Fund managers are no longer as smitten by the FANG stocks as they used to be even as they continue to pile into technology stocks for the seventh consecutive month, according to a research note from Bank of America Merrill Lynch (BAML). Large cap fund managers now have a record overweight in the sector but are opting to rotate out of Facebook Inc. (FB), Inc. (AMZN), Netflix Inc. (NFLX) and Alphabet Inc.(GOOGL) in favor of less crowded stocks.

This year, the FANGs' stock performance has far outpaced the S&P 500 Index. Now, it seems that fund managers are starting to conclude the FANGs' biggest gains are over. Look at these numbers. Fund managers’ overweight position in FANG stocks has dropped from 71% to 64%, while their overweight positions in tech, internet retail and other non-Fang stocks has jumped from 16% to 22%, according to BAML.

'FAAANG' Power

To be sure, the FANGs remain a dominant component of fund portfolios, especially since betting on these shares has reaped big rewards. Year to date as of September 5, 2017, Facebook gained 48%, Netflix 41%, Amazon 29% and Alphabet 20%.

But stocks such as Adobe Systems Inc. (ADBE) and Broadcom Ltd. (AVGO) also are popular with fund managers, where year-to-date stock gains of nearly 50% and 41% gave an extra boost to the FANGs in what the BAML report calls the ‘FAAANG’ stocks.

The rally in giant techs earlier had fund managers doubling down on these stocks, but that's changing. 

Source: FactSet

​Curious Case of Alpha

Typically, alpha-chasing managers seek value in underweight stocks and sell over-owned shares. As over-crowding increases, so do the risks and downside pressures. (See also: FANG Stocks' Downside Risk Jumps as Tech Bets Rise.)

However, 2017 has been an exception in many cases when it comes to that trend. Overcrowded trades, especially the FANG stocks, have done well, while betting on the under weights has failed to generate big gains. 

Short Action

So if big funds are cooling on the FANGs, then what's driving these stocks now? The research note suggests that recent market activity in the FANGs may just be short sellers covering their positions as short interest in these stocks hovers at record lows.

"The recent move in FANG may be driven more by short-covering than by active buying," BAML says.

The tech sector overall is so richly priced that rotating out of FANG stocks into other shares in the group may still leave fund managers vulnerable if the stock market turns sour. The wisdom of these rotations may not be fully tested until equities head into a steep correction, or even a bear market.