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October 2020 / INVESTMENT INSIGHTS

Extracting US Alpha Outside the FAANG Phenomenon

Identifying innovation and growth beyond the tech giants

The much-publicised FAANG stocks – Facebook, Amazon, Apple, Netflix and Google/Alphabet – have been the driving force behind the striking rebound for the US stock market since the depths of the coronavirus panic in March.

Apple has led the way, with its share price climbing 139% since the depths of March, making it the first company to have its market capitalisation reach US$2 trillion. Facebook and Amazon have more than doubled over this period also, rising 108% and 111%, respectively. Meanwhile, Netflix and Google-parent Alphabet have also ridden the recent tech wave, with share price increases of 86% and 63%, respectively.1

But the FAANG phenomenon is not just a 2020 story. In our view the sizeable performance of these index heavyweights has helped propel the US stock market to gains far in excess of every other major global index in recent years.
 

Only a quarter of outperformance

However, as a result of the FAANG dominance, there is a widely held view that alpha generation in the US has solely hinged on whether or not an investor has held active positions in these five tech giants. This is a major misconception.

Of course, as one of the largest active US equity managers in the world, we have shared in the long, medium and short-term success of the FAANG story – with these stocks being a significant driver of performance over the past five years. Indeed, we have been major owners of some of these companies in the T. Rowe Price US Large Cap Growth Equity Strategy for nearly fifteen years.

However, far from just a FAANG play, these five stocks have collectively accounted for only 26% of our outperformance of the benchmark over the past five years – with the vast majority of the alpha generated coming from other sources.2

Innovation not exclusive to FAANGs

The innovative and disruptive FAANGs have transformed industries and rightfully attracted widespread investor attention. These businesses have the characteristics we look for – companies able to take major share within established markets and generate the significant free cash flows that ultimately drive stock prices. In particular, Amazon, Alphabet and Facebook remain among our highest conviction investments.

However, there are many other examples of such innovative companies, aside from the FAANGs, in the technology sector and beyond. Here we highlight three examples from our portfolio:

Snapchat

We have followed Snapchat pre and post IPO and it has continued to innovate and develop its business model – achieving relevance and scale with its target audience. We think Snapchat, which has an impressive 200 million daily active users in the attractive 18-24 age demographic, is well poised to sustain future growth at more attractive margins. It has increased efficiency and margins, with greater scale, through its improved advertiser self-serve toolbox. It also has scope for additional advertisers to join the platform and an opportunity to close the large monetisation revenue gap per user versus the peer group – such as Facebook and Twitter.

Carvana

Relentless evolution in e-commerce is forcing companies to rethink consumer relationships and the management of image and reputation. We believe the digitally agile Carvana will redefine the buying experience in the highly fragmented US$800 billion US used car market. It uses data to improve the customer experience, while authenticity and trust are drivers of brand engagement.

Wix.com

We recently took a small position in Wix.com. It is a company we have known for a long time in our small cap portfolios. The company provides website development services to SMBs (small and medium businesses) to establish an online presence to reach and sell to consumers. In our view their disruptive technology, leading market share and innovative customer tools are ready to be monetised. Their freemium offering is experiencing good conversion to paid subscriptions providing good visibility to a high degree of recurring revenue. We expect the total addressable market for these services to grow materially with greater digital adoption and we believe Wix.com’s runway for growth is underappreciated by the market.

While we expect volatility to continue in this uncertain environment, our focus remains on identifying high-quality growth companies that we believe have a competitive advantage. We believe these companies have the potential to generate double-digit earnings growth over time by participating in expanding markets, taking market share, or improving profitability faster than sales. While the FAANGs continue to dominate investor attention, we continue to see numerous stocks well equipped to navigate and thrive in the current unsettled environment.

Performance

US Large-Cap Growth Equity Composite

Figures are calculated in US Dollars

US Large-Cap Growth Equity Composite

Past performance is not a reliable indicator of future performance.

Gross performance returns are presented before management and all other fees, where applicable, but after trading expenses. Net of fees performance reflects the deduction of the highest applicable management fee that would be charged based on the fee schedule contained within this material, without the benefit of breakpoints. Gross and net performance returns reflect the reinvestment of dividends and are net of all non-reclaimable withholding taxes on dividends, interest income, and capital gains.

∆ Index returns shown with gross dividends reinvested.

* The Value Added row is shown as US Large-Cap Growth Equity Composite (Net of Fees) minus the benchmark in the previous row.

London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). © LSE Group 2020. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.

 

IMPORTANT INFORMATION

This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.  

It is not intended for distribution to retail investors in any jurisdiction.

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202010-1355596
RELATED FUND
SICAV
Class I USD
ISIN LU0174119775
A pure growth portfolio of typically between 60-75 US large cap stocks with diversified exposure across industries. We seek to invest in competitively-advantaged businesses at various stages of their corporate life-cycle, leveraging innovation and change to drive rapid growth in earnings and cash flow.
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3YR Return
(Annualised)
18.56%
Fund Size
(USD)
$3.0b

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