by Olivier d'Assier
The FAANGs (Facebook, Amazon, Apple, Netflix, and Google) were the market darlings of the COVID-19 Pandemic, attaining almost cult-like status with investors in 2020[1]. Only Microsoft and Tesla came close to winning such adulation. The chart below shows the cumulative return of the STOXX® USA 500 index (blue line) and the FAANG cap-weighted portfolio (red line), from the peak of the market on February 19, 2020 through to August 31, 2020. During that time, the FAANGs outperformed the index by an incredible 41%.
But since that initial market peak on August 31, 2020, through to March 31,2021, the FAANGs have underperformed the index by almost 17% (see chart below). It seems that since the end of August 2020, investors have been finding value elsewhere.
Looking at this performance through the lens of our Sector ROOF scores[2], we obtain some insights into the FAANGs’ ebbing popularity. The first step in the Sector ROOF score methodology is to establish the ROOF personality of each sector portfolio, based on its exposure to the eight style factors in the ROOF classification. The signs and sizes of those exposures determine the sector’s personality: is it a risk-tolerant or a risk-averse sector? By putting our cap-weighted FAANG portfolio through the same process, we computed its ROOF personality scores.
The chart below shows the ROOF personality for the FAANG portfolio since January 2019. A positive value greater than +0.2 indicates a risk-tolerant personality, and a negative value less than -0.2 indicates a risk-averse personality. The FAANGs have seen their historically strong risk-tolerant personality decline steadily since the start of 2019. This decline towards a neutral personality (between +0.2 and -0.2) was initially accelerated by the COVID-19 pandemic. But the trend abruptly turned as these businesses benefited mightily from soaring demand driven by lockdowns and social-distancing measures. Since recovering its risk-tolerant status, however, the FAANGs’ ROOF personality has resumed its transition from risk-tolerant at the end of 2020 to a neutral state at the end of March 2021.
The ROOF personality is computed based solely on factor exposures vis-à-vis the broad market average. We therefore conclude that the FAANGs’ active exposures to those risk-tolerant factors were brought down by the weights of their own success (i.e., they became the market). As their active exposures diminished, they became less popular with investors trying to achieve certain style factor tilts as part of their active strategies.
This is confirmed by the weight of the FAANGs in our Risk-On and Risk-Off ROOF portfolios. These portfolios are built using the ROOF personality of sectors to determine their allocation in a risk-tolerant and risk-averse market portfolio. Interestingly, the Risk-On portfolio has only always been over-weight Netflix. It has never held any Facebook or Google, and has always been under-weight Amazon and Apple, except during the COVID-19 crash rebound where the active risk constraint forced it to load on Amazon for risk-reducing purposes. Since the end of August 2020, Amazon has returned to an underweight position.
Conversely, the Risk-Off portfolio has always been over-weight Google, never held Netflix, and has always been under-weight Amazon and Apple. Facebook was under-weight until the post COVID-19 crash rebound when it became slightly over-weight (average +0.5%), and has remained so since then.
Since January 2012, the weight of the FAANGs in the STOXX USA 500 parent index has been 12.8%. In comparison, it has only averaged 7.2% in the Risk-On portfolio and 10.6% in the Risk-Off portfolio.
According to the ROOF methodology, FAANGs as a group are neither all risk tolerant nor all risk averse, and their nature changes through time. Therefore, while the FAANGs are lumped together per the acronym, they differ substantially. Their specific risk, total risk, factor exposures, and correlations with each other dictate whether they are part of a risk-on portfolio and or its risk-off counterpart. The term FAANG may make for juicy headlines and investment lingo, but when it comes to portfolio construction, go for the á-la-carte menu instead and treat each as an individual.
[1] For more details, read Diana Baechle’s blog post: “The US market can thank its FAANGs”.
[2] Details on the methodology can be found here.
