Veteran fund manager Mark Hawtin says the FAANG trade is dead and reveals the stocks he thinks should replace some of the tech heavyweights — and why. The FAANG acronym, which refers to Meta (formerly known as Facebook), Amazon , Apple , Netflix , and Alphabet (the parent of Google) , was first coined by CNBC's Mad Money host Jim Cramer in 2013 to describe companies that "represent the future" and which are "totally dominant in their markets." Since then, FAANG stocks have been a dominant feature of the U.S. tech sector, with all but Netflix among the top 10 constituents of the Nasdaq Composite , contributing nearly 30% of the index's weight as of the end of March. Read more Bank of America names its top global tech stocks — including one it says has upside of 100% But some market watchers are now raising questions about the continued relevance of this exclusive club. Speaking to CNBC on April 29, Hawtin, investment director at Zurich-based GAM Investments, which has 94.8 billion Swiss Francs ($97.62 billion) under management, said that FAANG stocks are facing challenges within their industries. Rise of Digital 4.0 FAANG companies had been "huge innovators and disruptors," according to Hawtin, with the likes of Google and Facebook having disrupted "significant markets" such as advertising, as well as Amazon in the retail space. "But at some point, they reached a size and level of maturity, which means that they now move more in line with macro tailwinds and headwinds, and I think that's where we are with many of these names," Hawtin added. As a result, these companies will no longer be able to deliver returns in the same way as they used to in the past, he warned. "And that's why from an investment perspective, I think there is potentially a lot more interest in the next wave of opportunity. We call it Digital 4.0," Hawtin said. He identified health care, financials, industrials and transportation as sectors where the next wave of disruption will be. MANTA explained Against this backdrop, Hawtin believes this would sound the death knell of FAANG as the dominant acronym in Big Tech. MANTA — which comprises of Microsoft , Amazon, chip maker Nvidia , electric vehicle manufacturer Tesla and Apple — could take its place instead, according to Hawtin. He explained that Netflix is not a "winner takes all" platform player, with the company "clearly suffering" from the Covid-19 reopening and stiff competitive pressure. Netflix reported a loss of 200,000 subscribers during the first quarter and warned that it could lose 2 million subscribers in the next quarter. Read more ‘This is what you live for’: Top tech analyst says buy the dip on these high-quality stocks Hawtin noted that MANTA also removes two ad giants — Alphabet and Meta. With digital advertising now "reasonably mature," Alphabet and Meta will not be immune to a sharp fall in global advertising in a downturn, he opined. "I think one of the most important things here is that we don't yet know how the market will treat some of these companies in a downturn environment. None of these companies really existed in any form of maturity in the last downturn in the financial crisis in 2008. So, we are going to get our first look at this," he said. He believes the market is anticipating a downturn and much lower growth for Alphabet and Meta going forward. "I think that's one of the reasons why those two names look very cheap, because the market is anticipating maybe a downturn in advertising and much lower growth for those two names going forward," he added. To be sure, Hawtin does not believe this will mark the demise of the FAANG stocks, despite his belief that they are unlikely to deliver the same level of outsized returns as before. "I think they are going to remain strong companies. One of the key features is that they benefit from the network effect … so they are going to retain a strong position and as long as they invest sensibly, they can maintain that position," he said.
Jason Alden | Bloomberg | Getty Images
Veteran fund manager Mark Hawtin says the FAANG trade is dead and reveals the stocks he thinks should replace some of the tech heavyweights — and why.