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You may think the market loves a tech company for what it is, but sometimes the market cares more about a stock’s style. That’s the point of a recent note by Prashant Sundararajan, who heads quant research sales at Nomura Instinet.

In 2018, tech stock performance was driven as much by company-specific events as by the vicissitudes of certain styles—like how growth stocks lost favor in 2018’s last two months. This year, however, Sundararajan finds that the style factors account for all the returns of the leading techs (after adjusting for the moves of the overall market).


“If all your returns are being driven by style bets and industry bets,” says Sundararajan, “you should be cognizant that some of these factors can have large reversals.”
The tech leaders of the long bull market have been the FANGs. You know: Facebook (FB), Apple (AAPL), Amazon.com (AMZN), Netflix (NFLX) and Google parent Alphabet (GOOGL). Sundararajan broadened his study by adding Microsoft (MSFT) and chip maker Nvidia (NVDA), ending up with an equal-weighted set called Fangman.

“I always wondered why Microsoft wasn’t included, and I also wanted a semiconductor stock,” he says. “Besides, Fangman is just a much more interesting name.”

To disassemble the drivers of Fangman returns, Sundararajan carried out a performance attribution—a kind of statistical analysis that breaks performance down into systematic factors and stock-specific ones. A portfolio’s moves are compared against groups of stocks with a certain characteristic, like earnings growth or stock-price momentum. When such correlations are strong and seem to explain most of a portfolio’s moves, then it probably isn’t responding to the fundamentals of its specific stocks, such as individual companies’ earnings or products.

Since early December, the Fangman returns have been entirely driven by the style of stocks they represent, namely: high earnings growth, high variability of earnings, and highly liquid trading.

While Sundararajan isn’t among Nomura’s research analysts who recommend particular stocks, he notes that tech investors might want to hedge their portfolios with stocks that have offsetting style factors. “As quants,” he says, “we want to be as factor-diversified as possible.”