Don't Let the FAANGs Bite You!

The so-called FAANG stocks (Facebook, Apple, Amazon, Netflix and Google ) have had quite a run over the past several years, gaining more than 80% as compared with about 25% for the US large-cap market as a whole. As a group, they remained strong in August, but while four of the five have pulled back this month, Apple, the biggest of the lot, has continued to surge, propping up the group. From a risk perspective, however, their attractiveness may be fading.

I created a FAANG portfolio that weighted each stock based on its weight in the Russell 1000 (also used to calculate the returns above) and calculated total and active risk versus the Russell 1000, and I looked at some of the components of that risk.

As this set of stocks returned much more than the market recently, and therefore its weight has grown, the active risk of this portfolio versus the market has fallen substantially. So, at the end of July, if you owned just these stocks in their proportional weights, your active risk would be “only” about 10%, versus more than 14% 18 months ago. But looking more like the market is not necessarily a stamp of approval.

As we have noted repeatedly this year, predicted volatility has fallen nearly across-the-board, and this set of stocks is no exception. However, the predicted volatility of the FAANG portfolio has fallen much less than that of the overall market, and on a total risk basis they are now about twice as risky as the Russell 1000, up from 30% more risky a year ago.

Active style exposures can give an indication of the relative attractiveness of these names. In May 2016, this portfolio actually had a slightly positive Earnings Yield exposure, but the exposure has fallen substantially since then, returning to its prior negative level. Value – consistently negative – has also fallen in the past year, but the magnitude of change has been small.

Medium-Term Momentum was negative at the beginning of 2017, but not surprisingly, climbed in quite positive territory for much of the year. Notably, that exposure, while still positive, has been heading south since June. And while the Market Sensitivity exposure for these stocks has not changed much this year, Volatility has been increasing.

We will leave it to others to decide whether the strength of these stocks will continue. However, investors should keep in mind that these stocks are becoming increasingly volatile relative to the market, more overvalued, and their momentum seems to be waning. This simple risk assessment suggests the variables are moving in the wrong direction.

1Thanks to Axioma’s Tony Renshaw for his help in putting this analysis together.
2At the end of July Apple had just over 37% of the “portfolio” weight, Facebook 17.5%, Amazon about 17%, the two classes of Google combined about 25% and Netflix 3%.
3Based on the Russell 1000 index.
4Relative to the Russell 1000.

Melissa Brown, CFA

As Managing Director of Applied Research, Melissa Brown generates unique insights into risk trends by consolidating and analyzing the vast amount of data on market and portfolio risk maintained by Axioma. Brown’s perspectives help both clients and prospects to better understand and adapt to the constantly changing risk environment.