Tech giants are in the crosshairs of regulators. Here's why one of America's biggest investors thinks the worst is yet to come.
- Mega-cap tech companies in the US including Facebook, Amazon, and Alphabet found themselves under pressure on Monday amid newly announced antitrust probes.
- Chris Ailman, the chief investment officer of the California State Teachers' Retirement System - the second-largest pension fund in the US, with $228 billion under management - says the worst is yet to come unless these firms take drastic steps.
- Other experts across Wall Street have recently surmised that big tech is in trouble regardless of what happens on the regulatory front.
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Mega-cap tech has long been speculated as the target of US regulatory scrutiny. And based on recent developments, that negative pressure may soon be present in full force.
The US Federal Trade Commission and Justice Department said on Monday that they'll divide up antitrust probes into various tech elite. The FTC will handle Facebook and Amazon, while the DOJ will focus on Google parent Alphabet.
That immediately put enormous pressure on those three stocks. It dragged entire indexes lower at a time when they were already struggling to get out from under President Donald Trump's ever-escalating trade war. The tech-heavy Nasdaq 100 index plunged 2.6%, its biggest decline in three weeks.
Given the losses, it's clear the market hasn't yet fully priced in a scenario where US regulators turn the screws on the tech Illuminati. And judging by how swift and sharp the drop was, the wreckage could just be getting started, assuming firm action is taken down the line.
This isn't lost on Chris Ailman, the chief investment officer of the California State Teachers' Retirement System - the second-largest pension fund in the US, with $228 billion under management.
Ailman is in the unique position of being tasked with owning exposure to the entire market. Since tech is currently the biggest weighting in the benchmark S&P 500 - with a more than 20% allocation - any weakness in the space is going to sting his massive portfolio. As such, tech's newly vulnerable position has his attention.
Regardless of how the situation unfolds, Ailman says companies need to be proactive about implementing changes to address the concerns of regulators.
"These are people who are entrepreneurs who are not used to thinking about regulations and boundaries," Ailman told Business Insider in an exclusive interview at Milken. "They're going to need to have a board and people around them to put some safeguards in. You have to be responsible for your product."
Although the latest tech-regulation development has come in the US, Ailman is also keenly focused on the scrutiny those companies will face in Europe. After all, none of the principles are based in Europe, depriving that region of economic upside. That makes antitrust concerns much more difficult to ignore.
Ultimately, Ailman thinks the onus will be on the companies themselves to make an effort before the FTC and DOJ hand down any potentially crippling fines or legal rulings.
"I'm not a huge fan of regulation, but when you see a company facing potentially big regulation, you realize they need to be stepping up and doing stuff - participating in finding a way for their product to be used more positively," Ailman said. "
Even if mega-cap tech is able to sidestep the looming regulatory overhang, it still has other headwinds to combat. So says Vincent Deluard, a macro strategist at INTL FCStone.
His first argument is that the tech elite is simply too big to keep growing at their current pace.
"The law of physics conspire against mega-caps," Deluard said in a recent client note. "Just as thermodynamic systems eventually drift towards chaos, competitive advantages are usually lost, inventions are copied, trade secrets are discovered, corporate ethos are eroded, and market-leading firms eventually revert to mediocrity."
Deluard also sees the marketwide shift to passive investing coming back to big the tech cohort. Sure, they've been a main beneficiary of the flood of capital into passive strategies heavily weighted towards tech. But when the wind starts blowing in the other direction, they'll get hit the hardest.
"Index funds are naturally skewed towards the largest companies," Deluard said. "However, a sharp market correction would likely trigger rapid outflows from ETFs, which would result in a temporary stretch of underperformance by the tech mega companies."