The fading glamour of FAANG stocks

Few people know how the acronym FAANG for the five high-flying US tech companies Facebook, Amazon, Apple, Netflix, and Google came to pass. It was coined as FANG in 2013 by Mad Money host Jim Cramer and Apple was added to the acronym in 2017. But as so often is the case in investing (and with Jim Cramer’s recommendations), the performance after the concept was popularised declined.

No this is not me picking on Jim Cramer’s recommendations. That is far too easy to do and his “skill” as a stock picker has been shown to not exist a decade ago. Instead, I want to go back to a topic that I have touched on before. Many investment trends start to disappear the moment they become widely known. I have talked about this in the context of smart beta and factor investing which has performed much worse once the factors have been popularised.

And the same thing seems to happen to FAANG stocks, though it is not quite that obvious. Roger Loh from Singapore Management University showed that the raw return of FAANG stocks before they got their acronym in 2013 was about 33% per year. Since 2013, the raw annual return declined to 31%, and if we exclude the Covid period to 27%. That’s not so bad it seems.

The declining alpha of FAANG stocks

Source: Loh (2021).

But if you calculate the alpha of the stocks vs. the stock market and correct for the common four systematic factors market risk, size, value, and momentum, then we see a strong decline. Before 2013, the annual four-factor alpha was some 23% per year. Since then, it has dropped to some 7% per year. That is still a lot, but it is no longer statistically significant. And that implies that going forward, there is no reason to believe that FAANG stocks will outperform the US market. And lest you complain that one problem with this analysis is that FAANG stocks are now so big, they are a major part of the market, the data above for the performance after 2013 is based on alpha vs the market excluding the FAANG stocks, so there is no double counting.

We don’t know which companies will be the next FAANGs but as these companies mature, it is increasingly unlikely that any one of these or the five stocks as a group will be the outperformers of the next decade.