Portfolio managers are losing their enthusiasm for highflying tech stocks

Tech stocks have been helping active managers outperform this year.

  • By Ryan Vlastelica,
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Portfolio managers have turned a bit bearish on some of the year's biggest outperformers.

According to Goldman Sachs, mutual-fund managers cut their allocation to large-capitalization internet and technology stocks in the third quarter, turning underweight on the so-call FAAMG group of names.

The quintet of stocks — which includes Facebook (FB), Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), and Google parent Alphabet (GOOGL) — have all seen massive gains throughout the year, as has Netflix (NFLX), another trading favorite that is sometimes included in the group. Year-to-date gains in the stocks have ranged from 30.8% to nearly 60%, and all have easily outperformed the 18.3% rise of the S&P 500 (.SPX).

Thus far this year, the technology sector as a whole has risen 37%, by far the best performer of any S&P 500 sector, and accounting for a significant portion of the benchmark index's rise to dozens of records is due to the performance of these stocks. (Amazon and Netflix are classified as consumer discretionary stocks.)

The FAAMG names comprised five of the six stocks with the largest declines in fund positioning last quarter, according to Goldman's analysis. Fund managers did a particularly abrupt turn on Apple, the largest U.S. company by market cap. The stock "is the most underweight stock among large-cap mutual funds," the investment bank wrote, with managers reducing their allocation by 113 basis points (1.13%). Amazon and Microsoft also appeared in Goldman's basket of stocks that were underweight by fund managers.

For technology overall, portfolio managers cut their exposure to the group by 35 basis points, although they remain more allocated to it than the market as a whole. They are overweight on it by 109 basis points.

The reduced positions in FAAMG stocks could simply be an indication that managers are looking to take profits, although it comes at a time when there are concerns that tech stocks are overvalued.

The continuing strength in tech—minus a sharp pullback from earlier this week — extended a trend of helping a good percentage of these managers outperform the overall market, as has been the case throughout the year.

"An overweight allocation to Information Technology has been a key driver of fund outperformance," Goldman wrote, noting that 49% of large-cap mutual-fund managers had outperformed their benchmark index thus far this year. In 2016, only 19% managed the feat.

While 2017 is poised to be the best year for active manager outperformance since 2009, general underperformance — in addition to the higher fees of active managers—has been a major contributor to a continuing shift by investors toward passive investments, which simply mimic the performance of an index, rather than trying to best it through individual security selection.

Another factor seen as helping active managers do better than the overall market is a drop in market correlations, or the degree to which individual stocks move in tandem with the overall market. When correlations are high, as has been the case for years, it is seen as harder for managers to find undervalued names. Recently, however, correlations have been dropping, falling to multiyear lows, as seen in the following chart from LPL Financial.

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