Technology stocks had another hot season last month, capped by Amazon’s surprising decision to buy Whole Foods for $ 13.4 billion.
And, as with many of the stock-breaking companies these days, the portfolio managers of Parnassus Investments, a mutual fund company that invests primarily in large US companies, have come to an end when they Weekly meeting of the company’s investment committee.
“These stocks are climbing – again,” said Todd C. Ahlsten, who oversees the company’s $ 15.6 billion core stock fund, pointing out that even low-traded funds Risk used Facebook, Apple, Google, Netflix And, yes, Amazon.
The explosion of low costs and the index of tracking of the E.T.F.s index and the soaring stock of technology generates existential anxiety among portfolio managers working in traditional mutual fund companies.
The products of a culture where fame and fortune have been accumulated for those who have the skills to choose the winners of the stock market – above all Warren E. Buffett and Peter Lynch at Fidelity – these intelligent stock experts now find more Difficult as ever to fulfill their main function: Invest in stocks that have beaten the broader market indices.
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This is largely because a torrent of money has been poured into machine-based tracking funds, which allocate money to stocks like Facebook, Apple, Amazon, Netflix and Google’s parents – So-called Fang stocks – according to their size Become and where they rank in an index.
For stock pickers, who glory in their ability to zig, where other zag discovering undervalued gems, what follows the investment of the crowd is an anathema – and it appears in the figures.
According to S. & P. Dow Jones Indices, 88 percent of mutual funds that invest in large cap stocks have dragged their benchmark over a five-year period ending last year.
This period of underperformance was the most severe in the last 12 months, a period when Fang’s stocks largely outperformed the market.
Value investors who eliminate companies that do not meet strict social standards, Mr. Ahlsten and his team, over the past year, generated a respectable return of 14 per cent in their core stock fund Where they have big stakes at Apple and Google.
But positions are not enough to keep track of 18%. Of the Standard & Poor’s equity index, where six of the top 10 components are now technology stocks.
Even more stressful questions, Amazon, they do not own, have simply agreed to buy Whole Foods – an agreement that sent its stock even higher and could threaten a number of companies in the Parnassus portfolio.
“This gives me a return to LTCM with all this correlation,” said Benjamin E. Allen, Ahlsten’s partner on the fund, recalling the lethal behavior of investors that resulted in the collapse of Long Term Capital Management In 1998. “It is simply a matter of buying without spirit these technological names.”
During the year to May, $ 263 billion left the actively managed mutual funds investing in US equities, while $ 308 billion was invested in the E.T.F. And index. Vanguard and BlackRock have cleaned up just about all that money, according to Morningstar.
This wave of money, combined with the weakness of its old equity funds, prompted Laurence D. Fink, CEO of BlackRock, to shake off his stock-picking ranks this spring.
The funds have been reorganized, the managers have been let go, and in doing so, Mr. Fink asked whether, given the technological advances and the dissemination of information, stock experts could actually add value, It is a matter of evaluating the companies largely followed in the S. & P. Index 500.
More than $ 5 trillion remains invested in funds oriented according to FactSet, a data provider. It is still early to determine whether Mr. Fink is describing a trend that will eventually reach its limits or whether a more fundamental and longer-term reorganization of the stock selection process will take place.
Parnassus portfolio managers are not alone in their fears. Late, the argument was made that the increase in machinery and investment not
It was a well-established strategy, which gained momentum after the financial crisis as investors embraced both the fund’s philosophy and its performance.
Assets under management reached $ 25 billion today compared to $ 1.8 billion at the end of 2008.
Yet, as technology stocks soared, Parnassus’ compensation fund returns lagged. Some 80 per cent of the fund’s peer group did better in the past year.
In the longer term, however, the results of Parnassus are better. For 10 years, the core fund of equity has reached its benchmark – 9% against 7%, a record that exceeds 98% of the competition.
But at a time when investors are transferring money from costly mutual funds to lower-cost exchange traded funds and to date, exchange-traded funds, down 10 years, have become a lesser defense reliable.
In the first five months of the year, according to Morningstar data, the basic equity fund experienced outflows. They are small – $ 150 million out of a $ 15 billion fund – and they follow five consecutive years of inflow.
Nevertheless, they were enough to concentrate the spirits in Parnassus.
“It’s stressful, we’re competition people,” Allen said. “I do not like to call my clients all quarters and say” sorry “.
By adopting a high-value investment style, Parnassus is not a dynamic investor. And Mr. Allen, who was appointed President at the beginning of this year and is expected to succeed Mr. Dodson in the operation of the company, has made it clear that fund-raisers have the ultimate goal of surpassing Decline – as did equity in 2008 – as opposed to the advance in a bull market.
So instead of continuing Amazon and Facebook, Mr. Allen and his team have focused on healthcare stocks like Gilead Sciences.
“There’s a herd mentality out there,” he said. “People buy stocks independently of valuations, if we can not do the calculations, we will not do it.”
Parnassus has an eccentric culture. The turnover is very low and just about all investment professionals begin as summer interns, an approach that exposes potential hires to a three-month control period.
According to Mr. Dodson’s orders, men must wear ties – in the office and on the road – a sartorial request that stands out in the ultra-sophisticated San Francisco workplace.
To encourage membership, at the end of each Investment Committee meeting, participants are invited to offer personal content on how they have spent their weekend.
Deep value stock breeders often exhibit idiosyncratic qualities, and this is true here.
Mr. Allen, for example, keeps his office virtually unimpeded, encouraging a meager and disciplined reflection.
And Mr. Ahlsten, to keep his mind clear, is limited to one hour of listening (phone, computer or other device) per day.
Recently, Amazon has filled their brains and, following the investment committee meeting, the two portfolio managers huddled in Mr. Ahlsten’s office.
In their current assessment, they agreed that the stock was too expensive to buy.
But the Whole Foods transaction poses a potential threat to at least five companies that Parnassus owns – from Sysco, the food distributor, to CVS, the pharmacy chain.
The five have dragged the index over the past year, and worry is that the Amazon deal could put additional pressure on them.
“The threat to these companies has increased,” Allen told his colleague. “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 whole world.”
At least they hope so.