According to analysts at Goldman Sachs Group, mutual funds are facing challenges in outperforming their benchmarks as they remain underweight on megacap technology stocks. Despite attempting to catch up during the second quarter, their performance has continued to disappoint.

The default underweight position of both core and growth funds in the soaring megacap tech stocks remains the most significant obstacle to mutual fund performance, stated the Goldman analysts in a research note. Only 30% of large-cap mutual funds have beaten their benchmarks this year, compared to a 38% success rate since 2007.

Goldman highlights that the seven largest megacap tech stocks have outperformed the equal-weight version of the S&P 500, which gained around 4% this year. In the second quarter, mutual funds' underweight in megacap tech stocks increased further, despite portfolio managers chasing rallies in Google parent Alphabet Inc. (GOOGL), Facebook parent Meta Platforms Inc. (META), and Microsoft Corp. (MSFT).

Although Meta, Microsoft, and Alphabet have all experienced declines this month, they achieved substantial gains in the second quarter while performing well overall this year, according to FactSet data. Through Thursday, Meta has surged over 138% in 2023, Alphabet has soared over 47%, and Microsoft has jumped more than 33%.

Mutual Funds Adjust Tech Stock Allocations

According to Goldman Sachs, mutual funds have increased their underweight allocations to major tech companies in the second quarter. Specifically, their underweight positions in Apple Inc. (AAPL), Nvidia Corp. (NVDA), Tesla Inc. (TSLA), and Inc. (AMZN) have widened.

Record Underweight Position

Goldman Sachs analysts stated that mutual funds currently hold the largest underweight position in mega-cap tech stocks on record, amounting to 490 basis points.

Furthermore, their research reveals that the average large-cap mutual fund is now 792 basis points underweight the top seven tech stocks, compared to 721 basis points underweight at the beginning of the second quarter.

In addition, Goldman Sachs discovered that mutual funds are overweight in cyclical sectors, with increased exposure to financials and energy. This represents the highest exposure to these sectors since at least 2012.

Read: 'Rare' Rally in Cyclical Stocks Mostly Over, Warns Goldman Sachs

The analysts also noted that mutual funds remain overweight in industrials and materials.

While mutual funds are struggling to outperform benchmarks, the average large-cap portfolio excluding the top seven tech stocks has managed to outperform the Russell 1000 by 67 basis points this year, according to Goldman Sachs.

However, when including those stocks, the average large-cap mutual fund portfolio has performed worse than the Russell 1000 by 136 basis points in 2023, according to the analysts.

Leave Comment