Some Stock Pickers Wary of Rush to Technology Giants
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.’