Large cap mutual funds are on pace for their best year since 2009, and overweight positions in technology stocks have driven much of the gains, Goldman Sachs Group Inc. (GS) reports. However, these funds started the third quarter underweight in the five giant FAAMG​ tech stocks as a group, and reduced their exposure yet further by the start of the fourth quarter, per Goldman. In fact, of the six stocks whose positioning in big mutual funds dropped the most during the third quarter, five of them were the FAAMGs. In measuring positioning, Goldman compares these stocks' weights in mutual fund portfolios to their weights in the S&P 500 Index (SPX).

Lightening Up

Among all stocks, and not just the FAAMGs, Apple Inc. (AAPL) is the most underweight in large cap fund portfolios, Goldman says. These funds also are underweight in FAAMG components Facebook Inc. (FB), Inc. (AMZN) and Microsoft Corp. (MSFT). They are overweight in Alphabet Inc. (GOOGL), the parent of Google, but have reduced their allocation to it. Meanwhile, FAANG​ component Netflix Inc. (NFLX) is another big tech stock in which large cap funds are now underweight, per Goldman's November 30 report, "Mutual funds cut FAAMG exposure but remain overweight Tech." (For more, see also: Stock Valuations Highest Since 1929 Crash, Dotcom Bubble.)

Still Pricey

For the five FAAMG stocks, their year-to-date share price gains through the end of the third quarter (September 30), their gains for the fourth quarter to date through December 1, and their current forward P/E ratios are below. Most of the FAAMG stocks remain pricier than the S&P 500 average: 

  • Facebook: +46%, +2%, P/E 26
  • Apple: +34%, +11%, P/E 14
  • Amazon: +28%, +21%, P/E 142
  • Microsoft: +22%, +14%, P/E 22
  • Alphabet: +23%, +5%, P/E 24

Forward P/E data is per Thomson Reuters, as reported by Yahoo Finance. (For more, see also: How Facebook, Amazon, Alphabet Are Killing The Bears.)

Google Still Overweight

Goldman examined 495 mutual funds with a collective $1.9 trillion of assets under management (AUM). They excluded ETFs​ and index objective funds from their positioning analysis. These funds started the third quarter underweight by 84 basis points (bps) in the FAAMGs as a group, but started the fourth quarter underweight by 164 bps. They already were underweight in Apple, Microsoft and Amazon at the start of the third quarter, and cut their allocations to all five FAAMG stocks during the quarter. Facebook swung from overweight to underweight during the quarter.

As mentioned, of all stocks in the S&P 500 Apple is the most underweight in the mutual fund portfolios examined by Goldman, by 113 bps at the start of the fourth quarter. Alphabet, by contrast, is the second most overweight stock, by 21 bps, but this is down from 37 bps at the start of the third quarter.

Still Betting on Tech

Despite their underweight position in the FAAMGs, the mutual funds studied by Goldman are still betting heavily on information technology stocks, with this remaining the most overweight sector. However, their overweight position in tech was reduced during the third quarter from 144 bps at the start to 109 bps at the end, Goldman notes.

Without offering specific reasons for the shift, Goldman finds that the mutual funds it studied moved closer to market weights for nine of the eleven S&P 500 sectors. The only exceptions were health care, which increased from 32 to 52 bps overweight, and energy, which dropped from 31 to 34 bps underweight. Additionally, Goldman notes that funds' relative allocations to "bond-proxies" telecom and consumer staples are now at their highest levels in five years. All this may indicate a more defensive stance among fund managers, as well as an expectation that market leadership may rotate in the late stages of the bull market and economic cycle. (For more, see also: Stock Market's 'Absurdly Good' Returns Will Worsen In 2018.)

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