`Fear The Regulator' Has Been Winning Strategy for FAANG Traders

(Bloomberg) -- Investors discounted the threat of regulation in high-flying technology shares long before the recent data scandal at Facebook Inc. intensified calls for data protection.

A breakdown of the NYSE FANG+ Index into companies that monetize customer information and those that have a more traditional goods and services business model shows a consistent outperformance for the latter, at least over the last four years. In that time, a basket of firms not relying heavily on data sales has risen almost 290 percent versus about 80 percent for the group that does.

The analysis compares the performance of Facebook, Alphabet Inc., Twitter Inc. and Baidu Inc. to that of the remaining members of the much-followed index, Apple Inc., Amazon.com Inc., Tesla Inc., NVIDIA Corp. and Alibaba Group Holding Ltd. The first group may someday face stiffer regulations directly impacting their business models, according to The Leuthold Group’s chief investment strategist James Paulsen.

“Even though the issue of increasing regulation in this industry has only recently become acute, the stock market has seemingly been discounting this potential risk for some time,” he said in a recent note to clients. “In fact, ‘non-regulated’ FANGs have been besting ‘regulated’ FANGs persistently and by a wide margin since the third quarter of 2014.”

While there have been concerns about the protection of customer information before, revelations about the potential misuse of data at Facebook has intensified calls for governments to act. Starting next month, European Union privacy regulators will get the power for the first time to fine companies as much as 4 percent of global annual sales under powerful new data-protection rules.

“Regulation is not going to change overnight,” said Peter Wilmshurst, global equities fund manager at Franklin Templeton, in a recent interview in Sydney. “But it’s clearly one of the things you’ve got to watch, alongside product cycles and economic cycles. Can regulation step in and stop what are effectively quasi monopolies?”

The regulatory issue is at the forefront of investors’ minds this week. Facebook Chief Executive Officer Mark Zuckerberg will testify before congressional panels in the U.S. on Tuesday and Wednesday, and Chief Operating Officer Sheryl Sandberg will also speak to the EU’s Justice Commissioner Vera Jourova.

--With assistance from Adam Haigh and Stephanie Bodoni

To contact the reporter on this story: Cormac Mullen in Tokyo at cmullen9@bloomberg.net.

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Adam Haigh, Reed Stevenson

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