Investors are beginning to get a better understanding of FAANG companies and that is causing the stocks to drift further apart, according to Rathbones’ David Coombs.
During the past few years, the FAANG (Facebook, Amazon, Apple, Netflix and Google-parent Alphabet) stocks have been among the strongest performers in the US market, which has itself driven global markets.
Indeed, the ‘long FAANG+BAT’ trade has been seen the most-crowded trade in markets for eight consecutive months, according to the Bank of America Merrill Lynch Global Fund Manager Survey, reflecting the leadership of technology stocks.
Evolution of most-crowded trade
Source: BofA Merrill Lynch Global Fund Manager Survey
Yet, Coombs – head of multi-asset investing and lead manager of the Rathbone Strategic Growth Portfolio, Rathbone Total Return Portfolio, Rathbone Enhanced Growth Portfolio and Rathbone Strategic Income Portfolio funds – has become worried that the group of disparate stocks are being traded incorrectly.
“I’ve been very nervous that FAANGs became an asset class in itself,” said Coombs. 
The manager said the grouping together of companies such as the FAANGs stocks was not helpful for investors as they are very different and not just pure technology plays.
As such, the manager said he only holds Google and Amazon within his portfolios, with questions hanging over the other constituents.
For Coombs (pictured), Amazon is not a technology stock despite being treated as such and should instead be thought of as a retail distribution story.
He said the firm has invested wisely, has a low cost of debt, faces few competitors outside of China and has surprised the market by delivering strong profits.
The manager added: “Yes, there are regulation risks over the longer term, but at the moment its market share is still relatively small. It’s hard to see where regulation comes in.”
The second holding that the manager backs is Alphabet, the parent company of Google, which he likens to a “must have” utility, used by people every day.
“You can’t imagine life without it; it is almost like water and electricity,” he explained. “The competition is fractured at best: you can’t even see where the competition is right now and that gives us comfort in the valuation of that company.”
Yet, the manager is more bearish about the outlook for social networking platform Facebook, which he believes will face a number of challenges and a possible backlash from users.
“I don‘t hold it and the reason is that I was worried that privacy would become cool again,” he said.
“Increasingly for these companies – like Twitter and Snap also – people are going to wake up and worry about their digital footprints and digital history.”
He added: “When I was a teenager in the 1970s if I’d been using Twitter and tweeting about the girls in ABBA, I probably wouldn’t have got the job I’m in now.
“What was appropriate in the 1970s is not appropriate today. We’re already seeing people in the public domain losing jobs because of what they put on Twitter 10 or 15 years ago.”
Like Amazon, Coombs said Apple has been misidentified by the market as a technology stock but he views it instead as a luxury goods company.
“It doesn’t make phones it sells phones and increasingly they are selling incremental improvements in those phones: they’re increasing the prices and selling less. It should be valued like a luxury goods company rather than a tech company,” he said.
Performance of FAANG stocks over 1yr
Source: Nasdaq
The last member of the FAANG grouping – Netflix – is another stock that has been misidentified but also faces a lot more competition than the other four stocks.
The Rathbones manager said: “Increasingly the competition is starting to fight back and these are not small companies: Comcast, Disney and Time Warner [Warner Media]. These are companies with deep pockets.
“We think Netflix may have gone past its peak and will have to review its model going forward.
“Let’s not forget that Netflix bonds are junk status. Their cost of capital is high, so how long can they continue to burn that money?”
The multi-asset specialist said while he does not think the FAANG stocks he doesn’t own are bad companies, the market is starting to understand that they are fundamentally different. This is leading to some divergence in performance.
“That’s not saying ‘Netflix is a bad investment’ or ‘Apple is a bad investment’: I’m not saying that. But you can’t put in one basket five stocks and rate them the same,” he explained. “The market has finally worked it out, I think FAANGs is undone and won’t be coming back together.”
Notwithstanding his strong views on the FAANG stocks, technology and technology-related stocks play an important part in Coombs’ structural themes across the multi-asset fund range.
He said: “We tend to run a neutral global sector position because we take much higher conviction bets in the sub-sectors. Our interpretation of the sector is slightly different.”
Coombs prefers to back stocks that may be outside of the sector but plug into the theme of technological development.
“We think that the way the market will start to rate these companies will change and often a good stimulant for an upgrade in rating is if the company moves from a boring sector with a lower rating and into a slightly higher growth sector,” he said.
One example of a non-traditional technology stock is investment platform Hargreaves Lansdown, which he said is well-placed to benefit from further technological developments.
“I think Hargreaves Lansdown is well-set to be the biggest beneficiary from automated advice, or ‘robo advice’,” he said.
“Their platform and IT give them a massive advantage in the way moving forward with AI [artificial intelligence] smart beta, passives and everything else.”
Performance of stock since IPO
Source: FE Analytics
Coombs added: “I think increasingly Hargreaves Lansdown is starting to look like a technology company than a financial company. They have a great opportunity to exploit within technology sector over the next 10-20 years.”