Goldman reports show hedge funds, mutual funds split on megacaps

The biggest U.S. listed companies are now so large, they’ve become major underweights in mutual-fund portfolios. In contrast, they remain among the most popular picks for hedge funds, according to an analysis by Goldman Sachs Group Inc.

Many mutual funds have limits on how much of their assets can be in a single stock to ensure diversification. As a result, Apple Inc., Microsoft Corp. and Inc. 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 companies are on the firm’s Hedge Fund VIP list of most-popular names, according to a separate report with a team that also included those three strategists.

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

Goldman broadly categorized the second quarter as positive for both hedge funds and mutual funds.

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% of large-cap funds beat their benchmarks, compared with a 10-year average of 31%.

It isn’t just megacap holdings where hedge funds and mutual funds diverge. Mutual-fund overweights to value and cyclical sectors like financials are the highest on record, Goldman said. The hedge-fund long portfolio tilt away from value is extreme historically, and financials remain a large underweight, it said.

“As equity prices and economic data rebounded in 2Q, funds moved only slightly toward cyclicals,” Goldman said in the hedge-fund report. “The hedge fund long portfolio tilt away from value stocks is nonetheless the largest in our 18-year data history.”

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