Star Managers With Lots to Lose Are Unmoved by Tech Rout

(Bloomberg) — Tom Plumb has been investing for 40 years. The two funds he runs from Madison, Wisconsin, share a trait with virtually every other portfolio that has crushed the market this year: they’re laden with technology shares. Another similarity is the attitude of the manager toward the vortex that opened beneath these stocks last week. It won’t last.That’s an opinion that this year’s star managers need to come true. Among some 200 equity funds benchmarked to the S&P 500 Index and have at least $500 million in assets, those heavily tilted to Facebook Inc., Amazon.com Inc., Apple Inc., Microsoft Corp. and Alphabet Inc. are this year’s undisputed champs. Those with at least one fifth of their money in the big five returned 17% on average in 2020, compared with a gain of 2.6% for those where these tech giants make up less than one-tenth.Wall Street reeled last week when good news on a vaccine set off a historic rotation in equities, with traders — at least for a few days — bailing from tech and into companies tied to the economy’s reopening. A prime casualty was the Nasdaq 100 Index, which last Monday saw its worst day relative to the Russell 2000 in nearly two decades. A rally in Nasdaq futures fell apart Monday when Moderna Inc. reported positive news on its vaccine.Plumb, like others, is skeptical those holdings will be down for long.“There’s a lot of hype and expectations and hope that these companies whose stocks have been really depressed, that they’ll resume and come back. We’re pretty cynical about that,” said Plumb, who oversees Plumb Balanced Fund and Plumb Equity Fund, both of which hold Microsoft and Amazon and are besting the S&P 500 this year. “We’re going to be in a digital economy and that’s where we’ll be from now on.”Covid’s Getting WorsePretty much to a one, that’s the view of managers who have benefited from tech’s monster run-up this tormented year. To them, this is just the latest hiccup in the stay-at-home trade, and will fizzle like the others. Embedded in this view is a grim take: Despite good news on vaccines, nations around the world are being overwhelmed by new cases, the economic downturn could drag on and habits formed during the pandemic might become entrenched.The Nasdaq 100 retreated last week as promising news on Covid-19 vaccines fueled confidence in an economic recovery, prompting a rotation out of companies whose growth is seen as pegged to a lengthy pandemic. The rotation will peter out, says Mitch Rubin, chief investment officer who oversees $1.6 billion at RiverPark Capital Management LLC.“Every call that we were going to rotate away from growth and toward cyclicals has been wrong for the last eight or nine years. So I’m not terribly worried that this is the time,” Rubin said by phone. “The strategies of using the internet for commerce or the internet for media and connectivity — we still think those businesses will thrive in an accelerated fashion and we don’t want to trade away from them.”Rubin, whose RiverPark Large Growth Fund counts Amazon, Apple and Microsoft among its top holdings and is up 40% this year, says it’s premature to call the pandemic over. Indeed, the rotation showed signs of sputtering in the middle of last week amid surging Covid-19 case counts.Gerry Sparrow runs the Sparrow Growth Fund, stuffed with stay-at-home plays like Shopify Inc., Netflix Inc., and DocuSign Inc. and also holds positions in Amazon, Alphabet and Facebook. It’s up more than 70% for the year. Sparrow says consumer habits formed during lockdowns will continue even when the pandemic ends.“That particular behavior — shopping online, entertaining yourself online — is not going to go away and could continue to outpace the brick-and-mortar type activities,” he said by phone from St. Louis. “The new behavior and the new stay-at-home stocks I think have legs beyond the vaccine rollout early next year.”Big tech ownership has been a major determinant of success in a year when the S&P 500’s gain without the big five would equal to 2.8%.Apple (up more than 60% in 2020) has caused a particularly painful migraine. When only 27% of large-cap mutual funds beat their benchmarks in the third quarter, Bank of America strategists posited the iPhone maker was a key culprit. Its shares climbed 27% in the period, a return that almost tripled the S&P 500 and exceeded all but 33 members in the index. But the outsize return created a too-high hurdle to clear.A reversal of fortunes could, therefore, be a positive for anyone looking to play catch-up, says Ben Johnson, Morningstar’s global director of ETF research. Many have been pinning their hopes on the market’s leaders falling out of favor and anticipating a rotation back into names that have been unloved so far.“Many of them have probably been waiting for a moment like that,” he said. But, “if those market leaders get back up on their bikes and start pedaling again, it’s going to be awfully difficult to catch up.”(Updates third graf to include futures, Moderna news)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.


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