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September 18, 2020 at 10:13 AM
“Clouds could be forming on the horizon” for FAANMG stocks, a portent that they’ll potentially “struggle to continue producing the growth rates investors have been accustomed to,” argues Katie Koch, co-head of the fundamental equity business within Goldman Sachs Asset Management.
Hence, she recommends that investors seek out tech leaders with prospects of becoming the “mega-cap tech names of the future,” including those in high-growth emerging markets that, she says, could become local “tech titans.”
In an interview, Koch indeed urges to look further than the FAANMGs — Facebook, Apple, Amazon, Netflix, Microsoft and Google’s parent Alphabet — and talks specifics, pointing out that the pandemic has helped some tech-enabled innovators.
The GSAM FE team — Steven Barry is co-head — manages portfolios for institutional and individual clients globally, with $65 billion in assets under management.
Nearly 90% of the team’s strategies are outperforming year-to-date, with net inflows of about $5 billion vs. peers, Koch says.
She maintains that at this juncture since the steep March decline, “a lot is happening” underneath the rally; for example, an “adjustment” between growth and value stocks. In the interview, she forecasts that this will increase and is therefore focused on a balanced portfolio that’s not “overexposed to growth.”
Koch, 40, who started as an analyst at Goldman upon graduation from the University of Notre Dame in 2002, has spent her entire career at the firm. She became a partner at age 36.
She is a champion of gender diversity, believing that “diversity drives better performance.” To be sure, nearly half of GSAM FE’s assets are managed by female portfolio managers.
In our conversation, Koch discusses why and how her team influences its portfolio companies to be gender-diverse as well.
She began in Goldman Sachs Private Wealth Management, then during a decade-long stint in London, led several of the firm’s businesses. She was named head of the global portfolio solutions group for institutional business and in 2011 became a managing director.
ThinkAdvisor interviewed Koch, speaking by phone from New York City, on Sept. 10, with a follow-up email the next day.
She has a big family as well as a big career: She and her husband are parents of three children, 5, 3 and 1; and she is expecting a fourth in November. In 2018, Working Mother magazine named her Working Mother of the Year.
Reflecting on her choice of career, Koch says: “I always thought of investing as the art of predicting the future. That’s an audacious thing to do and believe that you can do — to imagine a future that’s different from the past and allocate capital around that. It was always exciting to me as a concept.”
Here are highlights of our interview:
THINKADVISOR: Technology companies led a broad selloff on Sept. 3 and 4. Was that something of a prelude to the long-overdue correction?
KATIE KOCH: Obviously, a lot of the market strength has been led by tech and the FAANMGs — Facebook, Amazon, Apple, Netflix, Microsoft, Google’s parent Alphabet — which are collectively still up about 48% year-to-date, with the other 495 [stocks] in the S&P 500 down about 1%.
The market’s up, but there’s a lot happening under that; and some of these trends are relevant to the decline [of two weeks ago].
Such as?
The growth part of the market is up around 24%, and the value part is down 10%. The trend that stands out to me most concerning the [9/3 and 9/4 selloff] is the compression between growth and value. The spread narrowed about 5%. So you’re seeing some adjustment, but it’s off one of the historically widest extremes.
Will we see more of that?
I think we’re going to experience some compression of growth vs. value. We’re trying to make sure we have a balanced portfolio and that we’re not overexposed to growth [stocks], which has had such strong performance.
What opportunities do you see for investing in tech?
We like tech a lot but strongly believe investors need to hunt beyond the largest, most well-known names to appropriately reflect the best future opportunities.
Why?
Investors are significantly over-exposed to the mega-cap tech names — the FAANMGs — but their dominance may be coming under threat. We continue to like several of them. However, after 10 years of [these stocks’] dominance, the next 10 years could look very different.
What will be the cause?
The FAANMGs may struggle to continue to produce the growth rates that investors have become accustomed to. Clouds could potentially be forming on the horizon for them. Therefore, we believe investors should seek out future tech leaders.
How do you characterize those, and where may they be found?
[They’re] the most innovative and differentiated smaller-cap tech names and rapidly emerging tech opportunities outside the U.S. Local companies applying proven business models in new high-growth markets are becoming local “tech titans.”
What are some specific areas in where you see the most opportunities?
Cloud-enabled software, digital payments, online entertainment, e-commerce. The pandemic has driven a big acceleration in adoption rates for many of these tech-enabled innovations.
Please elaborate.
