Investors in US equities suffered a disappointing 2015, with the S&P 500’s capital gain broadly flat for the year. Large caps performed better in general than small and mid caps, but the most significant returns came from a group of just four companies that have earned the acronym Fangs – Facebook, Amazon, Netflix and Google.
In other words, there was a distinct set of winners and losers last year, and as experienced investors will know, picking the winners – or at least avoiding the losers – is tricky.
Felix Wintle, head of US equities at Neptune Investment Management, explains: “Obviously we’ve now had the first [interest rate] raise but because you had interest rate rises coming, and you have what we believe is quite a long-term bear market in commodities, that spells disaster for certain companies – but the opposite for other companies.”
He illustrates this by pointing out that if the 10 largest companies in the S&P 500 were in an index of their own it would have been up 17 per cent in 2015.
Mr Wintle suggests that perhaps questions are being asked about whether investors’ reliance for returns on a small number of stocks reflects a healthy stockmarket, but he retains an optimistic stance.
He notes: “It’s very easy to think the breadth is so narrow that it must portend some doom. I’m not so sure about that.
“The sectors that are underperforming, like energy and materials, ought to be underperforming because the fundamentals are so bad. The sectors that are outperforming ought to be outperforming because the fundamentals are so good. I don’t think people are panicking into these names, they’re going up for very fundamentally sound reasons.”
As a group, the Fangs posted revenue growth of 25 per cent in 2015 against price appreciation of 83 per cent, according to Steven Bulko, chief investment officer, LO Funds Fundamental Equity Long/Short fund.
He asserts: “We believe the Fang names that provide accelerated growth will continue to attract investor interest and work into 2016, but with a broadening of participation as investors look outside this small group for additional winners. Despite the rising interest-rate environment, we anticipate that higher-multiple, faster-growing companies with improving margins will outperform.”
Chris Berrier, manager of the Brown Advisory US Smaller Companies fund, provides further reassurance that domination by the Fangs is not bad for investors.
“It is not abnormal for a handful of stocks to contribute a sizeable portion of overall positive returns. The Fang acronym and the common bond of being internet leaders made for a good story, but one that is not necessarily unique,” he says.
He claims the US small-cap universe will always provide investment opportunities as it is so vast in size, but admits these types of stocks “require patience and the stomach to handle short-term price fluctuations”.
There are other well-known US large caps that posted strong numbers last year, too – notably Apple, which reported the biggest annual profit in corporate history at $53.4bn. Other strong performers include Microsoft, Salesforce, Priceline, Starbucks and eBay.
For Artemis’ US equities manager Cormac Weldon, disruption will remain a theme this year. “We expect the debate surrounding ‘disruption’ to remain front and centre,” he confirms.