Head of multi-asset investments at Rathbones David Coombs has warned on the "hype" around so-called FAANG stocks and said investors risk "spectacular" losses if they continue to value these companies in the same way.
Tech stocks Facebook, Apple, Amazon, Netflix and Alphabet's Google (FAANG) have exploded in value over recent years and now account for more than 10% of the S&P 500.
Coombs' comments come after Apple became the world's first ever $1trn market-cap company earlier this month. The next largest is Alphabet's Google, which has a market cap of around $884bn.
According to AJ Bell, the five FAANG stocks are now valued at nearly 19% of US GDP (at 31 July 2018).
The manager, who is also a member of Rathbones' investment executive committee and strategic asset allocation committee, commented: "FAANGs have almost become an asset class in their own right. They have become a sub-set.
"But the way they are being lumped together is a risk in that the hype around them breaks away from more fundamental analysis of those companies' futures.
"Investors need to take a step back from the hype and understand all these companies are incredibly different.
"The risk of the FAANGs disappointing, as we have seen with Facebook, is share price falls can be spectacular. The hype around these stocks feels like dotcom mania."
There has already been increasing dispersion within the technology sector recently as Facebook shares slumped by about 20% in late July as the company reported earnings fell below investor expectations. Netflix also disappointed over the summer with lower-than-expected new subscriber numbers leading to a 14% fall in its share price.
Coombs said investors must understand these stocks "have very different drivers" as they are "very different businesses and you cannot just assume they all have the same growth potential, trajectory, etc".
The manager does not own record-breaking Apple, which he believes is seeing its famed innovation "beginning to slow down", as the company heads towards "becoming a luxury goods, retail business rather than a tech business".
He added: "It has not hurt the share price, clearly, but we are seeing a slowdown in iPhone sales.
"That is OK as long as they can retain the brand and the quality against cheaper rivals, but the stellar growth of the previous 15 years may be more troublesome.
"There are questions of whether it will be re-rated as a luxury goods company rather than a FAANG."
Of the FAANG stocks, Coombs only owns Amazon and Alphabet's Google, which he said "have almost become utilities" as "they have
an embedded place for the consumer and are creating barriers to entry".
Coombs added Google will inevitably be the next trillion-dollar company this year: "It is on a sounder base than some of the others. I would look at Google over Apple as a safe bet over the next two to three years, and ultimately overtaking it."
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