Shunning FAANG Isn’t a Losing Bet for $7 Billion Stock Manager
published Jan 15, 2018, 6:00:00 PM, by Jonas Cho Walsgard
Small tech is better than big tech.
That view has paid off for Storebrand’s Global Multifactor fund, which also sees small size as perhaps the thing to bet on in 2018 after momentum delivered gains last year.
“There will always be smaller stocks that will do better than the big ones,” Andreas Poole, the fund’s manager, said in an interview in Oslo on Friday. “There are other less known tech companies that have done better. And we’re looking for those.”
The so-called FAANG stocks, which include Facebook Inc. and Apple Inc. among others, led the global stock rally in 2017. Amazon.com, Inc. rose 61 percent in the past year while the Nasdaq 100 index increased 34 percent. But after four years of outperformance, Wall Street analysts are growing more cautious about the bull market.
“Earnings expectations on growth companies, such as Facebook — what’s priced in those type of stocks — is so high that the company on average can’t meet that,” said Poole, who manages 57 billion kroner ($7 billion). “And size makes it worse. It you’re big it’s even harder to grow in percent.”
Instead the fund holds tech companies such as Nvidia Corp. and Arista Networks Inc., which both have surged more than 100 percent in the past year. Poole’s multifactor fund performed in line with its benchmark in 2017. In the past five years the fund had an average annual excess return of 2.2 percent.
The fund holds 250 to 350 companies and seeks to outperform by buying stocks that score highest based on either small size, value, high momentum or low volatility. It excludes those that belong to the worst 10 percent in any of the factors and attempts to limit risk by taking many smaller bets.
Momentum was the best performing factor for the fund in 2017.
“Momentum is a factor that likes things to continue as before,” he said. “It has tendency to tick steadily up. But it’s a high risk factor and when it reverses it can turn around brutally. Buying only momentum is very risky.”
Since the factors outperform in different periods, the fund has four portfolios of the same size to harvest the long-term average of the four factors.
“What we’ve seen at the end of 2017 is that size came back a bit,” Poole said. “Smaller companies did better after performing badly for a period. So size could be a winning factor in 2018 if that continues.”