The joy of avoiding the herd

The joy of avoiding the herd

FANGs and BATs1 were the darlings of the most recent tech bubble. Until they weren’t. Here, Nick Clay, Newton’s Global Equity Income manager, explains how he steered clear of the pack.

Having just come through the thick of the earnings season for US and Chinese technology stocks, it’s hard to not cast my mind back to the heady days of 2017.

At the time, we made a point of highlighting some of the comparisons we’d noticed with an earlier tech boom/bust – around the turn of the millennium – when the likes of and – the erstwhile poster children of the late 1990s dotcom bubble – were riding high. These were sexy and exciting start-ups but were also the new kids on the block, often with unknowns at their helm, unproven products or services and very little in the way of demonstrable earnings.

But their forecasts were confident and sentiment did what sentiment always does: It drew in capital and drove momentum.

The analogy we made in 2017 was with the modern-day equivalent of those start-ups of yesteryear: the most widely used collective acronym for stock names ever: the FANGs (or FAANGs) and their China-based counterparts, the BATs.2

For several years, in common with their dotcom forebears, these companies rode an earnings wave that only appeared to be heading in one direction, boasting growth demonstrated by lines that ran from bottom left to top right with little sign of reversing. Until they did.

At various points in 2018, each of these companies started to see their fortunes falter. Arguably their slowdown in core growth was somewhat inevitable, hence widespread shifts into other product areas. In some cases, they were a victim of their own success as users became soaked in social media choice and momentum softened. Elsewhere, they got mired in political or regulatory wrangles which threatened to destroy or at least restrict their ability to grow.

In this latest earnings season, forecasts were missed and operating margins declined as the audience land-grab became more aggressive. But more importantly, the outlook became relatively tempered. Notwithstanding some bounce-back in the first weeks of 2019, many analysts’ expectations are now far more conservative on these stocks than they have been for many years.

Now, admittedly the FANGs and BATs have moved the ‘tech’ debate on significantly. They are not unproven, certainly not in Apple and Amazon’s case. Even Facebook is a mid-teen now rather than a ‘new kid’.

But the lesson – about not following the market herd – is the same. The FANGs and the BATs had such a clear distorting influence on market performance, and on the fragile egos of market participants fearful of missing out on stellar gains, that a retreat was almost a foregone conclusion, in our view.

While these observations might be reassuring (after all, who doesn’t like being right?), as a manager on the Newton Global Equity Income Strategy they are also a bit irrelevant, for which I’m grateful. I’ve not had to battle with my team or our colleagues about the timing or prospects for these stocks because my yield parameters prevented me from ever being tempted towards them in the first place.

As ever, one of the biggest challenges of investing is to keep the emotion (greed or fear) out of the equation. Instead, my preference has always been to try to focus on the mathematics behind predicting dividends and calculating the potential of compounding returns. By doing so, I believe you’re much more likely to be in a position to say: “I told you so”.

The value of investments can fall. Investors may not get back the amount invested. Income from investments may vary and is not guaranteed.

  1. 1 FA(A)NGs is an acronym for Facebook, Apple, Amazon, Netflix and Google – owned by Alphabet. BATs refers to Baidu, Alibaba and Tencent.