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Don’t fear FAANGs: Funds aren’t investing like it’s 1999

A man poses with a magnifier in front of a Facebook logo on display in this illustration taken in Sarajevo, Bosnia and Herzegovina, in this December 16, 2015, file photo.

DADO RUVIC/REUTERS

The FAANGs on the average investors' portfolios may not be as scary as they look.

This year, once again, five big technology stocks -- Facebook, Amazon, Apple, Netflix and Google -- have been rising quickly, on average three times as much as the rest of the market. And that's raised the fear that individual investors are rushing into tech stocks at highs in what could be a replay of the late 1990s bubble. It's also brought up concerns about another phenomenon many money managers like to warn about -- passive investing. As more investors put their money in indexes, dollars are herded into the same stocks, with an increasing percentage going into the ones that are rising the most.

Put those two trends together, and some are worried that if tech stocks were to crash again -- particularly the FAANG stocks -- it would be even worse than in 1999. As the New York Times put it recently, not only are Amazon, Apple and the others a big part of our daily lives, "these tech giants may be dominating our financial futures as well."

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Not quite. Compared with 1999, technology stocks actually occupy a significantly smaller portion of many investors' portfolios, at least when it comes to the largest mutual funds and ETFs, which is how most people invest. What's more, the reliance on index funds may actually be limiting the amount of money investors are pouring into tech stocks, not the opposite.

In 1999, the 10 largest U.S.-focused mutual funds by assets under management (ETFs were not really on the scene yet) held a collective $143-billion in technology stocks, or 25 per cent of their collective overall holdings. The tech holdings of the top 10 mutual funds and ETFs have grown to $432-billion, but as a percentage of their overall portfolios the have shrunk to 21 per cent.

What's more, in addition to tech, the large funds in 1999 had a nearly 8-per-cent exposure to the telecom sector, which, with the emergence of the internet, was closely aligned with tech. Now the exposure to telecom is half of that.

Funds, because of indexing or perhaps the pull of passive strategies, do tend to be more uniform than they used to be. For instance, the American Funds Washington Mutual Investors Fund had just 3.4 percent of its portfolio in tech stocks in 1999. It's current tech exposure is 15 percent, the lowest of the large funds. But the index trend seems to limit how much funds will overweight tech as well. In 1999, the Janus Twenty Fund, which was the 10th-largest mutual fund at the time, had 47 percent of its portfolio in tech. And it wasn't alone. Four of the top 10 funds had more than 30 percent of their investors' money in tech.

These days, only one of the top 10 funds, Fidelity Contrafund at 37 per-cent, is above that threshold.

None of this means that there is no reason to be worried about the FAANG stocks. Apple is trading like the yet-to-be-released iPhone 8 is already a huge hit. And nearly 90 per-cent of Amazon's valuation, at least by one analysis, is based on earnings that won't materialize until 2020 or later.

But the idea that investors are sucking more out of tech stocks than they did in the past is wrong as well.

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Stephen Gandel is a Bloomberg Gadfly columnist covering equity markets. He was previously a deputy digital editor for Fortune and an economics blogger at Time. He has also covered finance and the housing market.

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