per cent]. It is unusual to get such a wide dispersion in such a short period of time,” Grieves said.

“Also, whenever a group of stocks gains an acronym, it’s time to get nervous. Whether it’s FANGs or whether it’s a group of markets referred to as BRICs, it usually means that it has started to become a fad.

“That’s the great advantage of running a multi-cap mandate fund. We don’t think too much about what the index is doing, it’s about where we can find the best risk-adjusted returns.”

 

Since the benchmark-agnostic CF Miton US Opportunities launched in 2013, it has returned 97.11 per cent compared to its average peer’s return of 84.65 per cent.

Performance of fund vs sector since launch


Source: FE Analytics

The £288m fund has a clean ongoing charges figure of 0.84 per cent.


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Data provided by FE. Care has been taken to ensure that the information is correct, but FE neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.

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