By Edward Golding, CFA, MBA
Portfolio Manager, North American Equities
I find it hard to remember life before Google. What did I do before I could just instantly search for useless information and find what I need at my fingertips? I’m sure many of you feel the same way.
Google is one of the so-called FAANG stocks (Facebook, Amazon, Apple, Netflix and Google) that have been collectively driving up stock market returns. As of May 17, 2017 the S&P 500 is up over 7.6% (CAD), however one third of this return has come from these five companies. Year to date, they’ve posted remarkable returns: Facebook is up 27.7%, Amazon is up 27.8%, Apple is up 32.7%, Netflix is up 25.5% and Google is up 20.5%.
Pushing boundaries and driving change at an exponential rate
Why are these companies doing so well? They are the kings of their industries and changing the world as we know it.
Just last year Facebook revealed its 10-year road map, with a vision to “give anyone the power to share anything they want with anyone else.” This very ambitious outlook includes artificial intelligence, virtual/augmented reality, and new connectivity offerings, such as drone-delivered internet service.
Can you imagine an airplane that has a wingspan longer than a Boeing 737, weighs less than 1,000 pounds, and flies higher than commercial aircraft bringing internet service to the developing world? How about a $1 app that projects a digital TV on the wall instead of a physical TV, through the use of augmented reality technology?
And that’s just Facebook. Imagine Amazon successfully delivering a parcel from a drone just 13 minutes after being ordered. Or consider Google’s contribution to the likelihood that the next generation of Canadians will never own a driver’s license thanks to self-driving cars. And what about Netflix ensuring everyone can watch whatever show they want in 4K streaming, whenever they want, for a low monthly fee on a number of devices?
Sink your FAANGs into a diversified portfolio
Given the astronomical success of these companies, why not just put all of your money into just the FAANG stocks and call it a day?
These types of investments are not for the faint of heart as they have high growth rates and tend to be significantly more volatile than a traditional blue chip company that provides a stable dividend. However, if included in a well-diversified portfolio, the FAANGs give investors access to companies that offer robust sales and earnings growth through innovative technologies and industry leading strategies.
We have purchased Apple, Amazon, Google and Facebook within our MDPIM U.S. Equity Pool as we believe these companies offer above-average market returns in the long run. The expectations for above-average returns from these investments are high, but they also incorporate above-average risk. Our investments in these companies are monitored to ensure the risks are well diversified, and they currently account for approximately 6.5% of the MDPIM U.S. Equity Pool.
Change drives innovation
Given the pace of technological change, it’s pretty safe to assume that the world we’ll leave behind will look vastly different from the one we were born into. The FAANGs and other innovative companies are critical to the development of our societies and offer potential rewards to investors who have patience, risk tolerance and long-term investing time horizons.
Now that’s something to sink your teeth into.