Facebook’s stock meltdown helped one surprising group of investors

Getty Images / Spencer Platt

• Facebook suffered through a horrible day of stock
  trading on Thursday, as shares tumbled 19% and wiped out $120
  billion of market value, the most in US stock-market
  history.
• Goldman Sachs finds that one group of investors
  actually got a big boost from Facebook’s market struggles,
  relative to their competitors.

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Upon first glance, it would seem difficult to find any silver
lining in Facebook‘s earnings-driven stock-market disaster on Thursday,
which saw shares tumble 19%.

For one, the $120 billion in market value erased from the company
was by far the biggest drop in US stock market
history. There’s also the widespread damage that’s rippled
through hedge funds, for which Facebook was the most popular
stock prior to the market bloodbath, according to Goldman Sachs data.

But for mutual-fund managers — a
much-maligned group largely populated by traditional stock pickers — the damage has been
far more limited. In a shocking bit of prescience, their
portfolios were actually underweight Facebook ahead of
second-quarter earnings. 

As the chart below from Goldman shows, the average large-cap
mutual fund was 20 basis points underweight Facebook, relative to
benchmarks. And it didn’t happen overnight. The exposure has
actually been trimmed gradually over time since reaching a
multi-year high in mid-2015.

Goldman Sachs

This is not to say that mutual-fund managers came out entirely
unscathed. Any exposure to Facebook, however underweight relative
to benchmarks, likely stung. But at the same time, they were able
to make up valuable ground versus competitors.

Such a victory was needed, considering mutual funds have been
squeezed on both sides by
low-cost alternatives like exchange-traded funds and less liquid,
high-cost investment options.

While Goldman has maintained its buy rating on Facebook
specifically, other firms are starting to second-guess the
broader market’s heavy reliance on mega-cap tech.

Michael Hartnett, Bank of
America Merrill Lynch’s chief investment strategist, goes as far
as to recommend investors outright bet against the so-called FANG
group, which consists of Facebook, Amazon, Netflix, and Google/Alphabet.

More specifically, Hartnett says traders should consider going
long an emerging-markets group known as BRIC (Brazil, Russia,
India, and China) in the third quarter, while also shorting FANG.
The objective of such a strategy would be to play a reversal in
both groups from how they traded in the first half of 2018.

And wouldn’t you know it, mutual funds are ahead of the game once
again. Goldman finds that large-cap mutual funds are already
underweight FANG, and have been since the third quarter of 2016.

While only time will tell whether they’ll be right again, those
money managers have to be feeling good about their chances after
their relative success with Facebook this week.

Goldman Sachs