Some Stock Pick­ers Wary of Rush to Tech­nol­ogy Gi­ants

Honolulu Star-Advertiser - - BUSINESS - LAN­DON THOMAS JR.

Tech­nol­ogy stocks had an­other scorch­ing week­long run last month, capped off by Ama­zon’s star­tling de­ci­sion to buy Whole Foods for $13.4 bil­lion.

And like many stock pick­ers these days, the port­fo­lio man­agers at Par­nas­sus In­vest­ments, a mu­tual fund com­pany that in­vests mostly in large American com­pa­nies, were at their wits’ end. “These stocks are hit­ting highs — again,” said Todd C. Ahlsten, who over­sees the firm’s $15.6 bil­lion core eq­uity fund, point­ing out that even low-risk ex­change-traded funds were pil­ing into the likes of Face­book, Ap­ple, Ama­zon, Net­flix and Google — the so-called Fang stocks. The ex­plo­sion in low-cost, in- dex-track­ing E.T.F.s and soar­ing tech­nol­ogy stocks is gen­er­at­ing ex­is­ten­tial angst among port­fo­lio man­agers work­ing in tra­di­tional mu­tual fund com­pa­nies. Prod­ucts of a cul­ture where fame and for­tune have ac­crued to those with the skills to pick stock mar­ket win­ners, these stock ex­perts are now find­ing it harder than ever to ful­fill their core func­tion: in­vest­ing in stocks that beat the broader mar­ket in­dexes. That is largely be­cause a tor­rent of money has been pour­ing into ma­chine-driven track­ing funds, which al­lo­cate money to stocks like the tech gi­ants on the ba­sis of how big they have be­come and where they rank in an in­dex. Ac­cord­ing to S.&P. Dow Jones In­dices, 88 per­cent of mu­tual funds that in­vest in large cap­i­tal­iza­tion stocks trailed their bench­mark over a five-year peri- od end­ing last year. This pe­riod of un­der­per­for­mance has been most acute in the last 12 months, when the Fang stocks have out­paced the mar­ket by a large mea­sure. Value-ori­ented in­vestors who screen out com­pa­nies that don’t meet strict so­cial stan­dards, Mr. Ahlsten and his team have, over the last year, gen­er­ated a re­spect- able 14 per­cent re­turn in their core eq­uity fund where they have large stakes in Ap­ple and Google. But the po­si­tions are not nearly enough to keep pace with the 18 per­cent re­turn of the Stan­dard & Poor’s 500-stock in­dex, within which six of the 10 top compo- nents are now tech­nol­ogy stocks. Mak­ing mat­ters even more stress­ful is Ama­zon’s agree­ment to buy Whole Foods, which could threaten a num­ber of com­pa­nies in the Par­nas­sus port­fo­lio. Par­nas­sus was founded in 1984 by Jerome L. Dodson on the no­tion that buy­ing com­pa­nies that re­spect the en­vi­ron­ment, cul­ti­vate work­place har­mony and have sound gover­nance poli­cies would gen­er­ate de­cent in­vest­ment re­turns in ad­di­tion to mak­ing in­vestors feel vir­tu­ous. As­sets un­der man­age­ment shot up to $24.2 bil­lion to­day from $1.8 bil­lion at the end of 2008. Still, as tech­nol­ogy stocks have sky­rock­eted, the re­turns of Par­nas­sus’ bell­wether fund have lagged. Em­brac­ing a deep-value style, Par­nas­sus is no mo­men­tum in­vestor. So in­stead of chas­ing Ama­zon and Face­book, Ben­jamin E. Allen, Mr. Ahlsten’s part­ner, and team have bet big on health care stocks like Gilead Sciences. “There is a herd men­tal­ity out there,” Mr. Allen said. “Peo­ple are buy­ing stocks ir­re­spec­tive of valu­a­tions — if we can’t do the math, we are just not go­ing to own it.” At Ama­zon’s cur­rent val­u­a­tion, Par­nas­sus man­agers agreed, the stock was too ex­pen­sive to buy. But the Whole Foods deal poses a po­ten­tial threat to at least five com­pa­nies that Par­nas­sus owns — from Sysco, the food dis­trib­u­tor, to CVS, the phar­macy chain. “The threat to these com­pa­nies has in­creased,” Mr. Allen told Mr. Ahlsten in a meet­ing. “It re­veals what Jeff Be­zos’ am­bi­tions are, which are to dis­rupt and be part of every­thing. But the re­al­ity is that Ama­zon is not go­ing to take over the en­tire world.”

At least they hope not.

Priz­ing com­pa­nies that fa­vor the global good over ‘a herd men­tal­ity.’

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