Active US mutual fund managers are underweight in technology stocks, while the large-cap managers who had made the biggest bets on large tech companies are cutting back on their holdings, according to research from Bank of America Merrill Lynch and Morningstar.
Technology stocks drove gains for the S&P 500 in 2017 and have been the best performing sector to own in the weeks after the US stock market’s correction in early February. Yet the entire active management industry in the US — a group of more than 3500 funds — hold just 16.9 per cent of their portfolios in the technology sector, according to Morningstar data, far below tech’s 24 per cent weighting in the S&P 500 as a whole.
According to BofA data, a survey of 437 funds that invest in large US companies shows that they were overweight technology stocks by 18 per cent in February. But analysts add that the index weightings don’t tell the whole story. Despite remaining high, the allocation to technology stocks for so-called “large-cap” active managers has been falling relative to the benchmark S&P 500 weighting since September of last year.
Dan Suzuki, an analyst at BofA, says that managers have been moving away from the big-name technology companies that have seen big price gains, such as Amazon, Apple and Google.
“The trend for a while has been shift out of the more crowded super fast growth names into the rest of tech,” he says. “It’s possible that continues.”
The disparity also arises because of the greater diversity of fund mandates across the entire universe of active managers. Value investors, required by their mandates to hold stocks that look cheaper by standard metrics than the average stock, typically hold fewer technology names. Indices tracking smaller US companies also see a lower weighting to the technology sector. For example, the technology sector makes up 14.5 per cent of the Russell 2000, with financial stocks the biggest sector in the index at 24.8 per cent.
“Managers realise we have been in a nine-year bull market and that valuations are high and they may be trying to control risk by trimming and taking some money off the table in stocks that have up to this point performed very well,” said Daniel Culloton, director of equity strategies at Morningstar.