Industry Voice: As responsible and sustainable investors, we are often asked for our opinion on the FAANG stocks which dominate the US tech market and whether we would deem these suitable investments.
The firms which make up this collective - Facebook, Apple, Amazon, Netflix and Alphabet (Google) are the undisputed heavyweights of the tech world, with a combined market capitalisation of over $3 trillion. Their rise to the top has been relentless in recent years, driven by strong growth and underpinned by disruptive business models, all focussed around products or services credited with helping to change the way we live our lives.
As the FAANGs have gathered momentum over the last several years, institutional investors have thrown their weight behind them. Look at many global or US equity funds and it is likely you'll see one or more of the FAANGs feature in the top holdings. And the picture often does not change when you look at the FAANGs through the lens of many responsible and sustainable funds. It is a fact that many investment managers who build their funds on the principles of ESG investment have seen fit to include some or all of the FAANGs within their universe of investible stocks.
In that regard, EdenTree makes no claim to be different. We have exposure to Alphabet Inc, the holding company through which Google operates, in our Amity International Fund. However, where we can claim a difference is through the fact that Alphabet has been subjected to, and passed, our rigorous Amity screening process.
It is a nuanced process. The FAANGs present acute dilemmas to us as responsible and sustainable investors, because many of them have attracted continued controversy in various ways. Past examples include data misuse (Facebook), supply chain risk (Apple), poor labour conditions and workers' rights (Amazon), immature corporate governance (Netflix and Alphabet) and aggressive tax avoidance (Apple, Amazon and Alphabet). To have a positive mission and sustainable outlook is not, in and of itself, enough of a reason for a company to be considered responsible in our view; nor is the fact that the company may pass basic ESG screening processes. This is really where the rigour of our Amity process gives us the depth of understanding as to the suitability of the FAANGs for inclusion within a responsible and sustainable portfolio.
That is because, as part of the Amity process, in addition to the ethical screens we apply, we also subject our investments to a positive responsibility screen as well, in which we look to commend companies into our portfolios based on our nine ‘positive pillars' - core responsible and sustainable themes which actively contribute to making a positive difference to our society and the world we live in.
Overlooked ESG concerns
It is in this context that we identify the majority of the FAANGs as un-investible from a responsible and sustainable perspective. In the case of Apple or Amazon, their failings surrounding the protection of workers' rights both internally or throughout the supply chain are much debated. But a more common theme, which to the market at large does not seem as obvious or important, is poor corporate governance. Facebook for example, discriminates against ordinary shareholders via a dual share structure which gives the majority of voting power to its executives. Netflix's reporting of environmental, social and governance issues has lagged behind its rapid growth.
These more subtle, but no less important, ESG issues are often overlooked by investment managers who are more focussed on the disruptive and innovative nature of the FAANGs, which when looked at in isolation puts them at the forefront of societal change for the better.
We challenge that view and urge investors to look at the bigger picture. To examine the FAANGs only at a surface level is to not really understand that they all have underlying ESG challenges which present real risks to the responsible and sustainable investor.
Technology: democratising communication
At the moment, only Alphabet has been approved for inclusion within our Amity range. It still presents challenges for the responsible investor, not least around regulation and market dominance. However it has been a facilitator of news, knowledge and information, democratising the internet for users. It is also a leader in technology-led environmental management (having been carbon-neutral since 2007) and is a powerful advocate for the community and charitable sector.
The company is well-known for its positive work-life balance ethic and has an engaged workforce. As a holding of our Amity International Fund, we continue to monitor it on an ongoing basis and our SRI team engage with the business at a senior level over ESG concerns.
For EdenTree, technology is a key theme for investment. For many of the challenges that our world faces today, answers can most often be found in technology and this is a frequently explored topic in our Amity Insights. Individually and together, the FAANGs have changed the way in which hundreds of millions of people live their lives. Facebook has democratised communication. Apple has pushed the boundaries of innovation through design. Amazon and Netflix have empowered consumers and turned traditional industries on their heads. Alphabet, through Google, has facilitated the spread of news and knowledge throughout the world.
But however big the FAANGs are, the universe of tech investment is much bigger. As technology begins to permeate every aspect of our lives, it opens us up to capitalising on a much wider range of investment opportunities. We seek opportunities where companies have strong intellectual property, a leading market share, strong cash generation, a track record of innovation and which exhibit attractive valuations.
This leads us to capture multiple sector trends and to invest in a broader portfolio of technology companies such as Microsoft, Cisco Systems, Trimble and NXP Semiconductors. It is in companies such as these that the responsible and sustainable investor can truly capitalise on a rich and diverse range of technology companies, trading on attractive valuations that are poised to benefit from the exponential rise in tech and its ability to change this world for the better.