Investment

The Big Tech founder billionaires will slip into the management of their family offices

Against all the odds, the world’s biggest technology stocks have powered stock markets upwards for five years.

The NYSE Fang+ index has risen nearly 580% over the period, when rebased to zero, compared to a 100% for the S&P 500 and 200% for Nasdaq.

The bigger question is whether they have now become too big to succeed as governments slam their behaviour and rivals snap at their heels.  Over time, it is a racing certainty their founders will slip, like Microsoft’s Bill Gates, into the management of their family offices.

Their family offices are growing and evolving in their bid to remain relevant when the time comes for them to step aside…

Microsoft, Apple, Amazon, Alphabet and Facebook are the five largest companies in the S&P 500 index with a 25% weighting. Normally, you would expect the top five to account for 10% but an average earnings multiple of 57 explains their lofty valuations.

Their continued rise means many carefully calibrated quant investment strategies have come undone. David Blitz is head of research at Dutch manager Robeco.

After comparing the performance quant factors between 2018 and 2020 he says: “There was basically only one way to outperform during this period, namely by investing in the largest and most expensive growth stocks.”  The price correlation between each of them was an astonishing 75% to 89%.

Passive stocks picked up enough speed from mega-cap growth to pick up a huge quantity of business from active managers less impressed by tech. Specialist ETFs and active growth managers pushed up prices even higher. 

Each Fang+ company has benefited from different internet breakthroughs. Some of the latest developments in software are set to produce dramatic changes in the management of companies. AI will revolutionise society. Clean energy and battery technology can modify climate change.

However mega-cap growth companies have become too large and complicated to keep up to speed with the latest events. Rivals are continually finding new ways to compete. 

Because mega-cap growth has become so very mega, governments are increasingly calling their activities into question via regulation and antitrust lawsuits. Fortunes are being spent on media relations and lobbying.

Founders of businesses do not tend to find it enjoyable, or easy, to deal with issues like these, which may explain why the professional managements in charge of Apple and Microsoft have avoided more trouble than their peers. 

Alphabet and Amazon’s founders are making moves in a similar direction.  And, everywhere, their family offices are growing and evolving in their bid to remain relevant when the time comes for them to step aside.

Illustrations of the challenges faced by mega-cap growth companies are below. Some problems are larger than others, but collectively they show the challenge is daunting. For their part, investors need to decide whether mega-cap growth remains worth backing. A bit of downsizing may not come amiss.

* Facebook is facing a storm of regulatory issues in most regions, most recently Australia and US antitrust lawsuits suggesting it should be broken up. 

* Alphabet has dealt with Australia and antitrust issues. It was forced to start withdrawing Google from China in 2010. The value of its self-driving division has been cut by Morgan Stanley as competition develops.

*Apple has faced challenges from Samsung, criticism over its Chinese suppliers and antitrust allegations, more recently over its US sign-in protocols.

* Alibaba’s Jack Ma was brought to heel by the Chinese government which restructured Ant Group for political reasons as well as its potential financial dominance.

* Amazon is facing an antitrust challenge from the European Union and faces a growing determination to offer better pay and conditions to workers in the gig economy. Jeff Bezos is stepping down as chief executive to become chairman, reducing his exposure to confrontations. 

* Microsoft dealt with the anti-trust issue in 2001. To date, it has enjoyed an uneventful time with the regulators, helped by the emollient style of CEO Satya Nadella who wants better rules on personal data safety.

* Netflix has dealt with criticisms relating to its content. It has taken down films at the request of overseas governments. It has a narrow franchise and faces growing competition from Disney, Apple and Amazon Prime. 

* The US and UK antitrust authorities are probing Nvidia, a member of Fang+ , and its politically-charged $40 billion takeover of microchip designer Arm Holdings. 

* Tesla’s batteries could help to disrupt the US energy industry.  But its electric vehicle business is facing unprecedented competition from established car companies, aided and abetted by SPAC newcomers.

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