Goldman reports show mutual funds and hedge funds split on megacaps

The biggest US listed companies are now so large, they’ve become major underweights in mutual-fund (MF) portfolios. In contrast, they remain among the most popular picks for hedge funds, said an analysis by Goldman.

Many MFS have limits on how much of their assets can be in a single stock to ensure diversification. As a result, Apple, Microsoft, and Amazon.com are the three most-underweight stocks in large-cap funds, according to Goldman strategists including Ben Snider, David Kostin, and Arjun Menon. But those same firms are on the firm’s Hedge Fund VIP list of most-popular names, according to a separate report.

“Apple, Microsoft and Amazon — which each account for 5 per cent+ of the Russell 1000 Growth and S&P 500 indices — are the most underweight stocks across large-cap MFS,” Goldman said in one of the reports released August 20. “Unfortunately for the typical fund manager, these stocks have returned 59 per cent, 34 per cent, and 76 per cent YTD, respectively. Facebook and Alphabet also entered the most underweight basket this quarter.”

Goldman broadly categorised the second quarter as positive for both hedge funds and MFS. The strategists said hedge funds were rewarded for a continued commitment to their favorite growth stocks. The mutual-funds report said those vehicles benefited from strong performances by their most overweight stock positions since the March trough, and said that 40 per cent of large-cap funds beat their benchmarks, compared with a 10-year average of 31 per cent.

It isn’t just megacap holdings where hedge funds and MF diverge. MF overweights to value and cyclical sectors like financials are the highest on record, Goldman said.