From “FAANG” to “MAMAA” to “Magnificent 7” – what’s in a name?

By the Loomis Sayles Growth Equity Strategies Team

Beware the catchy nicknames and acronyms feeding the 24/7 news cycle.  Pundits like to give nicknames to some of our highest-profile portfolio holdings, emphasizing strong recent share price performance.  This can trigger yet more upward price momentum as herd mentality exacerbates short-term thinking.  In turn, investors fear that this outperformance now equates to greater downside risk.  

This might be the case. But, we believe that basing our investment decisions on short-term factors that have no bearing on long-term business fundamentals creates a far greater risk and, ultimately, negatively impacts our long-term returns. In this article, we highlight a key driver of our Alpha Thesis:  focus + conviction.  

Whether in up markets or down markets, assigning more weight to recent events – known as recency bias – is one of the key dangers the long-term investor must guard against. When viewed rationally, these reflexive responses to short-term market variables have no impact on long-term value.  They do, however, create asset pricing anomalies.  Because overcoming these natural tendencies is difficult, asset mispricings persistently recur, creating opportunities for long-term oriented investors with a disciplined process and patient temperament.  One of the key ways we do this is by changing the way we think about risk. 

Investors often define risk as market volatility.  Yet volatility is the nature of markets, largely driven by the reflexive behaviors of short-term investors noted above and when investors overreact to share price volatility, they can end up selling low only to subsequently jump back in seduced by the momentum of rising prices.  Defining and managing risk in absolute terms as a permanent loss of capital, on the other hand, can help investors stay focused on the fundamentals driving long-term value creation.  

Active, differentiated decision-making leads to differentiated returns 

Take Meta Platforms, for example, which we have owned continuously for almost 13 years. In 2022 as the “work from home” bubble burst, there were also questions as to the wisdom of Meta’s decision to allocate billions of dollars to its metaverse and AI innovations.  Many growth managers substantially reduced or sold entirely their holdings in Meta – many after shares had already declined over 30%¹. For those that defined risk in terms of price volatility, perception became reality as they locked in losses. In contrast, we believe the risk of owning a high-quality, secular-growth company is lower after its share price declines, so we took advantage of price weakness to add to our Meta holdings in every quarter of 2022. 

As ChatGPT burst onto the scene, concerns over Meta’s AI and virtual reality innovations flipped to exuberance for all things related to AI.  Price momentum in 2023 was a siren song to many growth managers who then bought back their shares in Meta. With many having begun the year with zero exposure to the company, those who repurchased Meta in 2023 are unlikely to have fully benefited from the company’s 194% annual return, which started with a 76% rebound in the first quarter alone. Similarly, because the Russell 1000 Growth Index follows a price momentum strategy, its weight in Meta fell to 0.34% by the end of 2022, down from 3.35% at the start of the year . This also left passive strategies with only a fraction of the contribution from the company’s 2023 rebound.  Our 4.99% position in Meta at the end of 2022 was highly differentiated.  Because our active and differentiated ownership history – and conviction - stands in stark contrast to that of our peers, so too do our returns.  Market volatility, such as we saw in 2022, engenders emotions, and fear can lead investors to make irrational investment decisions.  Trading in and out of companies increases trading costs, can create taxable events, and disrupts the benefits of compounding unnecessarily.  

It is not simply ‘what’ you own, that matters but ‘how’ you’ve owned it over time

In our experience, even great businesses routinely endure significant downward share price volatility in the course of generating substantial excess returns. For example, in the nearly 19 years we have owned Amazon, the company’s stock experienced price declines between 20% and 60% on 14 different occasions. Often as prices begin to fall, investors rush to sell their positions, hoping to avoid further losses. Yet, despite these nearly annual price shocks, the stock outperformed the Russell 1000 Growth index by over 12x during this period when held continuously.  This demonstrates not only the inherent risk of succumbing to behavioral biases but also the opportunities when investors can overcome innate behavioral biases.  As a continuous investor in Amazon for nearly 19 years, our returns are demonstrably different from those of many peers who currently invest in Amazon. 

Amazon:  Periods of Large Declines Since Q2 2006

Data Source:  Loomis Sayles, FactSet, Bloomberg.  As of 31 December 2024.
Examples above are provided to illustrate the investment process for the strategy used by Loomis Sayles and should not be considered recommendations for action by investors.  They may not be representative of the portfolio’s current or future investments and they have not been selected based on performance.  Loomis Sayles makes no representation that they have had a positive or negative return during the holding period.
Past Performance is no guarantee of future results.

Focus + conviction drives outperformance

When stocks are outperforming, they are easy to hold. It is far harder to stay invested, to stand one’s ground when everyone else is selling. But, this ability to buy into fear and sell into greed, to stand firm in our convictions is one of the things that sets us apart. 

In the table below, we demonstrate that our ownership history (focus) and position size (conviction) is differentiated not just over this recent period, but also over the life of our strategy.  Six constituents of the Magnificent 7, Alphabet, Amazon, Meta, Microsoft, Nvidia, and Tesla, are each among our top-ten holdings, signaling that we believe they are among the most attractive reward-to-risk positions in our portfolio as of year-end 2024. We have never owned the seventh constituent, Apple. We have owned Microsoft, Alphabet, and Amazon continuously since 2006. We have owned Meta since its IPO in 2012. Nvidia and Tesla were newer purchases in 2019 and 2022, respectively. When the term Magnificent 7 was coined in mid-2023, we had already owned six of the seven companies for an average of 11 years across our portfolios.  Today, the average is approaching 13 years.

Despite the success of companies such as Alphabet, Amazon, and Microsoft over the past 18 years, and the thousands of funds that have owned them at some point in time, only a small fraction have participated to the full extent in their value creation. Inevitably shaken out by short-term price volatility, these funds missed the full compounding of value. What’s more, the conviction of those few managers who remained continuously invested – as measured by median position size – is materially lower than ours, which is a powerful driver of our active and differentiated performance outcome.  

Active differentiated decision-making

Our ownership history stands in stark contrast to that of our peers, as do our returns. 

Holding period and concentration of companies held in Large Cap Growth since purchase date

*Year 2006 is used because it is the Large Cap Growth strategy inception. Although this information is dated, we believe that the results are still reliable.
**x Times Greater is the calculation resulting from the Median LCG Strategy Position Size divided by the Median Position Size in Open-End Funds Owning Shares for Duration Since LCG Purchase Date.
Data Sources: Loomis Sayles, FactSet.
*As of June 30, 2024 Although this information is dated, we believe that the results are still reliable.
The portfolio manager for the Growth Equity Strategies joined Loomis Sayles May 19, 2010, and performance prior to that date was achieved at his prior firm. Examples above are provided to illustrate the investment process for the strategy used by Loomis Sayles and should not be considered recommendations for action by investors. They may not be representative of the strategy's current or future investments and they have not been selected based on performance. Loomis Sayles makes no representation that they have had a positive or negative return during the holding period.
Past performance is no guarantee of future results. 

This suggests to us that the number of peers who will continuously own the Magnificent 7 over the next three-to-five-year period is likely to be very small, and that our returns three to five years hence are likely to look different from those peers, despite potential point-in-time overlap today. 

Finally, though we owned six of the seven, we were underweight their collective weighting in the Russell 1000 Growth Index by approximately 10% as of December 31, 2023. Despite this collective underweight to the market’s strongest returning companies, our six holdings outperformed the Magnificent 7 in 2023 and over the two-year 2022-2023 period, due both to what we owned and the size and manner in which we owned them. Any of the companies in our portfolio could (and likely will) face similar price volatility in the future due to short-term swings in market sentiment. Price volatility in and of itself does not change our assessment of intrinsic value or the attractiveness of the reward-to-risk proposition over our long-term investment horizon. 

Behavioral biases:  understanding risks and recognizing opportunities

Traditional economic theory often assumes that individuals make decisions by carefully, acting in a logical, rational, and self-interested manner.  Instead, as we’ve seen here, innate reflexive fear-and-greed responses, recency bias, and herd mentality can lead to emotional and irrational investment decision-making.  The 24/7 news cycle can exacerbate this innate short-termism.  

This kind of short-term thinking however, does create opportunities for those investors that can develop a competitive advantage by identifying these pricing anomalies and taking advantage of them in order to generate alpha.  The very first principle of our Growth Equity Strategies Team’s Alpha Thesis holds that our long-term investment horizon affords us the opportunity to capture value from secular growth and capitalize on the stock market’s shortsightedness through a process called time arbitrage.  We believe our GES Alpha Thesis, and our ability to consistently implement its tenets, constitutes a differentiated approach. The 2nd percentile ranking for our absolute and risk-adjusted returns since strategy inception in 2006 through year-end 2024 stand as proof points to our approach.