Fangs’ loss is income funds’ gain

Mr Vanderlee, who co-manages the Legg Mason IF ClearBridge US Equity Income fund, said income managers’ relative performance had suffered from the stocks’ rapid rise last year.

Properly weighted, the four stocks – Facebook, Amazon, Netflix and Google (Alphabet) – returned 64.4 per cent last year, according to analysis by Allianz GI.

This year, however, weakness in the latter pair has offset strength in the former, easing the relative performance pressures on managers who do not hold the stocks.

“The Fang stocks did very well [last year] but they are not going to be dividend payers. That’s a challenge for an income-oriented portfolio,” said Mr Vanderlee, who owns Alphabet but typically avoids companies that do not pay a dividend.

“Sometimes what you own hurts you and what you don’t own hurts you. Those stocks helped the S&P 500 but didn’t help us. This year we are seeing a reversion to that. It’s back to normal.”

Despite this prediction, the manager is comfortable holding Alphabet, which, alongside Berkshire Hathaway, is one of two stocks in the fund that does not pay a dividend.

While Berkshire Hathaway’s inclusion in the portfolio, which had 56 holdings at the end of March, was attributed to CEO Warren Buffett’s business acumen, Mr Vanderlee said he invested in Alphabet because of the potential he saw in the company.

He noted the firm’s success in several areas, from its search engine to the Android operating system.

“Google is the most valuable company on the planet right now,” he said.

“It just shows that in technology, if you get it right there’s so much value to be captured. They haven’t done things right once or twice, but many times.”

Despite shunning the rest of the Fang grouping, Alphabet is among a number of technology stocks – including Intel and Microsoft – which the manager is favouring.

“If you look at Microsoft, it’s becoming a growth vehicle again,” he explained.

“A lot of companies are moving their IT infrastructure to the cloud because it’s very expensive to manage in-house. [Cloud computing platform] Azure is a significant growth vehicle for the company.”

He noted that Microsoft had often defied expectations of its demise.

“It’s unusual for a company to be around that long and be willing to change,” he added. “The death of Microsoft has been announced so many times.

“First it was [competitor] Netscape and then it was Linux that were going to take Microsoft out of business. Where are they now?”

While information technology represented 14.4 per cent of the fund at the end of March, Mr Vanderlee has also been focusing on areas including consumer staples – with holdings such as Kimberly-Clark – and healthcare companies, including Pfizer and Johnson & Johnson.

According to FE Analytics, the ClearBridge fund has returned 28.5 per cent over three years, compared with 30.5 per cent from its Investment Association North America peer group.