The past decade hasn’t been kind to stockpickers, but maybe things are starting to turn around.
More than half of large-cap mutual funds have outpaced their respective benchmarks year to date, higher than the 10-year average of 34%, according to a Goldman Sachs (GS) report published on Monday. It’s too soon to tell whether that will continue, of course, but a peek into active managers’ portfolios shows their love/hate relationship with technology stocks, including Apple (AAPL).
Fourth-quarter holdings information shows that mutual funds on average raised their stakes in tech and industrials relative to other sectors, based on Goldman’s analysis of more than 600 mutual funds with $2.2 trillion of assets under management. Preference for chip stocks—as well as Apple—drove that rise. Preference for industrial stocks was broad, with average sector exposure at five-year highs, assuming changes to those portfolios haven’t been made since the end of last year.
Morgan Stanley’s (MS) Michael Wilson would likely take issue with the funds’ preference for tech stocks. Wilson says tech companies, which have been the largest contributor to earnings growth in the S&P 500 (.SPX), now rank in the middle among profit-growth contributors. He also expects them to start lagging the market.
Changes in mutual fund allocation could signal future outperformance or underperformance, according to the Goldman report. “An increase in mutual fund allocation of 2 basis points or more has coincided with meaningful stock outperformance during the same quarter,” Goldman analyst Arjun Menon wrote. “While this result makes intuitive sense, we cannot be certain that there is a causal relationship between changes in fund allocations and concurrent fund returns without insight into the timing or nature of allocation increases.”
In other words, a mutual fund’s stake in a stock would rise if the stock outpaces the broader market, even if the mutual fund manager didn’t make changes to the position. That said, stocks that saw an increase of at least two basis points in total fund relative allocation saw a bump in performance one and three months after positions were made public via filings. On the other side, stocks that saw the biggest declines in total fund allocations underperformed three months after the positions were made known.
That would suggest that the 10 largest raises in total fund allocation could outperform relative to other stocks that didn’t see such a jump. The stocks with the five biggest increases in total fund allocation were Apple, Cigna (CI), United Parcel Service (UPS), Microsoft (MSFT), General Electric (GE), and Facebook (FB). The five stocks that saw the biggest declines in total fund ownership were Amazon.com (AMZN), Berkshire Hathaway (BRK/B), Netflix (NFLX), Alphabet (GOOGL), and Linde (LIN).
Positions in GE are already paying off. Meanwhile, investors are starting to wonder whether Warren Buffett really thinks Berkshire shares are actually cheap.
Investor sentiment, professional or otherwise, toward Facebook, Amazon, Apple, Microsoft, and Alphabet—what Goldman calls the FAAMG stocks—doesn’t seem as hot and heavy as in the recent past. Those stocks are among the 20 most-underweight stocks relative to five-year allocation averages, not that stockpickers have performed all that well with their positions relative to the market over that period.
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