Biggest Apple-Amazon-Google Bulls Are Funds That Once Hated Risk

(Bloomberg) -- People have a lot of theories about who's driving the breakneck rally in Internet mega-caps, with everyone from short sellers to margin traders posited. An analysis of holdings data suggests it's a more buttoned-down constituency doing the buying.

Pension funds show the biggest increase in their combined stake in the quintet, which comprises Facebook Inc., Apple Inc., Amazon.com Inc., Netflix Inc. and Google parent Alphabet Inc., according to data compiled by Bloomberg. The group raised its share of holdings by about a fifth of a percentage point this year, while hedge funds sold.

Owning these five stocks could make the difference between beating a benchmark or trailing it in 2017, after the shares returned four times the S&P 500 Index. The foray into the high-flying names reflects the urge by pension funds to boost returns at a time when fixed-income yields are stuck near record lows and underfunded plans are growing.

“They are under pressure and are really looking to figure out in a low-return environment how they can meet actuarial returns,” Wayne Wicker, who oversees $33 billion as chief investment officer at ICMA-RC in Washington, said by phone. “A lot of them are increasing their appetite for non-traditional types of opportunities.”

After pension funds, whose combined stake increased by 0.19 percentage point since the end of last year, investment advisers and sovereign wealth funds are the next-biggest buyers, raising ownership by 0.16 and 0.11 percentage point, respectively.

By contrast, hedge funds cut their holdings by 0.18 percentage point. Short sales, a trade mostly employed by the group, climbed to 2.2 percent of FAANG's shares outstanding from less than 2 percent in December, exchange data compiled by Bloomberg show. Still, that's below the peak of 10 percent reached in 2012.

The process of closing out those wrong-way bets may have added fuel to the FAANG fire, according to Savita Subramanian, an equity strategist at Bank of America Corp. She sees the surge driven by short sellers who were forced to buy back the shares that they had sold in anticipation of a decline.

Ned Davis, founder of Ned Davis Research Inc., said speculators may have played a role when they borrowed money to chase the outsize gains in the cohort. It's contributing to a record amount of margin debt in the overall market, he said.

Equity holdings have been followed closely as investors either seek to mimic the best stock pickers or follow the trend to gauge a potential reversal in momentum. For instance, a rally driven by hedge funds accumulating stakes might put the stock at greater risk of a reversal than pension funds, who tend to be long-term holders.

“People get into the mode of watching ‘the smart money',” Wicker said.

To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net.

To contact the editors responsible for this story: Arie Shapira at ashapira3@bloomberg.net, Chris Nagi, Richard Richtmyer